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#22499 - 01/20/04 11:12 AM Savings Bonds vs. Education Credit
uicentral Offline
Member

Registered: 02/03/03
Posts: 19
Can you contribute qualified EE bond proceeds to a QTP and therefore avoid taxes on the bond interest and take the education credit in the same year for the amount of the EE bonds? For example contribute $10,000 ($5,000 principle and $5,000 interest) to the QTP and take a Lifetime Learning Credit based on $10,000 of expenses ($2,000 credit). Or if you do both in the same year will you always pay federal tax on some of the bond interest.

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#22500 - 01/20/04 04:42 PM Re: Savings Bonds vs. Education Credit
Joe Hurley Offline

Member

Registered: 01/07/00
Posts: 2737
Loc: Pittsford, NY, USA
I'm not sure I fully understand your situation. The education credit is incurred in the year you pay for tuition and related expenses. So can I presume that you are also withdrawing $10K from the 529 account? The expenses that create the credit cannot also be used for the savings bond exclusion or the 529 exclusion. It's possible the manuever of flushing the EE proceeds through the 529 account will create extra tax savings because room and board and books don't qualify for EE or education credit, but do qualify for 529 purposes. I call that Advanced 529 Planning and discuss it in my book.

Joe

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#22501 - 01/20/04 05:30 PM Re: Savings Bonds vs. Education Credit
uicentral Offline
Member

Registered: 02/03/03
Posts: 19
Thanks, Joe
I wasn't being clear. I'm talking about two separate transactions. I believe the contribution of EE proceeds to the 529 is a qualified expense in itself, and I don't have to use the funds to pay any expenses in that year whether I leave the money in the 529 or take it out as a non-qualified withdrawal. If I do have qualifying expenses, can I use other non-529 funds to pay them and thus take the Education Credit and not pay tax on the EE interest? Can I have my cake and eat it too??

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#22502 - 01/20/04 05:53 PM Re: Savings Bonds vs. Education Credit
Joe Hurley Offline

Member

Registered: 01/07/00
Posts: 2737
Loc: Pittsford, NY, USA
Thanks for clarifying. Sure, you can do that. The untaxed EE interest gets recorded by the 529 plan, however, and will be reported upon withdrawal from the 529 plan. So you still need to have qualifying 529 expenses in the year of withdrawal to keep the tax benefit.

Joe

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#22503 - 01/20/04 06:02 PM Re: Savings Bonds vs. Education Credit
uicentral Offline
Member

Registered: 02/03/03
Posts: 19
Last point (hopefully), Joe.
I've made contributions to my 529 and the plan never asks me the source of the funds. There is nothing on the paper form (in fact I can do an online transfer from my checking account and there is nothing on that screen either)to ask if the funds were from redeemed bonds. So how would they record that information?

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