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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.
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