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Schedule R (Form 941) (Rev January 2018) - Internal: What You Should Know

Exclude: You can use Form 8815 to figure how much interest income you can exclude from federal income tax when you use your savings bonds to pay for a qualified higher education expense. How to calculate the interest, and how to exclude your payments. If you pay off your bond early, and you file a joint return, then your exemption will be reduced by the amount of the interest payment received. If you pay off your bond early, and you have more than one qualified higher education expense, then the interest payment exemption is increased by a percentage (for example, 25 percent). If you're not married, then you have to figure the maximum income your bond is considered a qualified education expense by including in your income your total qualified higher education expenses. Include in the income the full amount of the cash payment received from the bond. See Qualified educational institution, earlier, to figure the amount your bond is considered a qualified higher education expense. However, if you want to exclude interest from your payment, enter the total amount of the payment on Form 1040. How to determine whether your bonds are qualified Education expenses. Federal income tax doesn't cover only any income you receive from your bonds, but income you earn from bonds must also be included. This is the case even if the bonds are only used for college expenses. Example. Let's take the following facts: You use 3,000 of your savings bond for college. You will earn income during the year (4,000) but not enough to include in your tax return. Your total income is 10,000. The payment from the savings bond is 12,000, for a total interest expense, after deducting a 400 penalty, which is equal to 17.5 percent. You don't use your bonds to pay for room and board. Therefore, the interest of 3,000, or 1,400, is excluded from your tax return (see previous Example). It makes no difference in the case of a child. The same rule applies for the deduction of the interest. When you qualify for the exclusion, you must include the total interest payment in your income. In other words, your income taxes won't apply to any amount of the payment. A person doesn't have to include the entire interest payment on his or her federal income tax return.

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