Education Savings Bond Program

§ 135. Income from United States savings bonds used to pay higher education tuition and fees(a) General ruleIn the case of an individual who pays qualified higher education expenses during the taxable year, no amount shall be includible in gross income by reason of the redemption during such year of any qualified United States savings bond. (b) Limitations(1) Limitation where redemption proceeds exceed higher education expenses(A) In generalIf—(i) the aggregate proceeds of qualified United States savings bonds redeemed by the taxpayer during the taxable year exceed (ii) the qualified higher education expenses paid by the taxpayer during such taxable year, the amount excludable from gross income under subsection (a) shall not exceed the applicable fraction of the amount excludable from gross income under subsection (a) without regard to this subsection. (B) Applicable fractionFor purposes of subparagraph (A), the term “applicable fraction” means the fraction the numerator of which is the amount described in subparagraph (A)(ii) and the denominator of which is the amount described in subparagraph (A)(i). (2) Limitation based on modified adjusted gross income(A) In generalIf the modified adjusted gross income of the taxpayer for the taxable year exceeds $40,000 ($60,000 in the case of a joint return), the amount which would (but for this paragraph) be excludable from gross income under subsection (a) shall be reduced (but not below zero) by the amount which bears the same ratio to the amount which would be so excludable as such excess bears to $15,000 ($30,000 in the case of a joint return). (B) Inflation adjustmentIn the case of any taxable year beginning in a calendar year after 1990, the $40,000 and $60,000 amounts contained in subparagraph (A) shall be increased by an amount equal to—(i) such dollar amount, multiplied by (ii) the cost-of-living adjustment under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 1989” for “calendar year 2016” in subparagraph (A)(ii) thereof. (C) RoundingIf any amount as adjusted under subparagraph (B) is not a multiple of $50, such amount shall be rounded to the nearest multiple of $50 (or if such amount is a multiple of $25, such amount shall be rounded to the next highest multiple of $50). (c) DefinitionsFor purposes of this section—(1) Qualified United States savings bondThe term “qualified United States savings bond” means any United States savings bond issued—(A) after December 31, 1989, (B) to an individual who has attained age 24 before the date of issuance, and (C) at discount under section 3105 of title 31, United States Code. (2) Qualified higher education expenses(A) In generalThe term “qualified higher education expenses” means tuition and fees required for the enrollment or attendance of—(i) the taxpayer, (ii) the taxpayer’s spouse, or