What must be done to exclude the accrued interest on EE bonds from income when used for higher-education expenses?

The correct choice is based on the requirement that to exclude accrued interest on Series EE bonds from income for tax purposes when the bonds are redeemed and the proceeds used for higher education expenses, the funds must be allocated to qualifying education costs for certain individuals. Specifically, the money must be used to pay for higher-education expenses incurred by the bondholder, their spouse, or dependents.

This provision is designed to provide tax benefits for those investing in education. In this context, higher education expenses include tuition, fees, and other required costs associated with attending an eligible institution. Allowing the exclusion only for the bondholder, spouse, or dependents reflects the intention of the tax policy to support education expenses for immediate family members, thereby promoting accessible education funding.

The other options do not meet the criteria required for the exclusion. Simply using the funds for the bondholder alone without including a spouse or dependent does not provide the same breadth of benefit. Additionally, a broader use of funds beyond the specified education expenses, as seen in the second choice, would not qualify for the exclusion, ensuring that tax incentives are used specifically for their intended purpose. Lastly, reinvesting in government securities is irrelevant to the context of using bonds for education and does not apply to this tax