Question

Starting in 1998, Jackson and Sasha have been purchasing Series EE bonds in their name to use for the higher education of their son, Pedro, who currently is age 18. In 2018, they cash in $18,000 of the bonds to use for tuition, fees, and room and board. Of this amount, $4,000 represents interest. Of the $18,000, $10,800 is used for tuition and fees, and $7,200 is used for room and board. Jackson and Sasha AGI, before the educational savings bond exclusion, is $98,000.

If an amount is zero, enter "0".

a. If Jackson and Sasha file a joint, how much is the savings bond exclusion?
$

b. Assume that Jackson and Sasha purchased the bonds in Pedro's name. Determine the tax consequences for Pedro.

$ of savings bond interest is included in Pedro's gross income.

c. Assume the same facts in part (a) except Jackson and Sasha file separate returns. Compute the savings bond exclusion.
$

Answer 1

The Educational saving bond allows the eligible taxpayers to excludes the interest from their gross total Income on the said saving bond on redemption There are certain terms and condition associated with the educational saving bond exclusions:-

Conditions 1) The education expenses should be incurred in the same year in which the bond has been redemeed.

2) the bondholder should be at least 24 year of age at the time of purchase of bond.

3) If the bond proceeds is used for the child education then the bond should be in the name of either or both the parents and the chils will be act as a beneficiary party in it not the co -owner.

4) the parents should file the return jointly to qualify for exclusion.

5) the educational institute should meet the standard of federal assistance such as guranteed student loan program.

If you meet all the above conditions then the following expenses will be allowed as exclusion

1) Tutions and fees 2) expenses that benefits either of the parent or dependent for whom the exclusion is claimed.

3) course fees 4) expenses paid for sports , games etc that is the part of the said courses.

5) the cost of books or room and board is not a qualifing expenses .

Now , In the case of Jackson and sasha AGI ,

1) the parents purchased the bond for their son , file the return jointly , used the proceeds for education therefore they qualify for exclusion :-

Total amount redeem $ 18000 in which $ 14000 is principal and $ 4000 is interest .

$ 10800 is used for Tuition and fees which is qualifing expenses and

$ 7200 is used in room and board which is not a qualifing expenses.

therefore, % of qualified expenses in total expenses = 10800/18000 *100 = 60%

therefore , exclusion will be 60% of $ 4000 = $ 2400

And rest $ 1600 will be added to the gross total income of Jackson and sasha AGI,

Calculation of taxable Income of Jackson and sasha AGI,

Gross total Income before saving bond exclusion = $ 98000

Add :- non qualified expenses Interest = $ 1600

Total Taxable Income = $ 99600

Answe b) If the bond is purchased in the name of the son Pedro then all the Interest will be treated as the taxable Income and liable for tax because the age of Pedro is only 18 at the time of purchase of the bond. To qualify for exclusion the bond holder must be at least 24 year of age.