Expert: Gina Boykin - 9/17/2008

Question
I have about 11 savings bonds that I had planned to use for my daughter's education. However,these were given to my daughter with her name or my name on them. They have her social security number on them. Can these be used for her college tuition without paying taxes on the interest?

Answer
Bonds must be registered in the name of the parent(s) to get the tax exclusion.  The children cannot be the owner or even the co-owner.  Unfortunately, that is the rule.  

However, you can possibly save on taxes by reporting the interest in your child's name.  You can file a federal return in the child's name and report all of the accrued interest up through this year.  No tax will be due unless the total interest is more than the minimum amount required for a return to be filed.  If you do this in the current year, then in future years you can accrue interest annually. What this means is that each year, tax will only be due on the current year's interest, which may be under the limit (meaning no tax due).  If it's under the limit, you won't have to continue to file returns, just keep good records.  Even if it's not under the limit, I believe the first $1,700 is taxed at the child's tax rate (much lower than your rate).  Then, when you cash in the bonds, you will only owe taxes on the current year's interest.

For more details, you can go to treasurydirect.gov or www.irs.gov.