1135L Tax Code: Qualifying Bonds, Income Limits, and Form 8815

You can exclude the interest earned on Series EE and Series I savings bonds from federal income tax when you use the proceeds to pay qualified higher education costs, but only if you meet the ownership, expense, and income rules in Internal Revenue Code Section 135. This savings bond interest exclusion for education starts phasing out in 2026 once modified adjusted gross income passes $101,800 for single filers or $152,650 for joint filers, and disappears entirely at $116,800 and $182,650 respectively.¹ Married couples filing separately cannot claim the exclusion at any income level.²

Which Bonds Qualify

Only Series EE and Series I bonds issued after 1989 are eligible. The bond owner must have been at least 24 years old before the issue date, which prevents parents from buying bonds in a child’s name and later cashing them tax-free for college.²

Registration matters just as much as the age rule. The bond has to be in your name, or in your name jointly with your spouse. A bond registered to your child as the owner is disqualified from the exclusion, even if you paid for it and even if your child later uses it for tuition.³ If a grandparent bought bonds in a grandchild’s name, those bonds cannot be used for this tax break. When you buy bonds now with future tuition in mind, keep them in your own name.

What You Can Spend the Money On

Qualified expenses are tuition and required enrollment fees paid to an eligible educational institution for you, your spouse, or a dependent.⁴ Room and board, books, supplies, and transportation do not count. Courses in sports, games, or hobbies are also excluded unless they are part of a degree program. Eligible institutions are those that participate in federal student aid programs, which covers essentially any accredited college, university, or postsecondary vocational school.

Before you plug expenses into the formula, subtract any tax-free educational assistance received for the same year: scholarships, fellowship grants, veterans’ education benefits, employer-provided assistance, and 529 plan distributions used for the same costs.⁵ If your child had $18,000 in tuition and received a $10,000 scholarship, only $8,000 counts as a qualified expense. Missing this reduction is a common source of IRS corrections.

Rolling Bond Proceeds Into a 529

You don’t need to pay a school directly. Contributions to a qualified tuition program count as qualified higher education expenses under Section 135, so you can redeem bonds and deposit the proceeds into a 529 account and still claim the exclusion. On Form 8815 you enter “QTP” with the program’s name and address instead of a college.³ This lets you time a redemption for a year when your income falls below the phase-out and hold the money for later use.

How the Exclusion Amount Is Calculated

If your qualified expenses equal or exceed your total bond proceeds (principal plus interest), all the interest is excludable. If you cash in more than you spend, only a proportional share qualifies:

Excludable interest = (Qualified expenses ÷ Total bond proceeds) × Total interest earned⁶

Say you redeem $20,000 in bonds, of which $4,000 is interest. If you paid $15,000 in qualified tuition, the applicable fraction is $15,000 ÷ $20,000, or 0.75. You exclude 75% of the $4,000 interest, meaning $3,000 is tax-free and $1,000 is taxable. Spending something on education doesn’t make all your interest tax-free; the math is strictly proportional.

The Income Phase-Out

After the proportional calculation, modified adjusted gross income is applied. For 2026:

Single, head of household, or qualifying surviving spouse: phase-out begins at $101,800 MAGI and ends at $116,800.
Married filing jointly: phase-out begins at $152,650 and ends at $182,650.

Income between the two figures reduces the exclusion proportionally. Above the upper number, you lose it entirely.¹ Married filing separately is barred outright, so if you and your spouse file separate returns for any other reason, this benefit is off the table.²

You Can’t Double Up With Education Credits

The same tuition dollars can’t be used for both the Section 135 exclusion and an education credit like the American Opportunity Tax Credit or Lifetime Learning Credit.⁷ If you paid $12,000 in tuition and $8,000 of it was covered by bond proceeds you’re excluding, only the remaining $4,000 is available for a credit.

The American Opportunity Credit runs up to $2,500 per student and is partially refundable, so the better choice isn’t automatic. Some families come out ahead by claiming the credit against direct tuition payments and routing the bond proceeds into a 529 for a later year. Compare both approaches before you file.

Claiming It on Your Return

File IRS Form 8815 with your Form 1040.³ The form asks for the student and school (or 529 program), your total bond proceeds, the subtraction for tax-free aid, the proportional formula, and then the income phase-out. The excludable amount carries to Schedule B and reduces the taxable interest on your return.

For each bond redeemed, keep a record of the serial number, issue date, face value, and proceeds broken into principal and interest. Form 8818 is offered for this, though any record with the same details works.⁸ Also hold on to tuition bills, payment receipts, and documentation of any scholarships or other aid.

If You Claim More Than You Should Have

If the IRS reviews your return and finds you excluded more interest than allowed, the excess becomes taxable for that year and you owe the tax plus interest from the original due date. When the improper exclusion produced an excessive refund or credit, Section 6676 allows a penalty of 20% of the excess amount.⁹ The penalty can be waived for reasonable cause; the interest charges stay unless the underlying penalty is removed. Most disallowances trace back to the same handful of mistakes: bonds registered in a child’s name, failing to reduce expenses by scholarships, or income that ends up above the phase-out once other adjustments are made.

1
Internal Revenue Service. Revenue Procedure 2025-32
2
TreasuryDirect. Using Bonds for Higher Education
3
Internal Revenue Service. Form 8815 – Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
4
Office of the Law Revision Counsel. 26 U.S. Code 135 – Income from United States Savings Bonds Used To Pay Higher Education Tuition and Fees
5
Internal Revenue Code. IRC Section 135 – Income From United States Savings Bonds Used To Pay Higher Education Tuition And Fees
6
Office of the Law Revision Counsel. 26 USC 135 – Income from United States Savings Bonds Used To Pay Higher Education Tuition and Fees
7
Internal Revenue Service. Publication 970, Tax Benefits for Education
8
Internal Revenue Service. Optional Form To Record Redemption of Series EE and I U.S. Savings Bonds Issued After 1989
9
Internal Revenue Service. Erroneous Claim for Refund or Credit