IRS offers refunds for EE bonds.

In order to help low- to middle-income parents save for their children's education, Congress added a provision to the Small Business Job Protection Act of 1996 that allows the interest on series EE U.S. savings bonds to be excluded from gross income if the bond proceeds are used to pay for the qualified higher education expenses of the taxpayer, a spouse or a dependent. However, if a taxpayer's modified adjusted gross income exceeds an inflation-adjusted threshold amount, the exclusion does not apply.

The Revenue Reconciliation Act of 1993 inadvertently reduced the dollar thresholds for post-1992 years, preventing many taxpayers from taking a larger interest exclusion; however, the 1996 act retroactively corrected this drafting error. As a result, some taxpayers may now qualify for refunds for up to three years.

According to information release 96-52, the Internal Revenue Service estimates this technical correction will mean refunds for several thousand middle-income taxpayers who have redeemed qualified U.S. savings bonds after 1992, paid higher education expenses in the year of redemption and had incomes between the "former threshold" and "exclusion ends" amounts as listed in the table below.

In order to obtain a refund, taxpayers should use Form 8815, Exclusion of Interest From Series EE U.S. Savings Bonds Issues After 1989, to determine the correct exclusion and attach it to a completed Form 1040X, Amended U.S. Individual Income Tax Return, for each year being amended. Any version of form 8815 may be used by marking the proper year in the upper righthand corner and entering on line 10 the appropriate "revised threshold" amount from the table. However, taxpayers will not qualify for the exclusion and shouldn't complete the form if the amount entered on line 9 equals or exceeds the appropriate "exclusion ends" amount from the table.

Since an increased exclusion will result in lower adjusted gross income, taxpayers must check their amended returns to see if their itemized deductions for medical, miscellaneous or casualty loss expenses are affected.

The 1996 form 8815 has already been revised to reflect the correct phaseout figures. For married couples, the threshold is $74,200 ($49,450 if unmarried) and the exclusion phases out completely for modified incomes above $104,200 ($64,450 if unmarried). The exclusion is not available to married couples who file separate income tax returns.

Observation: The statute of limitations for refund claims is the later of three years after a return is filed or two years after the tax is paid. Thus, most calendar year 1993 taxpayers have only until April 15, 1997, to claim their 1993 refunds. --Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.

Who Gets the Refund?
Married taxpayers
               Former            Revised        Exclusion
Year         threshold          threshold         ends

1993         $60,000            $68,250          $ 98,250
1994         $61,850            $70,350          $100,350
1995         $63,450            $72,150          $102,150

Unmarried taxpayers
               Former            Revised          Exclusion
Year         threshold          threshold           ends
1993         $40,000            $45,500            $60,500
1994         $41,200            $46,900            $61,900
1995         $42,300            $48,100            $63,100