ExpertHard1 markMultiple Choice
CPA · Question 25 · Area 3: Individual Taxation
A single taxpayer redeemed Series EE savings bonds in Year 1. The total proceeds were ,000 (,000 principal + ,000 interest). The taxpayer used all proceeds to pay for qualified higher education expenses. The taxpayer's modified AGI is ,000. The phase-out range for the exclusion is ,000 - ,000. What amount of interest is excludable from gross income?
A single taxpayer redeemed Series EE savings bonds in Year 1. The total proceeds were ,000 (,000 principal + ,000 interest). The taxpayer used all proceeds to pay for qualified higher education expenses. The taxpayer's modified AGI is ,000. The phase-out range for the exclusion is ,000 - ,000. What amount of interest is excludable from gross income?
Answer options:
A.
0
B.
,000
C.
,000
D.
,000
How to approach this question
Calculate the reduction percentage: (MAGI - Bottom of Range) / (Top - Bottom). Multiply total interest by (1 - reduction %).
Full Answer
C.,000✓ Correct
The exclusion is phased out because MAGI exceeds the threshold. The reduction fraction is (95,000 - 90,000) / 10,000 = 50%. Therefore, 50% of the ,000 interest is excluded (,000) and 50% is taxable.
Common mistakes
Applying the phase-out percentage to the principal + interest instead of just the interest, or calculating the taxable amount instead of the excluded amount.
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