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Education Savings Bonds


Taxpayers may deduct interest earned on series EE or series I U.S. savings bonds issued after 1989. This deduction is not limited to taxpayers who claim itemized deductions. The bond interest must have been used to pay for the qualified higher education expenses (tuition and fees required for enrollment, and contributions to a Coverdell Education Savings Account or Qualified Tuition Program) of the taxpayer, spouse, or dependent; the maximum deduction is limited to total qualifying expenses. In order for the interest to qualify for the deduction, the taxpayer must have been age 24 or older when the bonds were issued. Interest on bonds issued in the name of a child under age 24 does not qualify for the deduction.

Tax benefits

The deduction of interest earned on Education Savings bonds results in a reduction in federal tax liability. There is no reduction in state income tax because U.S. bonds are not taxable at the state level. The amount of the reduction depends on the taxpayer's marginal rate, and if the taxpayer is eligible for any credits or is subject to the alternative minimum tax (AMT).

A taxpayer claiming a deduction of $5,000 would, due to the income-based phaseout of the deduction, typically experience the greatest federal and state tax benefits with income in the 25 percent federal bracket and the 7.05 percent state bracket, resulting in tax benefits of $1,250 at the federal level and $353 at the state level.

A taxpayer with a $5,000 deduction who has taxable income only in the bottom federal and state brackets (in tax year 2016, 10 percent and 5.35 percent), is not eligible for any credits, and is not subject to the AMT, will experience a tax reduction of $500 at the federal level and $267 at the state level. Taxpayers with no regular tax liability do not benefit from the deduction.

Interaction with other programs

Taxpayers may not deduct interest for qualifying expenses that were paid for with distributions from a QTP plan or a Coverdell Education Savings Account. Taxpayers may not claim the American Opportunity credit or the Lifetime Learning credit for expenses that were paid for with interest earned on education savings bonds. In determining the student loan interest deduction, taxpayers must subtract from qualifying higher education expenses any expenses paid for with interest earned on education savings bonds.


The Education Savings bond interest deduction is subject to an income-based phase-out. In tax year 2016, the deduction is phased out for married taxpayers with modified adjusted gross income (AGI) between $116,300 and $146,300, and for single filers and heads of household with modified AGI between $77,550 and $92,550. The phaseout ranges are adjusted annually for inflation. Taxpayers with modified adjusted gross income above the phase-out may not deduct interest earned on Education Savings bonds. Modified adjusted gross income equals adjusted gross income before the deduction for student loan interest, plus foreign earned income, housing costs of individuals living abroad, and income from sources within Puerto Rico and U.S. territories.

March 2016