I have a small collection of EE/I bonds. They are all well over 5 years at this point. The vast majority of the value is in the I bonds which are 2001 vintage (i.e. a pretty good rate). The EE bonds are all maturing in 2013-2014.

Is the interest federally taxable as income (25% for me) or long term capital gains (15%)?


I'm in a part time masters degree program now. Last year I paid about $3000 in tuition and was able to take the maximum deduction for tuition which is $2000. For 2013 I expect my total tuition paid will be $4500-6000.

If in 2013, I cash $1000 worth of bonds, and pay at least $3500 in tuition, am I correct to assume I will qualify for 1) Tax free interest status on the cashed in bonds, and 2) the maximum $2000 tuition deduction?

The I-bonds have much higher total values--I would need tuition expenses over $9500 to cover just one bond... I could do that if I took 3-4 classes, but that puts too much of a strain on me... I suppose this makes a case for buying smaller denominations (but more of them).

Fortunately I don't have any particular reason to cash the I-Bonds, and as long as I can hold them longer than ~5 years the interest earned over that period should hopefully more than cover the potential tax savings opportunity I have now while paying tuition.

I have a small collection of EE/I bonds. They are all well over 5 years at this point. The vast majority of the value is in the I bonds which are 2001 vintage (i.e. a pretty good rate). The EE bonds are all maturing in 2013-2014.

Is the interest federally taxable as income (25% for me) or long term capital gains (15%)?

It's ordinary income interest, not a cap gain.

Before spending too much time on the calculation intricacies, make sure that the bonds qualify. From Pub 970:

A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (as the
sole owner) or in the name of both you and your spouse co-owners).

The owner must be at least 24 years old before the bond’s
issue date. The issue date is printed on the front of
the savings bond.

If the bonds are qualified you start with your qualified expenses and reduce them by the amount you take as a tuition deduction. The balance is available for exclusion of savings bond interest.

All the details are in Pub 970.

Phil
Rule Your Retirement Home Fool