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Internal Revenue Code, § 135. Income From United States Savings Bonds Used To Pay Higher Education Tuition And Fees

I.R.C. § 135(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.
I.R.C. § 135(b) Limitations
I.R.C. § 135(b)(1) Limitation Where Redemption Proceeds Exceed Higher Education Expenses
I.R.C. § 135(b)(1)(A) In General
If—
I.R.C. § 135(b)(1)(A)(i)
the aggregate proceeds of qualified United States savings bonds redeemed by the taxpayer during the taxable year exceed
I.R.C. § 135(b)(1)(A)(ii)
the qualified higher education expenses paid by the taxpayer during such taxable year, 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.
I.R.C. § 135(b)(1)(B) Applicable Fraction
For purposes of subparagraph (A), the term “applicable fraction” means the fraction the numerator of which is the amount described in subparagraph (A)(ii) and the denominator of which is the amount described in subparagraph (A)(i).
I.R.C. § 135(b)(2) Limitation Based On Modified Adjusted Gross Income
I.R.C. § 135(b)(2)(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).
I.R.C. § 135(b)(2)(B) Inflation Adjustment
In the case of any taxable year beginning in a calendar year after 1990, the $40,000 and $60,000 amounts contained in subparagraph (A) shall be increased by an amount equal to—
I.R.C. § 135(b)(2)(B)(i)
such dollar amount, multiplied by
I.R.C. § 135(b)(2)(B)(ii)
the cost-of-living adjustment under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting ‘calendar year 1989’ for ‘calendar year 2016’ in subparagraph (A)(ii) thereof.
I.R.C. § 135(b)(2)(C) Rounding
If any amount as adjusted under subparagraph (B) is not a multiple of $50, such amount shall be rounded to the nearest multiple of $50 (or if such amount is a multiple of $25, such amount shall be rounded to the next highest multiple of $50).
I.R.C. § 135(c) Definitions
For purposes of this section—
I.R.C. § 135(c)(1) Qualified United States Savings Bond
The term “qualified United States savings bond” means any United States savings bond issued—
I.R.C. § 135(c)(1)(A)
after December 31, 1989,
I.R.C. § 135(c)(1)(B)
to an individual who has attained age 24 before the date of issuance, and
I.R.C. § 135(c)(1)(C)
at discount under section 3105 of title 31, United States Code.
I.R.C. § 135(c)(2) Qualified Higher Education Expenses
I.R.C. § 135(c)(2)(A) In General
The term “qualified higher education expenses” means tuition and fees required for the enrollment or attendance of—
I.R.C. § 135(c)(2)(A)(i)
the taxpayer,
I.R.C. § 135(c)(2)(A)(ii)
the taxpayer's spouse, or
I.R.C. § 135(c)(2)(A)(iii)
any dependent of the taxpayer with respect to whom the taxpayer is allowed a deduction under section 151, at an eligible educational institution.
I.R.C. § 135(c)(2)(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.
I.R.C. § 135(c)(2)(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.
I.R.C. § 135(c)(3) Eligible Educational Institution
The term “eligible educational institution” has the meaning given such term by section 529(e)(5).
I.R.C. § 135(c)(4) Modified Adjusted Gross Income
The term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year determined—
I.R.C. § 135(c)(4)(A)
without regard to this section and sections 137, 221, 222, 911, 931, and 933, and
I.R.C. § 135(c)(4)(B)
after the application of sections 86, 469, and 219.
I.R.C. § 135(d) Special Rules
I.R.C. § 135(d)(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—
I.R.C. § 135(d)(1)(A)
a qualified scholarship which under section 117 is not includable in gross income,
I.R.C. § 135(d)(1)(B)
an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code,
I.R.C. § 135(d)(1)(C)
a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for educational expenses, or attributable to attendance at an eligible educational institution, which is exempt from income taxation by any law of the United States, or
I.R.C. § 135(d)(1)(D)
a payment, waiver, or reimbursement of qualified higher education expenses under a qualified tuition program (within the meaning of section 529(b)).
I.R.C. § 135(d)(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—-
I.R.C. § 135(d)(2)(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
I.R.C. § 135(d)(2)(B)
the amount of such expenses which are taken into account in determining the exclusions under sections 529(c)(3)(B) and 530(d)(2).
I.R.C. § 135(d)(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.
I.R.C. § 135(d)(4) Regulations
The Secretary may prescribe such regulations as may be necessary or appropriate to carry out this section, including regulations requiring record keeping and information reporting.
(Added by Pub. L. 100-647, title VI, Sec. 6009(a), Nov. 10, 1988, 102 Stat. 3688, and amended Pub. L. 101-239, title VII, Sec. 7816(c)(2), Dec. 19, 1989, 103 Stat. 2420; Pub. L. 101-508, title XI, Sec. 11101(d)(1)(E), 11702(h), Nov. 5, 1990, 104 Stat. 1388-405, 1388-516; Pub. L. 104-188, title I, Sec. 1703(d), 1807(c)(2), and 1806(b)(1), Aug. 20, 1996, 110 Stat. 1755; Pub. L. 105-34, title II, Sec. 201(d), 211(c), 213(e)(2), Aug. 5, 1997, 111 Stat 788; Pub. L. 105-206, title VI, Sec. 6004(c), (d), July 22, 1998, 112 Stat 685; Pub. L. 105-277, title IV, Sec. 4003(a), Oct. 21, 1998, 112 Stat 2681; Pub. L. 107-16, title IV, Sec. 401, 402, 431, June 7, 2001, 115 Stat. 38; Pub. L. 107-22, Sec. 1(b), July 26, 2001, 115 Stat. 196; Pub. L. 108-357, title I, Sec. 102(d)(1), Oct. 22, 2004, 118 Stat. 1418; Pub. L. 115-97, Sec. 11002(d)(1)(M), 13305(b)(1), Dec. 22, 2017, 131 Stat. 2054.)
BACKGROUND NOTES
AMENDMENTS
2017 — Subsec. (b)(2)(B)(ii). Pub. L. 115-97, Sec. 11002(d)(1)(M), amended clause (ii) by substituting “for ‘calendar year 2016' in subparagraph (A)(ii)”, for “for ‘calendar year 1992' in subparagraph (B)”.
Subsec. (c)(4)(A). Pub. L. 115-97, Sec. 13305(b)(1), amended par. (4)(A) by striking ‘‘199,’’.
2004 — Subsec. (c)(4)(A). Pub. L. 108-357, Sec. 102(d)(1), amended subpar. (A) by inserting “199,” before “221”.
2001 — Subsec. (c)(2)(C). Pub. L. 107-22, Sec. 1(b)(1)(B), amended subpar. (C) by substituting “a Coverdell education savings" for “an education individual retirement”.
Subsec. (c)(2)(C). Pub. L. 107-22, Sec. 1(b)(3)(B), amended the heading of subpar. (C) by substituting “Coverdell education savings” for “education individual retirement”.
Subsec. (c)(2)(C). Pub. L. 107-16, Sec. 402(a)(4), amended subpar. (C) by substituting “qualified tuition” for “qualified State tuition” in the heading and the text.
Subsec. (c)(4). Pub. L. 107-16, Sec. 431(c)(1), amended par. (4) by inserting “222,” after “221,”.
Subsec. (d)(1)(D). Pub. L. 107-16, Sec. 402(a)(4)(A), amended subpar. (A) by substituting “qualified tuition” for “qualified State tuition”.
Subsec. (d)(2)(A). Pub. L. 107-16, Sec. 401(g)(2)(B), amended subpar. (A) by substituting “allowed” for “allowable”.
Subsec. (d)(2)(B). Pub. L. 107-16, Sec. 402(b)(2)(A), amended subpar. (B) by substituting “the exclusions under sections 529(c)(3)(B) and 530(d)(2)” for “the exclusion under section 530(d)(2)”.
1998 — Subsec. (c)(4)(A). Pub. L. 105-277, Sec. 4003(a)(2)(B), amended subpar. (A) by inserting “221,” after “137,”.
Subsec. (c)(2)(C). Pub. L. 105-206, Sec. 6004(d)(9), amended subpar. (C) by inserting “and education individual retirement accounts” after “program” in the heading and by substituting “section 72” for “section 529(c)(3)(A)”.
Subsec. (c)(3). Pub. L. 105-206, Sec. 6004(c)(1), amended par. (3). Prior to amendment it read as follows:
“(3) Eligible educational institution
The term “eligible educational institution” means--
“(A) an institution described in section 1201(a) or subparagraph (C) or (D) of section 481(a)(1) of the Higher Education Act of 1965 (as in effect on October 21, 1988), and
“(B) an area vocational education school (as defined in subparagraph (C) or (D) of section 521(3) of the Carl D. Perkins Vocational Education Act) which is in any State (as defined in section 521(27) of such Act), as such sections are in effect on October 21, 1988.”
Subsec. (d)(2). Pub. L. 105-206, Sec. 6004(d)(4), amended par. (2). Prior to amendment it read as follows:
“(2) Coordination with higher education credit.--
“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 the amount of such expenses which are taken into account in determining the credit allowable to the taxpayer or any other person under section 25A with respect to such expenses.”
1997 — Subsec. (c)(2)(C). Pub. L. 105-34, Sec. 211(c), added subpar. (C).
Subsec. (c)(2). Pub. L. 105-34, Sec. 213(e)(2), amended subpar. (C) by inserting “, or to an education individual retirement account (as defined in section 530) on behalf of an account beneficiary” after “(as defined in such section)”.
Subsec. (d). Pub. L. 105-34, Sec. 201(d), redesignated pars. (2) and (3) as pars. (3) and (4), respectively, and added a new par. (2).
1996 — Subsec. (b)(2)(B)(ii). Pub. L. 104-188, Sec. 1703(d) added text before the period.
Subsec. (c)(4)(A). Pub. L. 104-188, Sec. 1807(c)(2) inserted “137,” before “911”.
Subsec. (d)(1). Pub. L. 104-188, Sec. 1806(b)(1) struck “or” at the end of subparagraph (B), struck the period at the end of subparagraph (C) and inserted “, or”, and added to the end new subparagraph (D).
1990 — Subsec. (b)(2)(B). Pub. L. 101-508, Sec. 11702(h)(1), substituted ‘the $40,000 and $60,000 amounts’ for ‘each dollar amount’ in introductory provisions.
Subsec. (b)(2)(B)(ii). Pub. L. 101-508, Sec. 11101(d)(1)(E), struck out before period at end ‘, determined by substituting ‘calendar year 1989’ for ‘calendar year 1987’ in subparagraph (B) thereof'.
Subsec. (b)(2)(C). Pub. L. 101-508, Sec. 11702(h)(2), struck out ‘(A) or’ after ‘subparagraph’.
1989 — Subsec. (d)(1). Pub. L. 101-239 substituted ‘subsection (a) with respect to’ for ‘subsection (a) respect to’.
EFFECTIVE DATE OF 2017 AMENDMENT
Amendment by Sec. 11002(d)(1)(M) of Pub. L. 115-97, effective for taxable years beginning after December 31, 2017.
Amendment by Sec. 13305(b)(1) of Pub. L. 115-97, effective for taxable years beginning after December 31, 2017. Pub. L. 115-141, Div .T, Sec. 101(c), added the following transition rule:
“(2) TRANSITION RULE FOR QUALIFIED PAYMENTS OF PATRONS OF COOPERATIVES.—
‘‘(A) IN GENERAL.—The amendments made by this section shall not apply to a qualified payment received by a taxpayer from a specified agricultural or horticultural cooperative in a taxable year of the taxpayer beginning after December 31, 2017, which is attributable to qualified production activities income with respect to which a deduction is allowable to the cooperative under section 199 of the Internal Revenue Code of 1986 (as in effect before the amendments made by this section) for a taxable year of the cooperative beginning before January 1, 2018. Any term used in this subparagraph which is also used in section 199 of such Code (as so in effect) shall have the same meaning as when used in such section.
‘‘(B) COORDINATION WITH SECTION 199A.—No deduction shall be allowed under section 199A of such Code for any qualified payment to which subparagraph (A) applies.’’
EFFECTIVE DATE OF 2004 AMENDMENT
Amendment by Sec. 102(d)(1) of Pub. L. 108-357 effective for taxable years beginning after December 31, 2004.
EFFECTIVE DATE OF 2001 AMENDMENTS
Amendments by Sec. 1 of Pub. L. 107-22 effective on the date of the enactment of this Act [Enacted: July 26, 2001].
Amendment by Sec. 401(g) of Pub. L. 107-16 effective for taxable years beginning after December 31, 2001.
Amendments by Sec. 402 of Pub. L. 107-16 effective for taxable years beginning after December 31, 2001.
Amendment by Sec. 431(c) of Pub. L. 107-16 effective for payments made in taxable years beginning after December 31, 2001.
Section 901 (Sunset of Provisions of Act) of Pub. L. 107-16, as amended by Pub. L. 107-358 and Pub. L. 111-312, Sec. 101(a), and struck by Pub. L. 112-240, Sec. 101(a)(1) (effective for taxable, plan, or limitation years beginning after Dec. 31, 2012, and estates of decedents dying, gifts made, or generation skipping transfers after Dec. 31, 2012), provided that:
“(a) IN GENERAL.—All provisions of, and amendments made by, this Act shall not apply—
“(1) to taxable, plan, or limitation years beginning after December 31, 2012, or
“(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2012.
“(b) APPLICATION OF CERTAIN LAWS.—The Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.
“(c) EXCEPTION.—Subsection (a) shall not apply to section 803 (relating to no federal income tax on restitution received by victims of the Nazi regime or their heirs or estates).”
PERMANENT EXTENSION OF MODIFICATIONS TO QUALIFIED TUITION PROGRAMS
Section 1304(a) of Pub. L. 109-280 provided that:
“Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 [Pub. L. 107-16] (relating to sunset provisions) shall not apply to section 402 of such Act (relating to modifications to qualified tuition programs).”
EFFECTIVE DATE OF 1998 AMENDMENTS
Amendment made by Sec. 4003(a)(2)(B) of Pub. L. 105-277 effective as if included in the provisions of the Taxpayer Relief Act of 1997 to which it relates.
Amendment made by Sec. 6004(c)(1) of Pub. L. 105-206 effective as if included in the provisions of the Taxpayer Relief Act of 1997 to which it relates [Effective Date of Pub. L. 105-34, Sec. 211: Taxable years beginning after December 31, 1997].
Amendments made by Sec. 6004(d) of Pub. L. 105-206 effective as if included in the provisions of the Taxpayer Relief Act of 1997 to which they relate [Effective Date of Pub. L. 105-34, Sec. 213: Taxable years beginning after December 31, 1997].
EFFECTIVE DATE OF 1997 AMENDMENTS
Section 201(f)(1) of Pub. L. 105-34 provided that: “amendments made by this section shall apply to expenses paid after December 31, 1997 (in taxable years ending after such date), for education furnished in academic periods beginning after such date.
Section 211(f)(4) of Pub. L. 105-34 provided that: “the amendments made by subsection (c) shall apply to taxable years beginning after December 31, 1997.
Section 213(f) of Pub. L. 105-34 provided that : “the amendments made by this section shall apply to taxable years beginning after December 31, 1997.
EFFECTIVE DATE OF 1996 AMENDMENT
Section 1703(o) of Pub. L. 104-188 provided that: “any amendment made by this section shall take effect as if included in the provision of the Revenue Reconciliation Act of 1993 to which such amendment relates.”
Section 1807(e) of Pub. L. 104-188 provided that: “amendments made by this section shall apply to taxable years beginning after December 31, 1996.”
Section 1806(c) of Pub. L. 104-188, as amended by Pub. L. 105-34, Sec. 1601(h)(1)(C), provided that:
‘(1) In general.—The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act [Aug. 20, 1996].
‘(2) Transition rule.—If—
‘(A) a State or agency or instrumentality thereof maintains, on the date of the enactment of this Act [Aug. 20, 1996], a program under which persons may purchase tuition credits or certificates on behalf of, or make contributions for education expenses of, a designated beneficiary, and
‘(B) such program meets the requirements of a qualified State tuition program before the later of—
‘(i) the date which is 1 year after such date of enactment, or
‘(ii) the first day of the first calendar quarter after the close of the first regular session of the State legislature that begins after such date of enactment,
‘then such program (as in effect on August 20, 1996) shall be treated as a qualified State tuition program with respect to contributions (and earnings allocable thereto) pursuant to contracts entered into under such program before the first date on which such program meets such requirements (determined without regard to this paragraph) and the provisions of such program (as so in effect) shall apply in lieu of section 529(b) of the Internal Revenue Code of 1986 with respect to such contributions and earnings.
‘For purposes of subparagraph (B)(ii), if a State has a 2-year legislative session, each year of such session shall be deemed to be a separate regular session of the State legislature.’
EFFECTIVE DATE OF 1990 AMENDMENT
Amendment by section 11101(d)(1)(E) of Pub. L. 101-508 applicable to taxable years beginning after Dec. 31, 1990, see section 11101(e) of Pub. L. 101-508, set out as a note under section 1 of this title.
Amendment by section 11702(h) of Pub. L. 101-508 effective as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such amendment relates, see section 11702(j) of Pub. L. 101-508, set out as a note under section 59 of this title.
EFFECTIVE DATE OF 1989 AMENDMENT
Amendment by Pub. L. 101-239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such amendment relates, see section 7817 of Pub. L. 101-239, set out as a note under section 1 of this title.
EFFECTIVE DATE
Section applicable to taxable years beginning after Dec. 31, 1989, see section 6009(d) of Pub. L. 100-647, set out as an Effective Date of 1988 Amendment note under section 86 of this title.
ADJUSTMENT OF LIMITATION ON EXCLUSION OF INCOME UNDER THIS SECTION FOR TAXABLE YEARS BEGINNING IN 1991
For adjustment of limitation on exclusion for income from redemption of United States savings bonds for taxpayers who pay qualified higher education expenses under this section for taxable years beginning in 1991, see section 7 of Revenue Procedure 90-64, set out as a note under section 1 of this title.
PROMOTION OF PUBLIC AWARENESS OF PROGRAM
Section 6009(b) of Pub. L. 100-647 provided that: ‘The Secretary of the Treasury or his delegate shall take such actions as may be necessary to make the general public aware of the program established by this section (enacting this section, amending sections 86, 219, and 469 of this title, renumbering former section 135 of this title as section 136 of this title, and enacting provisions set out as notes below and under section 86 of this title).’
PARENTAL ASSISTANCE WITH TUITION STAMP STUDY
Section 6009(e) of Pub. L. 100-647 provided that: ‘The Secretary of the Treasury or his delegate, after consultation with the Secretary of Education or his delegate, shall conduct a study of the feasibility of using stamps or similar programs to encourage and facilitate savings by parents towards the purchase of Series EE bonds eligible for the exclusion provided under the amendments made by this section (enacting this section, amending sections 86, 219, and 469 of this title, and renumbering former section 135 of this title as section 136 of this title). Not later than December 31, 1989, the Secretary of the Treasury or his delegate shall submit the results of such study, together with any recommendations deemed appropriate, to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate.’
PRIOR PROVISIONS
A prior section 135 was renumbered section 136 of this title.