Savings bonds for education

[avasilakis]

Under cashing savings bonds for education, do you include Box 2 of 1099-Q that was found to be not taxable in the box TT asks for Nontaxable Educational Benefits Received for 2019?

[KrisD15]

Yes, the earnings that are tax free for that tax year would included. 

Note that contributions made that tax year can be added to education expenses. 

According to the IRS Pub 970 Page 63 concerning savings bands used for education:

“Adjusted qualified education expenses. You must reduce your qualified education expenses by all of the following tax-free benefits.

1. Tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1).

2. Expenses used to figure the tax-free portion of distributions from a Coverdell ESA (see Qualified Education Expenses in chapter 7).

3. Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified Education Expenses in chapter 8).

4. Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as:

a. Veterans' educational assistance benefits (see Veterans' Benefits in chapter 1);

b. Qualified tuition reductions (see Qualified Tuition Reduction in chapter 1); or

c. Employer-provided educational assistance (see chapter 11).

5. Any expenses used in figuring the American opportunity and lifetime learning credits. See What Expenses Qualify in chapter 2 (American opportunity credit), and What Expenses Qualify in chapter 3 (lifetime learning credit), for more information.”.

IRS Pub 970

[Hal_Al]

No.  At least, not exactly.  It's the box 1 amount on the 1099-Q that cannot overlap with the savings bonds.  Note the wording from Pub 970:

"Expenses used to figure the tax-free portion of distributions from a QTP (see Qualified Education Expenses in chapter 8)".

Using an example:

You have $10,000 of qualified expenses.

You got a 1099-Q with $8000 in Box 1 and $4000 in box 2

You cashed $5000 of savings bonds 

You have to decide how to allocate the $10,000 of expenses.  If you allocate $8000 to the 1099-Q,  that only leaves $2000 to be used for the savings bond exclusion 

So, you essentially include Box 1 (not box 2) of 1099-Q in the box TT asks for Nontaxable Educational Benefits Received for 2019.

[avasilakis]

Thank you for your replies. In Pub 970 it is stated that for the QTP, the amount that is in box 1 on 1099-Q is  the sum of basis and earnings. I believe that it also states that the basis is return of investment capital and does not need to be reported. That’s why I’m confused. Please elaborate. Thanks again. 

[Hal_Al]

The box 2 amount is the maximum taxable amount, because, as you say, the basis is return of investment capital, and not taxed  But in order for some of the earnings (box 2) to not be taxable, all of the  box 1 amount must be used for qualified expenses.

Maybe another example may help:

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit  (or savings bond interest exclusion) equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit and/or savings bond interest exclusion)

 =$3000 Can be used against the 1099-Q

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)