Page 62 - 2020 Publication 17

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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
Form 1099-R, Distributions From Pen- schools that are accredited and eligible to par- 1040-SR, line 11) figured before the interest ex-
sions, Annuities, Retirement or Profit-Shar- ticipate in student aid programs run by the U.S. clusion, and modified by adding back any:
ing Plans, IRAs, Insurance Contracts, etc., Department of Education. 1. Foreign earned income exclusion,
for the year of distribution.)
Reduction for certain benefits. You must
For more information on including the cor- reduce your qualified higher education expen- 2. Foreign housing exclusion and deduction,
rect amount of interest on your return, see How ses by all of the following tax-free benefits. 3. Exclusion of income for bona fide resi-
To Report Interest Income, later. Pub. 550 in- dents of American Samoa,
cludes examples showing how to report these 1. Tax-free part of scholarships and fellow- 4. Exclusion for income from Puerto Rico,
amounts. ships (see Scholarships and fellowships in
Interest on U.S. savings bonds is ex- chapter 8). 5. Exclusion for adoption benefits received
under an employer's adoption assistance
TIP empt from state and local taxes. The 2. Expenses used to figure the tax-free por- program,
Form 1099-INT you receive will indi- tion of distributions from a Coverdell ESA.
cate the amount that is for U.S. savings bond in- 3. Expenses used to figure the tax-free por- 6. Deduction for student loan interest, and
terest in box 3. tion of distributions from a qualified tuition 7. Deduction for tuition and fees.
program. Use the Line 9 Worksheet in the Form 8815
Education Savings 4. Any tax-free payments (other than gifts or instructions to figure your modified AGI.
Bond Program inheritances) received for educational ex- curred to earn royalties and other investment in-
If you have investment interest expense in-
penses, such as:
You may be able to exclude from income all or a. Veterans' educational assistance ben- come, see Education Savings Bond Program in
part of the interest you receive on the redemp- efits, chapter 1 of Pub. 550.
tion of qualified U.S. savings bonds during the b. Qualified tuition reductions, or Recordkeeping. If you claim the inter-
year if you pay qualified higher educational ex- est exclusion, you must keep a written
penses during the same year. This exclusion is c. Employer-provided educational assis- RECORDS record of the qualified U.S. savings
known as the Education Savings Bond Pro- tance. bonds you redeem. Your record must include
gram. 5. Any expense used in figuring the Ameri- the serial number, issue date, face value, and
You don't qualify for this exclusion if your fil- can opportunity and lifetime learning cred- total redemption proceeds (principal and inter-
ing status is married filing separately. its. est) of each bond. You can use Form 8818 to
record this information. You should also keep
Form 8815. Use Form 8815 to figure your Amount excludable. If the total proceeds bills, receipts, canceled checks, or other docu-
exclusion. Attach the form to your Form 1040 or (interest and principal) from the qualified U.S. mentation that shows you paid qualified higher
1040-SR. savings bonds you redeem during the year education expenses during the year.
aren't more than your adjusted qualified higher
Qualified U.S. savings bonds. A qualified education expenses for the year, you may be
U.S. savings bond is a Series EE bond issued able to exclude all of the interest. If the pro- U.S. Treasury Bills,
after 1989 or a Series I bond. The bond must be ceeds are more than the expenses, you may be Notes, and Bonds
issued either in your name (sole owner) or in able to exclude only part of the interest.
your and your spouse's names (co-owners). To determine the excludable amount, multi- Treasury bills, notes, and bonds are direct
You must be at least 24 years old before the ply the interest part of the proceeds by a frac- debts (obligations) of the U.S. Government.
bond's issue date. For example, a bond bought tion. The numerator of the fraction is the quali-
by a parent and issued in the name of his or her fied higher education expenses you paid during Taxation of interest. Interest income from
child under age 24 doesn't qualify for the exclu- the year. The denominator of the fraction is the Treasury bills, notes, and bonds is subject to
sion by the parent or child. total proceeds you received during the year. federal income tax but is exempt from all state
The issue date of a bond may be ear- Example. In September 2020, Mark and and local income taxes. You should receive a
Form 1099-INT showing the interest paid to you
! lier than the date the bond is pur- Joan, a married couple, cashed qualified Series for the year in box 3.
CAUTION chased because the issue date as- EE U.S. savings bonds with a total denomina- Payments of principal and interest will gen-
signed to a bond is the first day of the month in tion of $10,000 that they bought in April 2004 erally be credited to your designated checking
which it is purchased.
for $5,000. They received proceeds of $7,128, or savings account by direct deposit through
Beneficiary. You can designate any individual representing principal of $5,000 and interest of the TreasuryDirect® system.
(including a child) as a beneficiary of the bond. $2,128. In 2020, they paid $4,000 of their Treasury bills. These bills generally have a
daughter's college tuition. They aren't claiming 4-week, 13-week, 26-week, or 52-week matur-
Verification by IRS. If you claim the exclu- an education credit for that amount, and their ity period. They are generally issued at a dis-
sion, the IRS will check it by using bond re- daughter doesn't have any tax-free educational count in the amount of $100 and multiples of
demption information from the Department of assistance. They can exclude $1,194 ($2,128 × $100. The difference between the discounted
the Treasury. ($4,000 ÷ $7,128)) of interest in 2020. They price you pay for the bills and the face value
must include the remaining $934 ($2,128 − you receive at maturity is interest income. Gen-
Qualified expenses. Qualified higher edu- $1,194) interest in gross income. erally, you report this interest income when the
cation expenses are tuition and fees required bill is paid at maturity. If you paid a premium for
for you, your spouse, or your dependent (for Modified adjusted gross income limit. a bill (more than the face value), you generally
whom you claim an exemption) to attend an eli- The interest exclusion is limited if your modified report the premium as a section 171 deduction
gible educational institution. adjusted gross income (modified AGI) is: when the bill is paid at maturity.
Qualified expenses include any contribution • $82,350 to $97,350 for taxpayers filing sin-
you make to a qualified tuition program or to a gle or head of household, and Treasury notes and bonds. Treasury
Coverdell education savings account (ESA). • $123,550 to $153,550 for married taxpay- notes have maturity periods of more than 1
Qualified expenses don't include expenses ers filing jointly or for a qualifying widow(er) year, ranging up to 10 years. Maturity periods
for room and board or for courses involving with dependent child. for Treasury bonds are longer than 10 years.
sports, games, or hobbies that aren't part of a Both are generally issued in denominations of
degree- or certificate-granting program. You don't qualify for the interest exclusion if $100 to $1 million and generally pay interest ev-
your modified AGI is equal to or more than the ery 6 months. Generally, you report this interest
Eligible educational institutions. These upper limit for your filing status. for the year paid. For more information, see
institutions include most public, private, and Modified AGI, for purposes of this exclusion, U.S. Treasury Bills, Notes, and Bonds in
nonprofit universities, colleges, and vocational is adjusted gross income (Form 1040 or chapter 1 of Pub. 550.
Page 58 Chapter 6 Interest Income