Question

Starting in 2011, Chuck and Luane have been purchasing Series EE bonds in their name to use for the higher education of their daughter Susie, who currently is age 18. During the year, they cash in $12,000 of the bonds to use for freshman year tuition, fees, and room and board. Of this amount, $5,000 represents interest. Of the $12,000, $8,000 is used for tuition and fees and $4,000 is used for room and board. Chuck and Luane's AGI, before the educational savings bond exclusion, is $132,200. Review § 135, and answer the following questions.

If Chuck and Luane file a joint, how much is the savings bond exclusion?
Round any division to five decimal places. Round your final answer to the nearest dollar.
$________

Answer 1

Step-by-step explanation:

The educational savings bond exclusion allows taxpayers to exclude from income all or part of the interest received on Series EE and I bonds when the bond proceeds are used to pay qualified higher education expenses.

To determine the amount of the exclusion, we need to calculate Chuck and Luane's modified adjusted gross income (MAGI), which is their AGI ($132,200) plus any tax-exempt interest they received during the year. Since the problem does not provide information about tax-exempt interest, we will assume it is zero.

Chuck and Luane can exclude from income the amount of interest on the bonds that was used to pay qualified higher education expenses, subject to certain limits based on their MAGI. For tax year 2022, the exclusion begins to phase out at MAGI of $125,550 for taxpayers filing jointly and is completely phased out at MAGI of $155,550 or more.

Since Chuck and Luane's MAGI is $132,200, they are within the phase-out range. To calculate the amount of their exclusion, we need to use the following formula:

Exclusion = (Qualified Education Expenses / Total Redemption Value) × Interest Earned

Total Redemption Value = Amount cashed in - Interest Earned

Total Redemption Value = $12,000 - $5,000 = $7,000

Exclusion = ($8,000 / $7,000) × $5,000

Exclusion = $5,714.29

Rounding to the nearest dollar, Chuck and Luane's savings bond exclusion is $5,714.