Question

In December of this year, Sam and Esterina, a married couple, redeemed qualified Series EE U.S. Savings Bonds. The proceeds were used to help pay for their daughter's college tuition. Sam and Esterina received proceeds of $12,000 representing principal of $9,000 and interest of $3,000. The qualified higher educational expenses they paid this year totaled $9,000. Their AGI is for 2018 is $129,550. What is the amount of interest income Sam and Esterina can exclude from their income this year?

A) $1,000

B) $1,500

C) $2,750

D) $3,000

Answer 1

Answer : $ 1,481

Working Notes :-

• Qualified educational expenses = $9,000
• Series EE proceeds = principal + interest = $12,000
• If Qualified educational expenses are less than the Series EE proceeds.
• Exclusion amount is alloted on pro rata basis =  Interest on EE savings bond x (Qualified educational expenses /Series EE proceeds)

= $3,000 × ( 9,000/ 12,000) = $ 2,250

• Assumed the AGI given is the modified AGI (MAGI) for calculation of further phase-out in interest -

Phase out in interest = [(MAGI - Phase-out threshold) ÷ Phase-out range] × excludable interest calculated

= [ (129,550 - 119,300) ÷ 30,000] × 2,250 = $ 769

Therefore,

Excludable interest after phase-out =

$2,250 - $ 769 = $ 1,481

(The phase-out threshold for 2018 is $119,300 and phase-out range for married is $ 30,000)