Form 8815

[Black Bart]

Recently ran into a client at the grocery store who asked "Can I cash in my old savings bonds, pay Junior's college expenses, and beat the taxes?" Told him no, that I thought they had to be for education in the first place (Coverdell-like), but would check it out. Searched and, voila, "Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989" (which I never ever heard of before today) pops up. I just keep gettin' surprised by what all I don't know (you probably aren't surprised at all).

Possible hitches: (1) Bonds may be pre-'90 (2) When I did their '08 taxes, his wife mentioned maybe buying Jr. a new car. Odd...the timing of that remark and the education expenses inquiry...

[Koss]

Education Expense vs. New Car

What, you mean a car is not an educational expense?

Of course it's not, at least not in this context.

But the taxpayer doesn't have to be able to trace the proceeds of the savings bonds directly to the educational expenses. They just have to show that the educational expenses were paid in the same calendar year that the bonds were cashed in.

BMK

[Black Bart]

Thanks for the tip, Burton.

What, you mean a car is not an educational expense?

Of course it's not, at least not in this context.

But the taxpayer doesn't have to be able to trace the proceeds of the savings bonds directly to the educational expenses. They just have to show that the educational expenses were paid in the same calendar year that the bonds were cashed in.

BMK

I hadn't thought of that angle. And of course, they probably are going to buy him a car with that dough, but I see what you're saying -- it doesn't really matter what/which funds are used as long as it's all done in the same year and enough ed expense is paid.

Do you know if this would have any effect on the Hope credit?

[Koss]

Hope Credit

Well, yeah, it does have an effect on the Hope Credit.

It may or may not kill it completely. The taxpayer can always choose to just report the savings bond interest as taxable income, and take the Hope Credit instead.

But it's not an all-or-nothing, black-and-white equation. It might work out that way for some folks, based on the actual numbers. But at least in theory, it looks like a taxpayer might be able to claim both the Hope Credit and the exclusion of interest on savings bonds, in the same calendar year, for the same student...

Bart, this gets really complicated really fast. I haven't done a Form 8815 in over ten years...

You're probably going to have use a worksheet that can only be obtained from the IRS office that is just outside Area 51 in Roswell, New Mexico.

There's some sort of ratio involved. In order for the savings bond interest to be totally tax-free, the gross proceeds from cashing in the bonds--not just the interest--has to be equal to or less than the adjusted educational expenses.

And qualifying educational expenses, for purposes of this calculation, are adjusted by reducing the amount of the expense by any amount that is used to figure the Hope Credit.

Soooo...

If the kid has no grants or scholarships, only loans, and he's going to an Ivy League school where the tuition is $25K per year, and the parents cashed in $10K worth of savings bonds ($10K in proceeds, not interest), and the kid paid the other $15K with loans and gifts from a rich uncle... and you hold everything else constant, assuming the kid still qualifies as a dependent of the parents...

It looks like you can exclude all of the interest on the bonds, which is included in the figure of $10K, and then you can still claim the Hope Credit based on the other $15K that was paid in tuition...

or something like that. Like I said, you probably have to visit Roswell for this one.

If the kid is attending a community college, where the tuition paid in 2008 was $3500, and he got a Pell Grant for $1500, and paid the rest with loans, and the parents cashed in $6000 worth of bonds and bought a car...

Now you've only got $2000 worth of qualifying out-of-pocket expenses, so they can't exclude all of the interest on the savings bonds. There's some goofy formula you have to use. It's in the Roswell worksheet...

In this example, they're probably better off just paying tax on the savings bond interest, and taking the Hope Credit, or maybe the Lifetime Learing Credit, on the $2000.

If he just started college in the fall term of 2008, they can choose to take the Lifetime credit for 2008, and then use the Hope Credit in 2009 and 2010. 'Cause at the beginning of 2010, he'll still be a sophomore... and if he's full-time, the aggregate amount of tuition paid in 2009 and 2010 will be better for the Hope Credit than the amount paid for only one term in 2008... if he doesn't drop out, or switch schools, or... well, I suppose you can always file an amended return.

BMK