In 1995, Lidia, age 30, purchased a Series EE bond for $1,000. In 2012, she redeemed it and used all of the proceeds to pay for qualified education expenses of her daughter, who is her dependent. On redemption, she received $1,450, $975 of which is principal and $475 of which is interest. If Lidia”s modified adjusted gross income in 2012 is $90,000, how much, if any, of the proceeds are excludable? (Assume Lidia is a single mother filing as head of household.)
a. Correct. Because Lidia”s MAGI is over $87,850 in 2012, she cannot exclude any interest on redemption of the bond, even though it is used for qualified higher education expenses of her dependent child.
b. Incorrect. The full amount of interest, or $475, would be excludable if her MAGI were below $72,850.
c. Incorrect. The $975 is principal, which is not taxable regardless of MAGI.
d. Incorrect. The $1,000 is what Lidia paid for the bond; the proceeds do not reflect a recovery of her full investment.