Under the Education Savings Bond Program, taxpayers may exclude from income the interest received on the redemption of Series EE savings bonds used to pay qualified higher education expenses. To qualify, the bonds must have been issued after 1989. Also, the right to this break phases out as modified adjusted gross income from $94,700 to $124,700 on joint returns and from $63,100 to $78,106 on individual returns. Those phase-out zones are for 2006; they will be slightly higher in 2007.
Contributions to a qualified state tuition or college savings program count as qualified higher educational expenses — so you can cash eligible bonds and move the money to a college savings plan tax-free — but expenses for which you claim a Hope credit or lifetime learning credit do not.
For more information, you may want to visit the following:
Interview for Form 8815, Series EE Savings Bonds
Form 8815, Exclusion of Interest from Series EE U.S. Savings Bonds (Issued after December 31, 1989)
Form 8818, Redemption of EE Savings Bonds
IRS Publication 550, Investment Income and Expenses (Including Capital Gains and Losses)