 and welcome to this session in which we will discuss educational savings bond. Well if you have a bond, if you have a savings bond, the savings bonds will pay interest. We're gonna be discussing the taxability of this interest but before we start we need to understand why do we have educational savings bond. Well the cost of education in the US is high and it has been increasing substantially, much faster than inflation. So the Congress, government, they want to help people pay for their education. So what did they do? They give you incentive. What is the incentive? Well if you invest in those bonds, the interest on those bonds is tax-free. So they want to help you to save for education. Now there are other ways they can help you but that's beside the point. So what would they do? They would say okay if you buy these bonds, the interest on these bonds will be executable. We will not tax you on these bond. So the incentive is the exclusion of the interest. So save, you would get some interest. The interest on that bond is tax-free. Of course, as long as you are using those bonds to do what? To pay for education. To qualify for this exclusion, there are certain conditions. One is the proceeds must be used to pay higher educational expenses. The bond has to be issued after December 31st, 1989, so 1990 and going forward. And the bond must be purchased by a person who is at least 24 years old. It means not the person attending school. That's the purpose of it. Again, the whole purpose of all of this is to make it financially feasible for individual to save for college education by utilizing this series EE. When we say series EE, it's basically the bond series that the government issue to do what? To pay for education. No taxes on the interest. The interest is executed. This is what we're going to be discussing in this session but always there are exceptions, rules, phase out and there are other other tools for savings for education and this is what we'll be discussing in this session. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's gonna help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true, false questions as well as exercises. Go ahead, start your free trial today. As always, the US government is generous to a point. So for example, in 2023 and this is basically 2023 means for this particular year. So this phase out might change. The phase out starts with a when modified adjusted gross income hits 91,854 individual which is single and 137,800 for joint return. What we mean by single head of household? It means it's not joint return. In other words, once you make so much money, once you make so much money, well guess what? You're gonna be losing that incentive. You're gonna be losing that tax-free interest. So once the modified adjusted gross income, just say adjusted gross income. There's a few computation but you don't have to worry about this. Once modified adjusted gross income exceeds 13 threshold by more than 15,000 for individuals. So the range is 15,000. You will start to lose your tax-free incentive 15,000 above. So if we're talking at 95,000, 91,850 happens to be for 2023. Again, this number could change from year to year. You have this range of 15,000. So once you start to get into this range, you will start to lose your tax-free incentive. And once you are above 91,850 plus 15, let me just compute the number. So I'll tell you once you go above that number which is 106,850, that's it. You would lose this incentive. For joint return, you start at 137,800, then you have a higher range of 30,000. So we're looking at 167,800. Anything above if you're modified adjusted gross income, you'll no longer qualify for this eligibility. Now, if the total redemption of the savings bond, including both principal and interest. So when you cash out those bonds and the bond, principal plus interest, remember, both principal and interest exceeds the cost of qualified education. Only a proportionate share of the interest can be eligible for this exclusion and will work an example illustrating this concept. So you have basically two limitation. One is the income limitation. The other one, if you cash out more than your higher education expenses. Let's take a look at an example. During 2023, Emily cashed out qualified savings bond, receiving 6,000 in redemption. 4,000 was the principal and 2,000 was interest. Now Emily's higher education expenses was only 5,000. So what do we see here? We see that she redeemed more than what she needed. Well, here's what's going to happen. She received interest of 2,000. Would that be executable? Without even looking at her modified adjusted gross income, we have to kind of make this computation. We'll take the 5,000 divided by 6,000. If we take 5 divided by 6, it means she only needed 83% of the amount that she cashed out, right? Because she only needed 5,000. She cashed out 6. So 83% what she needed times the interest component, so she can only execute 1,667. So notice this execution is made regardless of her modified adjusted gross income. Why? Because she redeemed more than what's needed. And remember, the redemption is supposed to be for higher education. So if you're redeeming more, it means there are a certain amount you are not using to pay higher education. Therefore, part of that interest, so only 83% of this interest of this 2,000 should be executable. The remaining, whatever the remaining is, will be included. Now let's assume to illustrate the the phase out component of it. Let's assume Emily's modified adjusted gross income being 100,000. Remember, you would start at 91,850. Notice, if we take 100,000 minus 91,008 100,000 minus 100,000 minus 81,000 91,000 100,000. So let's take 100,000 minus 91,850. She is 8,150 within the range, above the range. Now, it's 8,150 and the range is 15,000. Let's see what percentage is she within the range. If we take 81,50 divided by 15,000, she's 54.33, 54.43% inside the range. What do we do next? We'll take the phase out, the phase out. What do we do next? The phase out process decreases Emily's interest exclusion by $572. Well, this, this value is calculated by subtracting this amount from each other. And we said the amount is 8,150, then divide in the results by 15,000 as I showed you, then multiplying the outcome by 1,667. And the outcome was how much? 54.33. So if we'll take 54.33 times the amount that she's going to exclude, she's going to be only limited to $905.73. So this is the phase out limitation illustration. Now, what else do we have? What other incentives do we have to save for education? There's something called the qualified tuition program. And this is offered by states, not the federal government by the state, they offer what we call the prepaid tuition program. What is a prepaid? It means parents can pay the tuition now. So in 20 years or in 18 years, when their kids attend school, they are locked in with that tuition, okay, to secure college education against raising costs. Simply put, it's a form of hedging. Or in other words, you are getting a discount. You pay now, you will get a discount. That's what it is. Now, if the child does not attend school and the parents receive a refund, well, that's taxable. The interest of that refund is taxable. So those programs are similar to the below market rate loan, but they have an exclusion provision by the government. So think of it, you're just getting, you're paying for something, and you're getting a discount, basically, below market loan. But that below market loan return to you is tax free. The contribution must be obviously used for approved higher educational expenses, such as fees, books, supplies, room and board. Now, bear in mind, those contributions are not pre-tax, they're after tax. They could also cover necessary equipment, computer software and internet access, special needs services, K-12 tuition, public, private and religious schools, and specific apprenticeship program are eligible expenses as well. Also, what they did recently, you could use up to $10,000 to be used to repay education loan as well. Let's take a look at a quick example to illustrate this concept. Anna contributed $22,000 to a qualified tuition program for her son's college education. By the time her son graduated from high school, the fund grew to $32,000. So it went from $10,000 to $32,000. So you have an interest earned of $10,000. Now, the interest was not considered as part of Anna's interest. Why? Because it's in a program that's for what? For the purpose of paying her education. In this year, $7,500 of the fund was utilized to pay her son's tuition. None of that amount is taxable. Why? Because the original amount, this was already taxable, this is after tax money, and the $10,000 will grow tax-free. So when you take $7,500 out of the $32,000, none of that amount is taxable because the original amount was taxable and the additional growth is tax-free. Now, if the parents get a refund, any access amount refunded beyond the parents' initial contribution, which is beyond $22,000, is considered part of their taxable income. One more tool. We have the Coverdale Education Savings Account. Also known as 530 Plan, again, allow savings for both K-12 and post-secondary education. It's very similar to 529. The 529 was very limited now, they expended, so they're very similar now to each other. Contribution to this plan are capped at $2,000 per year, and the beneficiary must be under 18 or special need beneficiary at the time of the contribution. Similar to 529, contribution are not tax-deductible. Very, very similar to 529, but the penny income is tax-free if used for higher qualified education. Just saying thing as 529. What should you do now? You should go to Farhat Lectures, look at additional resources that deal with gross income exclusion. Gross income exclusion, it means amount that you receive, but it's not subject to taxation. Why is this concept important? Because everything, as far as we are concerned, is taxable, unless it's specifically executed. And this is what we learn. We learn about specific gross income exclusion. I have multiple choice truffles. You got to practice. You got to practice in order to understand these concepts. Good luck, study hard, and of course, stay safe.