Is it possible to transfer an EE Series bond to my niece for her to use to pay for higher education? I have no children and do not claim her as a dependent on my taxes.

[pengland01]

I have several EE Series bonds and I want to help my niece with her college tuition. If there is a way for me to gift or transfer ownership to her, then perhaps she can use them without me having to pay taxes and reduce the amount that I can give to her for schooling.

[Opus 17]

Probably not.

As you probably realize, the interest you get when cashing in the bond is only tax-free for education if the student is the owner, spouse, or the dependent of the owner of the bonds.  So if you cash them in and give the proceeds to your niece, you will still owe the tax.

It is possible to transfer ownership of an EE bond to a different person, but this is treated as a cashout and reissue.  You will owe tax on the interest so far, but you niece would not owe tax on interest when she cashes them out for education.

So this only really makes sense if your niece is young and has a long way until school.  Let's say she's 10 and the bonds are 5 years old.  You would pay tax now on 5 years worth of interest, and then when she cashes them out at 18, she would not owe tax on the next 8 years of interest.

But if she is a student now or soon, there is no way to cash them out in such a way that you won't owe tax on the income, unless she is your dependent.

[Opus 17]

I was thinking you could just add the niece as a co-owner, and let her cash them in, but that won't work either in most cases since the bonds would not be eligible anyway for the exclusion. See here. <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f8815.pdf">https://www.irs.gov/pub/irs-pdf/f8815.pdf</a>

The exclusion is really designed for a person to pay the education expenses of themselves or their children.  If you bought a bond in 2000, and made your niece a co-owner, she would not qualify for the exclusion unless she was over 24 years old when the bond was issued (i.e. 2000).  The rules on that tax form 8815 make it almost impossible to use a bond to pay for the education of anyone except your child or dependent.  (Bonds issued in the name of a child when the child is little, do not qualify.)

[Hal_Al]

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[Hal_Al]

There is a roundabout way (actually a tax loop hole) of doing what you want to do.  You can "rollover"* the savings bonds to a  529 plan. You open a 529 plan for yourself (naming yourself as beneficiary is allowed by most plans).  Then later, you transfer (rollover) the plan to another 529 where your niece would be the beneficiary. Transfers of 529 plan  beneficiarys, to other family members, is allowed. Check your 529 plan rules before doing this as some of them may have age limits.

For some back ground info see: http://www.fastweb.com/financial-aid/articles/how-do-i-roll-over-us-savings-bonds-into-a-529-college...

*You actually cash in the bonds. Then deposit the entire proceeds into a 529 plan.

[Opus 17]

So you cash in the bonds and collect the interest. Then deposit the entire proceeds into a 529 plan.

The first problem is that contributions to a 529 plan are only tax deductible on state taxes in 33 states.  Contributions to a 529 plan are not deductible on federal taxes.  If you lived in a high tax state like NY (7%) you would normally pay 25% federal tax and 7% state tax on the EE interest. Cashing in the bonds and putting them in a 529 plan would save the 7% state tax but not the 25% federal tax.

The second problem is that for this to work, you have to live in the same state where the niece will go to college.  Only 8 states allow you to deduct contributions to a different state's 529 plan.

It will work, but seems like a lot of effort for small benefit.

[Hal_Al]

By cashing the bonds and rolling over the proceeds to a 529 plan, the FEDERAL tax on the interest is effectively postponed. The taxpayer fills out form 8815 and gets a Federal interest exclusion for the current year. His basis in the 529 plan is what he paid for the bonds. The 529 plan will record the savings bond interest as "earnings" on the 529 plan account.

When the beneficiary withdraws $ from the 529 plan for college, she takes an education exclusion on the earnings (the former savings bond interest)*. This is done on the fedearl return.

This works for private 529 plans as well as most state plans. I'm not familiar with all state 529 plans, but mine (Ohio) works for out of state colleges. You may be thinking of Pre paid tuition plans.

As an additional tax bonus, you probably get the state deduction. Even though it's sort of a rollover from USSB to a 529; it is, in actuality, a 529 plan contribution and eligible for the state deduction.

*For future reference: Since the taxpayer (pengland01 in this case) is the still the  owner of the 529 plan, he/she will want the designate the eventual 529 plan withdrawals to go to school or the beneficiary (the niece) and not to him.

There's an additional benefit to rolling over savings bonds to a 529 plan. Room & board are "qualifying expenses" for a 529 plan withdrawal but not for cashing savings bonds and using the proceeds to directly pay for college.

[Opus 17]

From what read, the rules for rolling bonds over to a 529 are the same as cashing them in.  <a rel="nofollow" target="_blank" href="http://www.fastweb.com/financial-aid/articles/how-do-i-roll-over-us-savings-bonds-into-a-529-college...>

"Before redeeming US savings bonds, bond owners should double check to make sure they qualify for a tax-free redemption. Only bonds issued in 1990 or a later year qualify for tax-free treatment. The child must be listed as a beneficiary on the bonds, not as an owner or co-owner. The bond owner must claim an exemption for the beneficiary on his/her federal income tax return. The bond owner must have been at least 24 years old when the bonds were issued. The bond owner must have modified adjusted gross income under the income phaseouts noted above. The tax exclusion is not available to married taxpayers who file separate returns."

[Opus 17]

The rules for cashing in savings bonds on form 8815 are the same whether you pay cash tuition or put the cash in a qualified tuition plan.  <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/f8815.pdf">https://www.irs.gov/pub/irs-pdf/f8815.pdf</a>

[stevekayak]

Possible work-around here?

https://www.savingforcollege.com/article/how-to-rollover-us-savings-bonds-into-a-529-plan

Look at the paragraphs in section 

How to Handle Grandparent-owned Savings Bonds