Answered Essay: In 2013​, Hubert and Madison purchased Series EE​ bonds, and in 2017 redeemed the​ bonds, receiving $660 of interest a

In 2013​, Hubert and Madison purchased Series EE​ bonds, and in 2017 redeemed the​ bonds, receiving $660 of interest and $840 of principal. Their income from other sources totaled $38,000. They paid $2,000 in tuition and fees for their dependent daughter. Their daughter is a qualified student at State University. ​(The proceeds from the Series EE bonds were used to pay the tuition and​ fees.)

Exclusion​ phaseouts: Phaseout occurs when the combined amount of principal and interest received during the year exceeds the net qualified educational expenses and the​ taxpayer’s modified adjusted gross income is over $78,150 ​($117,250 for married individuals filing a joint​ return). The exclusion is fully​ phased-out for taxpayers whose 2017 modified AGI is more than $93,150 ​($147,250 for married individuals filing a joint​ return).

Requirement a. How much of the Series EE bond interest is​ excludable?

Requirement b. Assuming that the daughter received a $3,300 ​scholarship, how much of the interest is​ excludable? Ignore any tax credits that might be available.

Requirement c. Assuming the daughter received the $3,300 scholarship and that the​ parents’ income from other sources is $120,830​, how much of the interest is​ excludable?

Expert Answer

 

Part a)

As per the applicable rules of IRS, if the amount of total proceeds received from redemption is less than the value of qualified educational expenses, the total interest received will be treated as tax free. In the given case, the value of total proceeds received is $1,500 which is less than the qualified educational expenses of $2,000 (incurred for dependent daughter). Therefore, the entire amount of Series EE bond interest of $660 is​ excludable.

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Part b)

As per the applicable rules of IRS, the amount of qualified educational expenses should be reduced by the value of any tax-free scholarships received during the year. In the given case, as the total value of scholarship ($3,300) received by the daughter exceeds the amount of $2,000 paid by Hubert and Madison, the total amount of interest received from redemption will be taxable. Therefore, the value of interest excludable will be 0.

_____

Part c)

As per the applicable rules of IRS, the amount of qualified educational expenses should be reduced by the value of any tax-free scholarships received during the year. In the given case, as the total value of scholarship ($3,300) received by the daughter exceeds the amount of $2,000 paid by Hubert and Madison, the total amount of interest received from redemption will be taxable. Therefore, the value of interest excludable will be 0.

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