In December of this year, David and Mary, a married couple, redeemed qualified Series David and...

In December of this year, David and Mary, a married couple, redeemed qualified Series David and Mary received proceeds of $10,000 representing principal of $7,000 and interest of $3,000. The qualified higher educational expenses they paid this year totaled $6,000. Their AGI for 2018 is $125,550. What is the amount of interest income that David and Mary can exclude from their income this year?

A)$1440
B)$1840
C)$2400
D)$3400

Expert Solution

Tax free interest = Interest x Qualified higher educational expense/Proceeds of qualified series
= 3000 x 6000/10000
= 3000 x 0.60
= 1800

Phase out Threshold = 119250
Phase out limit = 147250
Phaseout reduction = Tax free interest x (MAGI-Phaseout Threshold)/(Phaseout limit - Phaseout Threshold)
= 1800 x (125550-119550)/(149550-119550)
=1800 x 6000/30000
= 1800 x 0.20
= 360

Amount of exclusion = Tax free interest - Phaseout reduction
= 1800-360
= 1440

ekkarill92 answered 2 years ago

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