Mike Smith received $10,000 (consisting of $6,000 principal and $4,000 interest) when he redeemed a Series EE savings bond in Year 6. The bond was issued in his name in Year 1 and the proceeds were used to pay for Mike's 21-year-old daughter's college tuition. Mike had not elected to report the yearly increases in the value of the bond. Mike must include what amount in gross income for Year 6 as a result of the bond redemption?
A.
$0
Correct B.
$4,000
C.
$6,000
D.
$10,000
A cash-basis taxpayer, unless he elects otherwise, is required to report the total increment in value of noninterest-bearing U.S. savings bonds issued at a discount (i.e., Series E and EE) at the time the bonds are surrendered. Thus, the increment in value from the date of purchase to the date of surrender at or before maturity is to be reported as income when the bond is surrendered.
As a result, when Mike redeems the Series EE bond, $4,000 in interest is taxable.
The exclusion for U.S. Savings Bond Income Used for Higher Education (IRC Section 135) does not apply for this question because the bonds must be qualified U.S. Savings Bonds issued after 1989 to an individual who has reached age 24 before the date of issuance.
Why is this not zero? According to Wiley:
Interest on series EE savings bonds can be excluded at maturity or when redeemed if the taxpayer uses the proceeds to pay higher education expenses in the year of redemption.
1. The exclusion is available if the owner of the bond is at least 24 years old (the bond must not be held in a child's name).
2. The interest is excluded in proportion to the educational expenses (tuition and fees) of the taxpayer, spouse, or dependent that are not reimbursed by scholarships.
FAR - June 2016 - 88
REG - July 2016 - 89
AUD - Aug 2016 - review phase currently
BEC - Sep 2016 -
Wiley CPA Excel & Ninja MCQ
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