Funding 529 with 60 day rollover of US bonds Follow up question from Sept 9, 23

[vitaasso]

Hello Turbo tax team,

I have a question related to purchase price/face value of US bonds added as income when deposited into a 529. If someone can give me a clear answer I would sincerely appreciate it.

I am taking the interest exclusion on a number US I bonds cashed and rolled into a NY529 for myself. I first opened a NY529 college saving plan for myself/ Some months after opening the 529 plan I cashed some US I bonds and was advised that I must deposit the full, total amounts (purchase price and interest) otherwise the full interest exclusion would not apply.

A few months prior to opening my 529 I cashed some US bonds and DID NOT include or deposit any of those funds into my 529 as it was beyond 60 days. The interest amount on these US bonds are taxable but the face or purchase amounts of these bonds are not calculated as addition income and the purchase price amounts have no impact on my taxable and non taxable Social Security amounts.

The I bonds cashed and deposited into my NY529 and form 8815 has the interest fully excluded from my income. However it appears the face amount or purchase prices of these bond have be added to my Social Security as taxable income. If someone could please explain or knows why US bond face purchase amounts, used for education are added to Social Security as income and reduces the non taxable SS amounts. US bonds cashed and NOT used for education do not have their purchase price amounts added as income. Tax was already paid on the funds used to purchase these all bonds already.

I can't understand how funds already taxed and treated as income is being treated as income a second time. Could this be a program issue with the data transfer form 8815? Again my sincere thanks.

[Hal_Al]

Q. Does the face amount or purchase prices of these bond have be added to my income as taxable income?

A. No. 

Q.  Does  the face amount or purchase prices of these bond have be added to my income in calculating how much of my Social Security becomes taxable income?

A. No

You're entering something wrong.  You may want to upgrade to TT Live to get personal support.

[Hal_Al]

Enter the 1099-INT at the the interest income section. TurboTax (TT) will detect that it is savings bond interest and ask about education expenses. Be sure the interest is entered in box 3 (check that your 1099-Int has more than just a box 1).

At the screen "Tell us if any of these uncommon situations apply"", do NOT check the box "I need to adjust the taxable amount".  Click yes when asked if you used your bonds to pay for higher education expenses (the fine print tells your 529 counts). At the "Report educational expenses and benefits" screen, enter the amount of the 529 contribution as "Qualified higher educational expenses paid in 2023". At the "Additional Bond Information" screen, you enter the cashed bonds info.

You may need to combine the two 1099-INTs into one entry (if you got 2 separate 1099-INTs).  

[vitaasso]

Thanks for reply.  I have learned that bonds cashed and deposited into a 529 the face amount is treated as income to SS and effects the taxable amount.  Normally this is not the case but only when deposited into a 529.  thanks again.  

[Hal_Al]

@vitaasso said "  I have learned that bonds cashed and deposited into a 529 the face amount is treated as income to SS and effects the taxable amount.  Normally this is not the case but only when deposited into a 529.  thanks again."

What is your source for that? I've never heard of that. What is probably happening is that TurboTax (TT) is treating the interest as taxable.  When you add more income to your tax return, it affects the amount of your social security income that gets taxed. 

Earlier you said "I am taking the interest exclusion on a number US I bonds cashed and rolled into a NY529". Then you said "A few months prior to opening my 529 I cashed some US bonds and DID NOT include or deposit any of those funds into my 529 as it was beyond 60 days."  

Those appear to be conflicting statements, or did you have two different sets of bonds?