An education savings bond program allows qualified taxpayers to exempt all or a portion of interest earned upon redemption of eligible savings bonds from their annual gross income. To qualify for this program, savings bonds must be Series EE or Series I bonds issued after 1989. The bonds become tax exempt when the owner uses both the principal and interest to pay for higher education at qualified institutions for himself, a spouse or a dependent.

The following rules apply in order for you to take advantage of the program:

1. The bond owner must be 24 years of age at the time of purchasing the bond. If a parent buys the bond for his or her child and puts it in the child's name who is under 24 years of age, the bond does not qualify.

2. When the savings bonds are redeemed, all funds must be used toward higher education payments for the owner, his or her spouse or a dependent. The Internal Revenue Service, or IRS, only recognizes payments made to qualified institutions where the U.S. Department of Education has established student-aid programs. Funds can only be used towards tuition, including lab and course fees, and degree-required courses. Ineligible expenses include room and board, books, sports and recreational activities.

3. Funds from the redeemed bonds can also be used to make tax-free contributions to a Coverdell Education Savings Account.

4. Eligible education expenses must be incurred during the same tax year as the bond's redemption.

5. Any nontaxable education payments, education aid or tax-free scholarships must be subtracted from eligible expenses.

6. If the total proceeds from the bonds are less than the amount of eligible expenses, all of the interest accrued on the bond remains tax-free. However, if the bond proceeds exceed the eligible expense amount, the amount of tax-exempt interest is subject to a prorated reduction.

7. The amount of interest eligible to be tax exempt is based on the owner's modified adjusted gross income, or MAGI. If the owner's MAGI reaches a certain threshold, he may not be eligible for the education savings bond program. For joint tax filers in 2013, that threshold was between $109,250 and $139,250. For single filers, the MAGI must fall between $72,850 and $87,850 to still take advantage of tax exemptions through the program. Married owners are required to file joint taxes to receive the exemption.

8. All payments made with bond proceeds must be reported to the IRS. This includes all receipts, bills or proofs of payment. It is also necessary to keep a detailed, itemized record of all bonds that are redeemed. The IRS has designed specific forms to be filled out when the education savings bond program is claimed on the owner's taxes.