26 U.S.C. § 135: Income from United States savings bonds used to pay higher education tuition and fees

(a) General rule In the case of an individual who pays qualified higher education expenses during the taxable year, no amount shall be includible in gross income by reason of the redemption during such year of any qualified United States savings bond.

Cases: Medina v. Commissioner, T.C. Summ. Op. 2003-115

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(b) Limitations

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(1) Limitation where redemption proceeds exceed higher education expenses

(A) In general If—

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(i) the aggregate proceeds of qualified United States savings bonds redeemed by the taxpayer during the taxable year exceed

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(ii) the qualified higher education expenses paid by the taxpayer during such taxable year,

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the amount excludable from gross income under subsection (a) shall not exceed the applicable fraction of the amount excludable from gross income under subsection (a) without regard to this subsection.

(B) Applicable fraction For purposes of subparagraph (A), the term “applicable fraction” means the fraction the numerator of which is the amount described in subparagraph (A)(ii) and the denominator of which is the amount described in subparagraph (A)(i).

(2) Limitation based on modified adjusted gross income

(A) In general If the modified adjusted gross income of the taxpayer for the taxable year exceeds $40,000 ($60,000 in the case of a joint return), the amount which would (but for this paragraph) be excludable from gross income under subsection (a) shall be reduced (but not below zero) by the amount which bears the same ratio to the amount which would be so excludable as such excess bears to $15,000 ($30,000 in the case of a joint return).

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(B) Inflation adjustment In the case of any taxable year beginning in a calendar year after 1990, the $40,000 and $60,000 amounts contained in subparagraph (A) shall be increased by an amount equal to—

Amended 1990

1990 Pub. L. 101-508 Pub. L. 101–508, § 11702(h)(1), substituted “the $40,000 and $60,000 amounts” for “each dollar amount” in introductory provisions.

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(i) such dollar amount, multiplied by

(ii) the cost-of-living adjustment under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 1989” for “calendar year 2016” in subparagraph (A)(ii) thereof.

Amended 1990, 1996, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 11002(d)(1)(M), substituted “for ‘calendar year 2016’ in subparagraph (A)(ii)” for “for ‘calendar year 1992’ in subparagraph (B)”.
1996 Pub. L. 104-188 Pub. L. 104–188, § 1703(d), inserted “, determined by substituting ‘calendar year 1989’ for ‘calendar year 1992’ in subparagraph (B) thereof” before period at end.
1990 Pub. L. 101-508 Pub. L. 101–508, § 11101(d)(1)(E), struck out before period at end “, determined by substituting ‘calendar year 1989’ for ‘calendar year 1987’ in subparagraph (B) thereof”.

(C) Rounding If any amount as adjusted under subparagraph (B) is not a multiple of $50, such amount shall be rounded to the nearest multiple of $50 (or if such amount is a multiple of $25, such amount shall be rounded to the next highest multiple of $50).

Amended 1990

1990 Pub. L. 101-508 Pub. L. 101–508, § 11702(h)(2), struck out “(A) or” after “subparagraph”.

(1) Qualified United States savings bond The term “qualified United States savings bond” means any United States savings bond issued—

(A) after December 31, 1989,

(B) to an individual who has attained age 24 before the date of issuance, and

(2) Qualified higher education expenses

(A) In general The term “qualified higher education expenses” means tuition and fees required for the enrollment or attendance of—

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(i) the taxpayer,

(ii) the taxpayer’s spouse, or

(iii) any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151,

at an eligible educational institution.

(B) Exception for education involving sports, etc. Such term shall not include expenses with respect to any course or other education involving sports, games, or hobbies other than as part of a degree program.

(C) Contributions to qualified tuition program and Coverdell education savings accounts Such term shall include any contribution to a qualified tuition program (as defined in section 529) on behalf of a designated beneficiary (as defined in such section), or to a Coverdell education savings account (as defined in section 530) on behalf of an account beneficiary, who is an individual described in subparagraph (A); but there shall be no increase in the investment in the contract for purposes of applying section 72 by reason of any portion of such contribution which is not includible in gross income by reason of this subparagraph.

Amended 1997, 1998, 2001

2001 Pub. L. 107-22 Pub. L. 107–22, in heading substituted “Coverdell education savings” for “education individual retirement” and in text substituted “a Coverdell education savings” for “an education individual retirement”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 402(a)(4)(A), (B), substituted “qualified tuition” for “qualified State tuition” in heading and text.
1998 Pub. L. 105-206 Pub. L. 105–206, § 6004(d)(9), inserted “and education individual retirement accounts” after “program” in heading and substituted “section 72” for “section 529(c)(3)(A)” in text.
1997 Pub. L. 105-34 Pub. L. 105–34, § 213(e)(2), inserted “, or to an education individual retirement account (as defined in section 530) on behalf of an account beneficiary,” after “(as defined in such section)”.
1997 Pub. L. 105-34 Pub. L. 105–34, § 211(c), added subpar. (C).

(3) Eligible educational institution The term “eligible educational institution” has the meaning given such term by section 529(e)(5).

Amended 1998

1998 Pub. L. 105-206 Pub. L. 105–206, § 6004(c)(1), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “The term ‘eligible educational institution’ means—
“(A) an institution described in section 1201(a) or subparagraph (C) or (D) of section 481(a)(1) of the Higher Education Act of 1965 (as in effect on October 21, 1988), and
“(B) an area vocational education school (as defined in subparagraph (C) or (D) of section 521(3) of the Carl D. Perkins Vocational Education Act) which is in any State (as defined in section 521(27) of such Act), as such sections are in effect on October 21, 1988.”

(4) Modified adjusted gross income The term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year determined—

(A) without regard to this section and sections 85(c), 137, 221, 911, 931, and 933, and

Amended 1996, 1998, 2001, 2004, 2017, 2020, 2021

2021 Pub. L. 117-2 Pub. L. 117–2 inserted “85(c),” before “137”.
2020 Pub. L. 116-260 Pub. L. 116–260 struck out “222,” after “221,”.
2017 Pub. L. 115-97 Pub. L. 115–97, § 13305(b)(1), struck out “199,” before “221”.
2004 Pub. L. 108-357 Pub. L. 108–357 inserted “199,” before “221”.
2001 Pub. L. 107-16 Pub. L. 107–16, § 431(c)(1), inserted “222,” after “221,”.
1998 Pub. L. 105-277 Pub. L. 105–277 inserted “221,” after “137,”.
1996 Pub. L. 104-188 Pub. L. 104–188, § 1807(c)(2), inserted “137,” before “911”.

(B) after the application of sections 86, 469, and 219.

(d) Special rules

(1) Adjustment for certain scholarships and veterans benefits The amount of qualified higher education expenses otherwise taken into account under subsection (a) with respect to the education of an individual shall be reduced (before the application of subsection (b)) by the sum of the amounts received with respect to such individual for the taxable year as—

Amended 1989

1989 Pub. L. 101-239 Pub. L. 101–239 substituted “subsection (a) with respect to” for “subsection (a) respect to”.

(A) a qualified scholarship which under section 117 is not includable in gross income,

(B) an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code,

(C) a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for educational expenses, or attributable to attendance at an eligible educational institution, which is exempt from income taxation by any law of the United States, or

(D) a payment, waiver, or reimbursement of qualified higher education expenses under a qualified tuition program (within the meaning of section 529(b)).

Amended 1996, 2001

2001 Pub. L. 107-16 Pub. L. 107–16, § 402(a)(4)(A), substituted “qualified tuition” for “qualified State tuition”.
1996 Pub. L. 104-188 Pub. L. 104–188, § 1806(b)(1), added subpar. (D).

(2) Coordination with other higher education benefits The amount of the qualified higher education expenses otherwise taken into account under subsection (a) with respect to the education of an individual shall be reduced (before the application of subsection (b)) by—

Amended 1997, 1998

1998 Pub. L. 105-206 Pub. L. 105–206, § 6004(d)(4), substituted “other higher education benefits” for “higher education credit” in heading and amended text of par. (2) generally. Prior to amendment, text read as follows: “The amount of the qualified higher education expenses otherwise taken into account under subsection (a) with respect to the education of an individual shall be reduced (before the application of subsection (b)) by the amount of such expenses which are taken into account in determining the credit allowable to the taxpayer or any other person under section 25A with respect to such expenses.”
1997 Pub. L. 105-34 Pub. L. 105–34, § 201(d), added par. (2) and redesignated former pars. (2) and (3) as (3) and (4), respectively.

(A) the amount of such expenses which are taken into account in determining the credit allowed to the taxpayer or any other person under section 25A with respect to such expenses; and

Amended 2001

2001 Pub. L. 107-16 Pub. L. 107–16, § 401(g)(2)(B), substituted “allowed” for “allowable”.

(B) the amount of such expenses which are taken into account in determining the exclusions under sections 529(c)(3)(B) and 530(d)(2).

Amended 2001

2001 Pub. L. 107-16 Pub. L. 107–16, § 402(b)(2)(A), substituted “the exclusions under sections 529(c)(3)(B) and 530(d)(2)” for “the exclusion under section 530(d)(2)”.

(3) No exclusion for married individuals filing separate returns If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and his spouse file a joint return for the taxable year.

Amended 1997

1997 Pub. L. 105-34 Pub. L. 105–34, § 201(d), added par. (2) and redesignated former pars. (2) and (3) as (3) and (4), respectively.

(4) Regulations The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations requiring record keeping and information reporting.

Amended 1997

1997 Pub. L. 105-34 Pub. L. 105–34, § 201(d), added par. (2) and redesignated former pars. (2) and (3) as (3) and (4), respectively.