What amount of education bond interest must be included in taxable income when only part is used for education costs?

When it comes to education bonds, specifically Series EE and Series I U.S. savings bonds, the interest earned on these bonds can be excluded from taxable income if the proceeds are used for qualified education expenses. If only part of the interest is used for education costs, the amount that needs to be included in taxable income is proportional to the amount that was not used for those qualified expenses.

This means that if the bondholder uses a portion of the bond proceeds for non-qualified expenses, then only the interest portion that corresponds to that non-qualified amount must be reported as taxable income. For example, if 70% of the bond's proceeds are used for qualified education costs, only 30% of the accrued interest would be taxable.

This proportional approach ensures that taxpayers are only taxed on the benefit they did not receive for educational purposes, aligning tax liability with the actual use of the funds. Thus, the rationale for including only proportional interest in taxable income is rooted in the principle of fairness regarding how the bond proceeds were utilized.