Is interest earned on us savings bonds exempt if used to open a 529 plan for my granddaughter who is still in High School? If so, how do I enter it on the tax return?

[KWP3]

Savings bonds were purchased in my name thru a payroll deduction plan offered by my employer starting in September 1983.  I cashed them in 2017 and used all proceeds to open a 529 plan for my granddaughter.  I was told that the interest earned on these bonds is tax exempt if used to open a 529 plan.  How do I enter this information?  Thank you! 

[AnthonyC · Accepted solution]

Contributions to a qualified tuition program (a.k.a 529 plan) can be used as a qualifying expense for purposes of the exclusion from income for savings bond interest (see IRS Publication 907 page 56).

However, the contributions must also be for either you, your spouse, or a dependent for whom you claim an exemption for on your tax return.  So, assuming that your grandchild is not a dependent on your return, the contributions to a 529 plan for her would not qualify given this information.

Now, a possible way around this would have been to open the 529 plan in your own name, cash in the bonds and fund the 529, then use this contribution as a basis for the interest exclusion, and then change the beneficiary of the 529 plan later on to your grandchild.  From your post, it appears you may have already opened and funded the account in your grandchild's name - so this would not work at this time.

If your grandchild is a dependent on your return or you did do the above scenario with a 529 plan funding, let me know in the comments and I can explain entering this into TurboTax in greater detail.   

[KWP3]

Thank you for the clarification and the suggestion to get around it.  You guessed it right, I have already opened and funded the account.  I will just have to pay taxes and be done with it.