Military Finances 201: Getting Ready to Use US Savings Bonds to Pay for College? It Might Not Work Like You ThinkCollege Planning Taxes
I Remember the Days of the Military Savings Bond Drives
I remember when I was a lieutenant the annual Savings Bond Drives. Some lucky junior officer or NCO was responsible for making sure everyone in the organization had the opportunity to buy Savings Bonds. There was generally an expectation that as a good member of the military, you would buy the bonds. Or maybe you would be told that if you use the proceeds of the bonds for qualified education expenses, you wouldn't pay taxes on the interest. That may have been true then, it might not be now.
Higher Military Rank or Working after Military Retirement May Goof Up Your Plan
If you planned on using the bonds to pay for college expenses, you may earn yourself into a pickle. If you've reached O-5 or O-6 or if you have significant bonuses, you'll probably lose out on the exclusion from income. If you're retired and working, you'll almost certainly lose some or all of the exclusion. That is because the exclusion has income limits and a phase out range. Specifically (for 2023):
- $137,800 - $167,800 of Adjusted Gross Income (AGI) for those who are married and file jointly.
- $91,850 - $106,850 of AGI for those who file single or head of household
- Those who are married and file separately are not eligible for the exclusion at any income level
If you're above the upper limit, you get no exclusion. About 3% of the interest will become taxable for each $1,000 of income you add above the start of the phase out range.
What Can You Do About It?
If you're already in the phase out range and your kids are in school, the only solution is to decrease your AGI. One of the most effective ways to do this is to increase your pre-tax contributions to a 401(k) or TSP.
If you're below the phase out range and your kids are in school, use the bonds while you still can get tax-free income.
If you're below the phase out range but your kids haven't started college yet and your income will be above the limit when they do, consider cashing the bonds and depositing the proceeds into a 529 account. Contributions to a 529 account are considered a qualified education expense so the interest won't be taxed. And, if you use the 529 funds for qualified education expenses you won't pay taxes when you take the funds out either.
Military Finances are Different
In this case, civilians and military members are treated the same by the tax code. That isn't always the case and military members and retirees have financial benefits that are different from their civilian counterparts. That's why we think that if you're a active or retired Senior Military Officer or NCO, you should work with someone that deals with your issues each and every day. If you'd like to see how we do that, use the button below to schedule a free, initial consultation.
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