Rolling US Savings Bonds into a 529 College Savings Plan for Tax-Free Treatment

I read your article on rolling savings bonds into a 529 plan but I am still not sure of one thing. If we are over the income threshold for tax-free redemption, can we roll the bonds into the 529 and avoid paying taxes on the bonds? Then when we take deductions from the 529 to pay for qualified expenses do we have to pay taxes at that point? — Maria A. To avoid a tax liability when redeeming US savings bonds, the bond owner's income must fall under the income phaseouts during the tax year when the bonds are redeemed. This requirement applies regardless of whether the proceeds are used to pay for qualified higher education expenses or are rolled into a 529 college savings plan, prepaid tuition plan or Coverdell Education Savings Account. If the bond owner expects to have income above the income phaseouts when the child enrolls in college, but currently has income below the phaseouts, the bond owner should consider redeeming the savings bonds now to roll them into a 529 college savings plan. The current redemption will be tax-free because the bond owner's income is below the income phaseouts and the rollover into a 529 college savings plan qualifies for tax-free treatment. Since there are no income phaseouts on tax-free distributions from 529 college savings plans, the future distributions to pay for qualified higher education expenses will also be tax-free. Thus rolling US Savings Bonds into a 529 college savings plan can be an effective method of bypassing the income phaseouts on tax-free redemptions of US savings bonds. But if the bond owner's income is above the income phaseouts now and the bond owner expects his or her income to continue to be above the phaseouts when the child enrolls in college, there's no way to avoid paying income taxes on the savings bonds. The income phaseouts in 2011 were between $71,100 and $86,100 for single filers and beween $106,650 and $136,650 for married taxpayers who file jointly. Married taxpayers who file separate returns are not eligible for tax-free redemption of US savings bonds. Eligible US savings bonds include Series EE bonds issued after 1989 and Series I bonds. To claim the interest exclusion, taxpayers should file IRS Form 8815 with their federal income tax returns.