Hi - I have a bunch of savings bonds that have matured, that I neglected to use for my daughters college educational expenses. My daughter has since graduated. I would like to cash them in to use them as disposable income and avoid paying taxes on them. I have heard that I may be able to cash them in and avoid paying taxes on amounts equal to the amounts of scholarship monies my daughter received during her time in college. Any input if this is correct?
There is no truth to that.
The closest thing is that there is no penalty for withdrawing 529 plan money, if the student has scholarships. But even then, the tax is due. It's only the early/unqualified 10% penalty that is waived.
Savings bonds cashed and the money placed in a 529 plan qualifies as education spending (for avoiding tax on the interest). One gimmick is to set up a 529 plan for your daughter, with the savings bond money. If she doesn't use it for grad school, you can later change the beneficiary to a grandchild*.
But, you say the bonds have matured. That means tax, on the deferred interest, was due the year the bonds matured. I'm not sure the 529 plan gimmick is still available to you, after maturity. I wouldn't try that without consulting a professional tax accountant.
Savings bonds can only be used for tuition and fees (or contribute to a 529 plan). But once in a 529 plan, the money can also be used for room & board, books and computers.
What you heard is not correct (or you misunderstood). If a number of conditions are met, you can avoid tax on savings bond interest equal to the amount of tuition that you paid yourself, not tuition or other expenses that were paid by scholarships. You have to pay the tuition, or contribute to a 529 plan, in the same year that you cash in the savings bonds. There is no way to avoid tax and use the money as disposable income. Only Series EE and Series I bonds are eligible, and as I said, there are a number of other conditions that must be met. You can read all the details in Chapter 10, Education Savings Bond Program, in IRS Publication 970.