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H and r block online filing 7. H and r block online filing   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. H and r block online filing For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. H and r block online filing There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. H and r block online filing However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. H and r block online filing See Contributions , later. H and r block online filing This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. H and r block online filing What is the tax benefit of the Coverdell ESA. H and r block online filing   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. H and r block online filing   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. H and r block online filing See Tax-Free Distributions , later. H and r block online filing    Table 7-1 summarizes the main features of the Coverdell ESA. H and r block online filing Table 7-1. H and r block online filing Coverdell ESA at a Glance Do not rely on this table alone. H and r block online filing It provides only general highlights. H and r block online filing See the text for definitions of terms in bold type and for more complete explanations. H and r block online filing Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. H and r block online filing Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. H and r block online filing Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. H and r block online filing Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). H and r block online filing Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. H and r block online filing What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. H and r block online filing When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. H and r block online filing To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. H and r block online filing The document creating and governing the account must be in writing and must satisfy the following requirements. H and r block online filing The trustee or custodian must be a bank or an entity approved by the IRS. H and r block online filing The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. H and r block online filing The contribution is in cash. H and r block online filing The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. H and r block online filing The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. H and r block online filing Money in the account cannot be invested in life insurance contracts. H and r block online filing Money in the account cannot be combined with other property except in a common trust fund or common investment fund. H and r block online filing The balance in the account generally must be distributed within 30 days after the earlier of the following events. H and r block online filing The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. H and r block online filing The beneficiary's death. H and r block online filing Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. H and r block online filing For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. H and r block online filing Designated beneficiary. H and r block online filing   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. H and r block online filing Contributions to a qualified tuition program (QTP). H and r block online filing   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. H and r block online filing In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. H and r block online filing See chapter 8, Qualified Tuition Program . H and r block online filing Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. H and r block online filing Eligible postsecondary school. H and r block online filing   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. H and r block online filing S. H and r block online filing Department of Education. H and r block online filing It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. H and r block online filing The educational institution should be able to tell you if it is an eligible educational institution. H and r block online filing   Certain educational institutions located outside the United States also participate in the U. H and r block online filing S. H and r block online filing Department of Education's Federal Student Aid (FSA) programs. H and r block online filing Eligible elementary or secondary school. H and r block online filing   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. H and r block online filing Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. H and r block online filing As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. H and r block online filing The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. H and r block online filing Tuition and fees. H and r block online filing Books, supplies, and equipment. H and r block online filing Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. H and r block online filing Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). H and r block online filing The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. H and r block online filing The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. H and r block online filing The actual amount charged if the student is residing in housing owned or operated by the school. H and r block online filing Half-time student. H and r block online filing   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. H and r block online filing Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. H and r block online filing As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. H and r block online filing There are special rules for computer-related expenses. H and r block online filing The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. H and r block online filing Tuition and fees. H and r block online filing Books, supplies, and equipment. H and r block online filing Academic tutoring. H and r block online filing Special needs services for a special needs beneficiary. H and r block online filing The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. H and r block online filing Room and board. H and r block online filing Uniforms. H and r block online filing Transportation. H and r block online filing Supplementary items and services (including extended day programs). H and r block online filing The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. H and r block online filing (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. H and r block online filing ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. H and r block online filing For individuals filing joint returns, that amount is $220,000. H and r block online filing Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. H and r block online filing There is no requirement that an organization's income be below a certain level. H and r block online filing Contributions must meet all of the following requirements. H and r block online filing They must be in cash. H and r block online filing They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. H and r block online filing They must be made by the due date of the contributor's tax return (not including extensions). H and r block online filing Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. H and r block online filing Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. H and r block online filing Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. H and r block online filing When contributions considered made. H and r block online filing   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. H and r block online filing They must be made by the due date (not including extensions) for filing your return for the preceding year. H and r block online filing   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. H and r block online filing Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. H and r block online filing Limit for each designated beneficiary. H and r block online filing   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. H and r block online filing This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. H and r block online filing Rollovers are discussed under Rollovers and Other Transfers , later. H and r block online filing Example. H and r block online filing When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. H and r block online filing In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. H and r block online filing For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. H and r block online filing Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. H and r block online filing These contributions could be put into any of Maria's Coverdell ESA accounts. H and r block online filing Limit for each contributor. H and r block online filing   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. H and r block online filing This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. H and r block online filing Example. H and r block online filing The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. H and r block online filing If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. H and r block online filing Reduced limit. H and r block online filing   Your contribution limit may be reduced. H and r block online filing If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). H and r block online filing If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. H and r block online filing Table 7-2. H and r block online filing Coverdell ESA Contributions at a Glance Do not rely on this table alone. H and r block online filing It provides only general highlights. H and r block online filing See the text for more complete explanations. H and r block online filing Question Answer Are contributions deductible? No. H and r block online filing What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. H and r block online filing What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. H and r block online filing What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. H and r block online filing Can contributions other than cash be made to a Coverdell ESA? No. H and r block online filing When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. H and r block online filing Modified adjusted gross income (MAGI). H and r block online filing   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. H and r block online filing MAGI when using Form 1040A. H and r block online filing   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. H and r block online filing MAGI when using Form 1040. H and r block online filing   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. H and r block online filing MAGI when using Form 1040NR. H and r block online filing   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. H and r block online filing MAGI when using Form 1040NR-EZ. H and r block online filing   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. H and r block online filing   If you have any of these adjustments, you can use Worksheet 7-1. H and r block online filing MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. H and r block online filing Worksheet 7-1. H and r block online filing MAGI for a Coverdell ESA 1. H and r block online filing Enter your adjusted gross income  (Form 1040, line 38)   1. H and r block online filing   2. H and r block online filing Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. H and r block online filing       3. H and r block online filing Enter your foreign housing deduction (Form 2555, line 50)   3. H and r block online filing         4. H and r block online filing Enter the amount of income from Puerto Rico you are excluding   4. H and r block online filing       5. H and r block online filing Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. H and r block online filing       6. H and r block online filing Add lines 2, 3, 4, and 5   6. H and r block online filing   7. H and r block online filing Add lines 1 and 6. H and r block online filing This is your  modified adjusted gross income   7. H and r block online filing   Figuring the limit. H and r block online filing    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. H and r block online filing The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). H and r block online filing The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). H and r block online filing Subtract the result from $2,000. H and r block online filing This is the amount you can contribute for each beneficiary. H and r block online filing You can use Worksheet 7-2. H and r block online filing Coverdell ESA Contribution Limit to figure the limit on contributions. H and r block online filing    Worksheet 7-2. H and r block online filing Coverdell ESA Contribution Limit 1. H and r block online filing Maximum contribution   1. H and r block online filing $2,000 2. H and r block online filing Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. H and r block online filing   3. H and r block online filing Enter $190,000 if married filing jointly; $95,000 for all other filers   3. H and r block online filing   4. H and r block online filing Subtract line 3 from line 2. H and r block online filing If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. H and r block online filing   5. H and r block online filing Enter $30,000 if married filing jointly; $15,000 for all other filers   5. H and r block online filing     Note. H and r block online filing If the amount on line 4 is greater than or equal to the amount on line 5, stop here. H and r block online filing You are not allowed to contribute to a Coverdell ESA for 2013. H and r block online filing       6. H and r block online filing Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. H and r block online filing . H and r block online filing 7. H and r block online filing Multiply line 1 by line 6   7. H and r block online filing   8. H and r block online filing Subtract line 7 from line 1   8. H and r block online filing   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. H and r block online filing Example. H and r block online filing Paul, who is single, had a MAGI of $96,500 for 2013. H and r block online filing Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. H and r block online filing Worksheet 7-2. H and r block online filing Coverdell ESA Contribution Limit—Illustrated 1. H and r block online filing Maximum contribution   1. H and r block online filing $2,000 2. H and r block online filing Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. H and r block online filing 96,500 3. H and r block online filing Enter $190,000 if married filing jointly; $95,000 for all other filers   3. H and r block online filing 95,000 4. H and r block online filing Subtract line 3 from line 2. H and r block online filing If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. H and r block online filing 1,500 5. H and r block online filing Enter $30,000 if married filing jointly; $15,000 for all other filers   5. H and r block online filing 15,000   Note. H and r block online filing If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. H and r block online filing You are not allowed to  contribute to a Coverdell ESA for 2013. H and r block online filing       6. H and r block online filing Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. H and r block online filing . H and r block online filing 100 7. H and r block online filing Multiply line 1 by line 6   7. H and r block online filing 200 8. H and r block online filing Subtract line 7 from line 1   8. H and r block online filing 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. H and r block online filing Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. H and r block online filing Excess contributions are the total of the following two amounts. H and r block online filing Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). H and r block online filing Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. H and r block online filing Exceptions. H and r block online filing   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). H and r block online filing   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. H and r block online filing You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. H and r block online filing Box 2 of that form will show the amount of earnings on your excess contributions. H and r block online filing Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. H and r block online filing See Instructions for Recipient on the back of copy B of your Form 1099-Q. H and r block online filing Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. H and r block online filing For more information, see Taxable Distributions , later. H and r block online filing   The excise tax does not apply to any rollover contribution. H and r block online filing Note. H and r block online filing Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. H and r block online filing Example. H and r block online filing In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. H and r block online filing Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. H and r block online filing In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. H and r block online filing Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. H and r block online filing (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. H and r block online filing Figuring and reporting the additional tax. H and r block online filing   You figure this excise tax in Part V of Form 5329. H and r block online filing Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). H and r block online filing Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. H and r block online filing The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. H and r block online filing Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. H and r block online filing This age limitation does not apply if the new beneficiary is a special needs beneficiary. H and r block online filing An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. H and r block online filing Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. H and r block online filing These are not taxable distributions. H and r block online filing Members of the beneficiary's family. H and r block online filing   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. H and r block online filing Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. H and r block online filing Brother, sister, stepbrother, or stepsister. H and r block online filing Father or mother or ancestor of either. H and r block online filing Stepfather or stepmother. H and r block online filing Son or daughter of a brother or sister. H and r block online filing Brother or sister of father or mother. H and r block online filing Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. H and r block online filing The spouse of any individual listed above. H and r block online filing First cousin. H and r block online filing Example. H and r block online filing When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. H and r block online filing He wanted to give this money to his younger sister, who was still in high school. H and r block online filing In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. H and r block online filing Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. H and r block online filing This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). H and r block online filing Military death gratuity. H and r block online filing   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). H and r block online filing Such payments are made to an eligible survivor upon the death of a member of the armed forces. H and r block online filing The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. H and r block online filing   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . H and r block online filing The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. H and r block online filing   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. H and r block online filing See Distributions , later. H and r block online filing The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. H and r block online filing Changing the Designated Beneficiary The designated beneficiary can be changed. H and r block online filing See Members of the beneficiary's family , earlier. H and r block online filing There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. H and r block online filing Example. H and r block online filing Assume the same situation for Aaron as in the last example (see Rollovers , earlier). H and r block online filing Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. H and r block online filing Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. H and r block online filing After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. H and r block online filing Example. H and r block online filing In their divorce settlement, Peg received her ex-husband's Coverdell ESA. H and r block online filing In this process, the account was transferred into her name. H and r block online filing Peg now treats the funds in this Coverdell ESA as if she were the original owner. H and r block online filing Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. H and r block online filing Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. H and r block online filing See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. H and r block online filing Table 7-3. H and r block online filing Coverdell ESA Distributions at a Glance Do not rely on this table alone. H and r block online filing It provides only general highlights. H and r block online filing See the text for definitions of terms in bold type and for more complete explanations. H and r block online filing Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. H and r block online filing After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. H and r block online filing Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. H and r block online filing Also, certain transfers to members of the beneficiary's family are permitted. H and r block online filing Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. H and r block online filing Adjusted qualified education expenses. H and r block online filing   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. H and r block online filing Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. H and r block online filing The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. H and r block online filing Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. H and r block online filing Do not report tax-free distributions (including qualifying rollovers) on your tax return. H and r block online filing Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. H and r block online filing Excess distribution. H and r block online filing   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. H and r block online filing Earnings and basis. H and r block online filing   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. H and r block online filing The amount of your gross distribution will be shown in box 1. H and r block online filing For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. H and r block online filing This will be shown in the blank box below boxes 5 and 6. H and r block online filing   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. H and r block online filing Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. H and r block online filing Figure the taxable portion for 2013 as shown in the following steps. H and r block online filing Multiply the total amount distributed by a fraction. H and r block online filing The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. H and r block online filing Subtract the amount figured in (1) from the total amount distributed during 2013. H and r block online filing The result is the amount of earnings included in the distribution(s). H and r block online filing Multiply the amount of earnings figured in (2) by a fraction. H and r block online filing The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. H and r block online filing Subtract the amount figured in (3) from the amount figured in (2). H and r block online filing The result is the amount the beneficiary must include in income. H and r block online filing The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. H and r block online filing Example. H and r block online filing You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. H and r block online filing There were no contributions in 2013. H and r block online filing This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. H and r block online filing The value (balance) of your account on December 31, 2013, was $950. H and r block online filing You had $700 of adjusted qualified education expenses (AQEE) for the year. H and r block online filing Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. H and r block online filing   1. H and r block online filing $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. H and r block online filing $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. H and r block online filing $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. H and r block online filing $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. H and r block online filing Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. H and r block online filing Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). H and r block online filing Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. H and r block online filing This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. H and r block online filing Example. H and r block online filing Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. H and r block online filing He paid his college expenses from the following sources. H and r block online filing     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. H and r block online filing Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. H and r block online filing Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. H and r block online filing     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. H and r block online filing The balance in Derek's account was $1,800 on December 31, 2013. H and r block online filing Prior to 2013, $2,100 had been contributed to this account. H and r block online filing Contributions for 2013 totaled $400. H and r block online filing Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. H and r block online filing   1. H and r block online filing $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. H and r block online filing $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. H and r block online filing $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. H and r block online filing $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). H and r block online filing This is the amount of distributed earnings not used for adjusted qualified higher education expenses. H and r block online filing Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. H and r block online filing The following two examples illustrate possible allocations. H and r block online filing Example 1. H and r block online filing In 2013, Beatrice graduated from high school and began her first semester of college. H and r block online filing That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. H and r block online filing To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. H and r block online filing No one claimed Beatrice as a dependent, nor was she eligible for an education credit. H and r block online filing She did not receive any tax-free educational assistance in 2013. H and r block online filing Beatrice must allocate her total qualified education expenses between the two distributions. H and r block online filing Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. H and r block online filing The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. H and r block online filing Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). H and r block online filing She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. H and r block online filing Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. H and r block online filing (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. H and r block online filing ) Example 2. H and r block online filing Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. H and r block online filing In this case, she allocates her qualified education expenses as follows. H and r block online filing Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. H and r block online filing Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). H and r block online filing   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). H and r block online filing See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. H and r block online filing   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). H and r block online filing The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. H and r block online filing However, you do not have to allocate your expenses in the same way. H and r block online filing You can use any reasonable method. H and r block online filing Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. H and r block online filing You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. H and r block online filing Your basis is the total amount of contributions to that Coverdell ESA. H and r block online filing You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. H and r block online filing If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. H and r block online filing ) from all such accounts in order to determine your taxable earnings for the year. H and r block online filing By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. H and r block online filing For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. H and r block online filing Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. H and r block online filing Exceptions. H and r block online filing   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. H and r block online filing Made because the designated beneficiary is disabled. H and r block online filing A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. H and r block online filing A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. H and r block online filing Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. H and r block online filing Made on account of the attendance of the designated beneficiary at a U. H and r block online filing S. H and r block online filing military academy (such as the USMA at West Point). H and r block online filing This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. H and r block online filing S. H and r block online filing Code) attributable to such attendance. H and r block online filing Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). H and r block online filing Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). H and r block online filing The distributed earnings must be included in gross income for the year in which the excess contribution was made. H and r block online filing Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. H and r block online filing Figuring the additional tax. H and r block online filing    Use Part II of Form 5329, to figure any additional tax. H and r block online filing Report the amount on Form 1040, line 58, or Form 1040NR, line 56. H and r block online filing When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. H and r block online filing The designated beneficiary reaches age 30. H and r block online filing In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. H and r block online filing However, this rule does not apply if the beneficiary is a special needs beneficiary. H and r block online filing The designated beneficiary dies before reaching age 30. H and r block online filing In this case, the remaining assets must generally be distributed within 30 days after the date of death. H and r block online filing Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. H and r block online filing (“Family member” was defined earlier under Rollovers . H and r block online filing ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. H and r block online filing This age limitation does not apply if the new beneficiary is a special needs beneficiary. H and r block online filing There are no tax consequences as a result of the transfer. H and r block online filing How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. H and r block online filing You determine these earnings as shown in the following two steps. H and r block online filing Multiply the amount distributed by a fraction. H and r block online filing The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. H and r block online filing Subtract the amount figured in (1) from the total amount distributed during 2013. H and r block online filing The result is the amount of earnings included in the distribution. H and r block online filing For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. H and r block online filing The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. H and r block online filing Worksheet 7-3 Instructions. H and r block online filing Coverdell ESA—Taxable Distributions and Basis Line G. H and r block online filing Enter the total distributions received from all Coverdell ESAs during 2013. H and r block online filing Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). H and r block online filing Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. H and r block online filing Line 2. H and r block online filing Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. H and r block online filing   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. H and r block online filing For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. H and r block online filing For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. H and r block online filing You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. H and r block online filing Line 4. H and r block online filing Enter the total distributions received from this Coverdell ESA in 2013. H and r block online filing Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). H and r block online filing   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. H and r block online filing Line 7. H and r block online filing Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. H and r block online filing A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. H and r block online filing   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. H and r block online filing An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. H and r block online filing Worksheet 7-3. H and r block online filing Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. H and r block online filing • • • Complete Part I, lines A through H, on only one worksheet. H and r block online filing  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. H and r block online filing  Complete Part III, the Summary (line 16), on only one worksheet. H and r block online filing Part I. H and r block online filing Qualified Education Expenses (Complete for total expenses)       A. H and r block online filing Enter your total qualified education expenses for 2013   A. H and r block online filing   B. H and r block online filing Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. H and r block online filing         C. H and r block online filing Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). H and r block online filing Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. H and r block online filing         D. H and r block online filing Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. H and r block online filing         E. H and r block online filing Add lines B, C, and D   D. H and r block online filing   F. H and r block online filing Subtract line E from line A. H and r block online filing This is your adjusted qualified education expense for 2013   E. H and r block online filing   G. H and r block online filing Enter your total distributions from all Coverdell ESAs during 2013. H and r block online filing Do not include rollovers  or the return of excess contributions (see instructions)   F. H and r block online filing   H. H and r block online filing Divide line F by line G. H and r block online filing Enter the result as a decimal (rounded to at least 3 places). H and r block online filing If the  result is 1. H and r block online filing 000 or more, enter 1. H and r block online filing 000   G. H and r block online filing . H and r block online filing Part II. H and r block online filing Taxable Distributions and Basis (Complete separately for each account) 1. H and r block online filing Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. H and r block online filing Do not include rollovers or the return of excess contributions   1. H and r block online filing   2. H and r block online filing Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. H and r block online filing   3. H and r block online filing Add lines 1 and 2   3. H and r block online filing   4. H and r block online filing Enter the total distributions from this Coverdell ESA during 2013. H and r block online filing Do not include rollovers  or the return of excess contributions (see instructions)   4. H and r block online filing   5. H and r block online filing Multiply line 4 by line H. H and r block online filing This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. H and r block online filing         6. H and r block online filing Subtract line 5 from line 4   6. H and r block online filing         7. H and r block online filing Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. H and r block online filing         8. H and r block online filing Add lines 4 and 7   8. H and r block online filing         9. H and r block online filing Divide line 3 by line 8. H and r block online filing Enter the result as a decimal (rounded to  at least 3 places). H and r block online filing If the result is 1. H and r block online filing 000 or more, enter 1. H and r block online filing 000   9. H and r block online filing . H and r block online filing       10. H and r block online filing Multiply line 4 by line 9. H and r block online filing This is the amount of basis allocated to your  distributions, and is tax free   10. H and r block online filing     Note. H and r block online filing If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. H and r block online filing       11. H and r block online filing Subtract line 10 from line 4   11. H and r block online filing   12. H and r block online filing Divide line 5 by line 4. H and r block online filing Enter the result as a decimal (rounded to  at least 3 places). H and r block online filing If the result is 1. H and r block online filing 000 or more, enter 1. H and r block online filing 000   12. H and r block online filing . H and r block online filing       13. H and r block online filing Multiply line 11 by line 12. H and r block online filing This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. H and r block online filing   14. H and r block online filing Subtract line 13 from line 11. H and r block online filing This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. H and r block online filing   15. H and r block online filing Subtract line 10 from line 3. H and r block online filing This is your basis in this Coverdell ESA as of December 31, 2013   15. H and r block online filing   Part III. H and r block online filing Summary (Complete only once)       16. H and r block online filing Taxable amount. H and r block online filing Add together all amounts on line 14 for all your Coverdell ESAs. H and r block online filing Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. H and r block online filing   Prev  Up  Next   Home   More Online Publications