§ 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.
(b)
Limitations
(1)
Limitation where redemption proceeds exceed higher education expenses
(A)
In general
If—
(i)
the aggregate proceeds of qualified United States savings bonds redeemed by the taxpayer during the taxable year exceed
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.
(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).
(c)
Definitions
For purposes of this section—
(1)
Qualified United States savings bond
The term “qualified United States savings bond” means any United States savings bond issued—
(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—
(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.
(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—
(B)
an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title
38, United States Code,
(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—
(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
(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.