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Free State Return Efile

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Free State Return Efile

Free state return efile Index A Adjusted basis Worksheet 1 to figure, Worksheet A Instructions. Free state return efile Assistance (see Tax help) F Free tax services, How To Get Tax Help H Help (see Tax help) M More information (see Tax help) P Publications (see Tax help) T Tax help, How To Get Tax Help Taxpayer Advocate, Taxpayer Advocate Service. Free state return efile TTY/TDD information, How To Get Tax Help W Worksheets Adjusted basis (Worksheet 1), Worksheet A Instructions. Free state return efile Prev  Up     Home   More Online Publications
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The Free State Return Efile

Free state return efile 7. Free state return efile   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. Free state return efile For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Free state return efile There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Free state return efile However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Free state return efile See Contributions , later. Free state return efile This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Free state return efile What is the tax benefit of the Coverdell ESA. Free state return efile   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Free state return efile   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. Free state return efile See Tax-Free Distributions , later. Free state return efile    Table 7-1 summarizes the main features of the Coverdell ESA. Free state return efile Table 7-1. Free state return efile Coverdell ESA at a Glance Do not rely on this table alone. Free state return efile It provides only general highlights. Free state return efile See the text for definitions of terms in bold type and for more complete explanations. Free state return efile Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Free state return efile 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. Free state return efile Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Free state return efile 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). Free state return efile Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Free state return efile 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. Free state return efile When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Free state return efile To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Free state return efile The document creating and governing the account must be in writing and must satisfy the following requirements. Free state return efile The trustee or custodian must be a bank or an entity approved by the IRS. Free state return efile The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Free state return efile The contribution is in cash. Free state return efile The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free state return efile The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Free state return efile Money in the account cannot be invested in life insurance contracts. Free state return efile Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Free state return efile The balance in the account generally must be distributed within 30 days after the earlier of the following events. Free state return efile The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Free state return efile The beneficiary's death. Free state return efile Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Free state return efile For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Free state return efile Designated beneficiary. Free state return efile   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Free state return efile Contributions to a qualified tuition program (QTP). Free state return efile   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Free state return efile 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. Free state return efile See chapter 8, Qualified Tuition Program . Free state return efile 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. Free state return efile Eligible postsecondary school. Free state return efile   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free state return efile S. Free state return efile Department of Education. Free state return efile It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free state return efile The educational institution should be able to tell you if it is an eligible educational institution. Free state return efile   Certain educational institutions located outside the United States also participate in the U. Free state return efile S. Free state return efile Department of Education's Federal Student Aid (FSA) programs. Free state return efile Eligible elementary or secondary school. Free state return efile   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Free state return efile Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Free state return efile 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. Free state return efile The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Free state return efile Tuition and fees. Free state return efile Books, supplies, and equipment. Free state return efile 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. Free state return efile Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Free state return efile The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Free state return efile 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. Free state return efile The actual amount charged if the student is residing in housing owned or operated by the school. Free state return efile Half-time student. Free state return efile   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. Free state return efile Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Free state return efile As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Free state return efile There are special rules for computer-related expenses. Free state return efile The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Free state return efile Tuition and fees. Free state return efile Books, supplies, and equipment. Free state return efile Academic tutoring. Free state return efile Special needs services for a special needs beneficiary. Free state return efile The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Free state return efile Room and board. Free state return efile Uniforms. Free state return efile Transportation. Free state return efile Supplementary items and services (including extended day programs). Free state return efile 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. Free state return efile (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Free state return efile ) 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. Free state return efile For individuals filing joint returns, that amount is $220,000. Free state return efile Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Free state return efile There is no requirement that an organization's income be below a certain level. Free state return efile Contributions must meet all of the following requirements. Free state return efile They must be in cash. Free state return efile They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free state return efile They must be made by the due date of the contributor's tax return (not including extensions). Free state return efile 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. Free state return efile Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Free state return efile Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Free state return efile When contributions considered made. Free state return efile   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. Free state return efile They must be made by the due date (not including extensions) for filing your return for the preceding year. Free state return efile   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. Free state return efile 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. Free state return efile Limit for each designated beneficiary. Free state return efile   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. Free state return efile This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Free state return efile Rollovers are discussed under Rollovers and Other Transfers , later. Free state return efile Example. Free state return efile 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. Free state return efile In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Free state return efile 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. Free state return efile Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Free state return efile These contributions could be put into any of Maria's Coverdell ESA accounts. Free state return efile Limit for each contributor. Free state return efile   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Free state return efile 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. Free state return efile Example. Free state return efile The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Free state return efile If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Free state return efile Reduced limit. Free state return efile   Your contribution limit may be reduced. Free state return efile 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). Free state return efile 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. Free state return efile Table 7-2. Free state return efile Coverdell ESA Contributions at a Glance Do not rely on this table alone. Free state return efile It provides only general highlights. Free state return efile See the text for more complete explanations. Free state return efile Question Answer Are contributions deductible? No. Free state return efile What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Free state return efile 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. Free state return efile 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. Free state return efile Can contributions other than cash be made to a Coverdell ESA? No. Free state return efile 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. Free state return efile Modified adjusted gross income (MAGI). Free state return efile   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free state return efile MAGI when using Form 1040A. Free state return efile   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free state return efile MAGI when using Form 1040. Free state return efile   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. Free state return efile MAGI when using Form 1040NR. Free state return efile   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Free state return efile MAGI when using Form 1040NR-EZ. Free state return efile   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Free state return efile   If you have any of these adjustments, you can use Worksheet 7-1. Free state return efile MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Free state return efile Worksheet 7-1. Free state return efile MAGI for a Coverdell ESA 1. Free state return efile Enter your adjusted gross income  (Form 1040, line 38)   1. Free state return efile   2. Free state return efile Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free state return efile       3. Free state return efile Enter your foreign housing deduction (Form 2555, line 50)   3. Free state return efile         4. Free state return efile Enter the amount of income from Puerto Rico you are excluding   4. Free state return efile       5. Free state return efile Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free state return efile       6. Free state return efile Add lines 2, 3, 4, and 5   6. Free state return efile   7. Free state return efile Add lines 1 and 6. Free state return efile This is your  modified adjusted gross income   7. Free state return efile   Figuring the limit. Free state return efile    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Free state return efile The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Free state return efile The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Free state return efile Subtract the result from $2,000. Free state return efile This is the amount you can contribute for each beneficiary. Free state return efile You can use Worksheet 7-2. Free state return efile Coverdell ESA Contribution Limit to figure the limit on contributions. Free state return efile    Worksheet 7-2. Free state return efile Coverdell ESA Contribution Limit 1. Free state return efile Maximum contribution   1. Free state return efile $2,000 2. Free state return efile 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. Free state return efile   3. Free state return efile Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free state return efile   4. Free state return efile Subtract line 3 from line 2. Free state return efile If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free state return efile   5. Free state return efile Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free state return efile     Note. Free state return efile If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Free state return efile You are not allowed to contribute to a Coverdell ESA for 2013. Free state return efile       6. Free state return efile Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free state return efile . Free state return efile 7. Free state return efile Multiply line 1 by line 6   7. Free state return efile   8. Free state return efile Subtract line 7 from line 1   8. Free state return efile   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free state return efile Example. Free state return efile Paul, who is single, had a MAGI of $96,500 for 2013. Free state return efile 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. Free state return efile Worksheet 7-2. Free state return efile Coverdell ESA Contribution Limit—Illustrated 1. Free state return efile Maximum contribution   1. Free state return efile $2,000 2. Free state return efile 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. Free state return efile 96,500 3. Free state return efile Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free state return efile 95,000 4. Free state return efile Subtract line 3 from line 2. Free state return efile If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free state return efile 1,500 5. Free state return efile Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free state return efile 15,000   Note. Free state return efile If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Free state return efile You are not allowed to  contribute to a Coverdell ESA for 2013. Free state return efile       6. Free state return efile Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free state return efile . Free state return efile 100 7. Free state return efile Multiply line 1 by line 6   7. Free state return efile 200 8. Free state return efile Subtract line 7 from line 1   8. Free state return efile 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free state return efile 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. Free state return efile Excess contributions are the total of the following two amounts. Free state return efile 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). Free state return efile 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. Free state return efile Exceptions. Free state return efile   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). Free state return efile   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Free state return efile You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Free state return efile Box 2 of that form will show the amount of earnings on your excess contributions. Free state return efile Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Free state return efile See Instructions for Recipient on the back of copy B of your Form 1099-Q. Free state return efile Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Free state return efile For more information, see Taxable Distributions , later. Free state return efile   The excise tax does not apply to any rollover contribution. Free state return efile Note. Free state return efile Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Free state return efile Example. Free state return efile In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Free state return efile 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. Free state return efile 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. Free state return efile 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. Free state return efile (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. Free state return efile Figuring and reporting the additional tax. Free state return efile   You figure this excise tax in Part V of Form 5329. Free state return efile Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Free state return efile Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Free state return efile The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Free state return efile 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. Free state return efile This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free state return efile An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Free state return efile Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Free state return efile These are not taxable distributions. Free state return efile Members of the beneficiary's family. Free state return efile   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Free state return efile Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Free state return efile Brother, sister, stepbrother, or stepsister. Free state return efile Father or mother or ancestor of either. Free state return efile Stepfather or stepmother. Free state return efile Son or daughter of a brother or sister. Free state return efile Brother or sister of father or mother. Free state return efile Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Free state return efile The spouse of any individual listed above. Free state return efile First cousin. Free state return efile Example. Free state return efile When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Free state return efile He wanted to give this money to his younger sister, who was still in high school. Free state return efile 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. Free state return efile Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Free state return efile This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Free state return efile Military death gratuity. Free state return efile   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). Free state return efile Such payments are made to an eligible survivor upon the death of a member of the armed forces. Free state return efile 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. Free state return efile   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Free state return efile 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. Free state return efile   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. Free state return efile See Distributions , later. Free state return efile The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Free state return efile Changing the Designated Beneficiary The designated beneficiary can be changed. Free state return efile See Members of the beneficiary's family , earlier. Free state return efile 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. Free state return efile Example. Free state return efile Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Free state return efile 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. Free state return efile 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. Free state return efile After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Free state return efile Example. Free state return efile In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Free state return efile In this process, the account was transferred into her name. Free state return efile Peg now treats the funds in this Coverdell ESA as if she were the original owner. Free state return efile Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Free state return efile 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. Free state return efile See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Free state return efile Table 7-3. Free state return efile Coverdell ESA Distributions at a Glance Do not rely on this table alone. Free state return efile It provides only general highlights. Free state return efile See the text for definitions of terms in bold type and for more complete explanations. Free state return efile 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. Free state return efile After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Free state return efile Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Free state return efile Also, certain transfers to members of the beneficiary's family are permitted. Free state return efile Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Free state return efile Adjusted qualified education expenses. Free state return efile   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. Free state return efile 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. Free state return efile The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Free state return efile Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Free state return efile Do not report tax-free distributions (including qualifying rollovers) on your tax return. Free state return efile 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. Free state return efile Excess distribution. Free state return efile   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Free state return efile Earnings and basis. Free state return efile   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Free state return efile The amount of your gross distribution will be shown in box 1. Free state return efile 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. Free state return efile This will be shown in the blank box below boxes 5 and 6. Free state return efile   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. Free state return efile 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. Free state return efile Figure the taxable portion for 2013 as shown in the following steps. Free state return efile Multiply the total amount distributed by a fraction. Free state return efile 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. Free state return efile Subtract the amount figured in (1) from the total amount distributed during 2013. Free state return efile The result is the amount of earnings included in the distribution(s). Free state return efile Multiply the amount of earnings figured in (2) by a fraction. Free state return efile The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Free state return efile Subtract the amount figured in (3) from the amount figured in (2). Free state return efile The result is the amount the beneficiary must include in income. Free state return efile The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Free state return efile Example. Free state return efile You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Free state return efile There were no contributions in 2013. Free state return efile This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Free state return efile The value (balance) of your account on December 31, 2013, was $950. Free state return efile You had $700 of adjusted qualified education expenses (AQEE) for the year. Free state return efile Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Free state return efile   1. Free state return efile $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Free state return efile $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Free state return efile $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Free state return efile $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Free state return efile Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Free state return efile 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). Free state return efile 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. Free state return efile 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. Free state return efile Example. Free state return efile Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Free state return efile He paid his college expenses from the following sources. Free state return efile     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. Free state return efile Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Free state return efile Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Free state return efile     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. Free state return efile The balance in Derek's account was $1,800 on December 31, 2013. Free state return efile Prior to 2013, $2,100 had been contributed to this account. Free state return efile Contributions for 2013 totaled $400. Free state return efile Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Free state return efile   1. Free state return efile $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Free state return efile $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Free state return efile $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Free state return efile $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Free state return efile This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Free state return efile 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. Free state return efile The following two examples illustrate possible allocations. Free state return efile Example 1. Free state return efile In 2013, Beatrice graduated from high school and began her first semester of college. Free state return efile 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. Free state return efile To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Free state return efile No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Free state return efile She did not receive any tax-free educational assistance in 2013. Free state return efile Beatrice must allocate her total qualified education expenses between the two distributions. Free state return efile 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. Free state return efile The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Free state return efile 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). Free state return efile 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. Free state return efile Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Free state return efile (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Free state return efile ) Example 2. Free state return efile Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Free state return efile In this case, she allocates her qualified education expenses as follows. Free state return efile 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. Free state return efile 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). Free state return efile   $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). Free state return efile See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Free state return efile   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Free state return efile The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Free state return efile However, you do not have to allocate your expenses in the same way. Free state return efile You can use any reasonable method. Free state return efile 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. Free state return efile 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. Free state return efile Your basis is the total amount of contributions to that Coverdell ESA. Free state return efile 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. Free state return efile If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Free state return efile ) from all such accounts in order to determine your taxable earnings for the year. Free state return efile By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Free state return efile For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Free state return efile 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. Free state return efile Exceptions. Free state return efile   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. Free state return efile Made because the designated beneficiary is disabled. Free state return efile 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. Free state return efile 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. Free state return efile 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. Free state return efile Made on account of the attendance of the designated beneficiary at a U. Free state return efile S. Free state return efile military academy (such as the USMA at West Point). Free state return efile 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. Free state return efile S. Free state return efile Code) attributable to such attendance. Free state return efile 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). Free state return efile Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Free state return efile The distributed earnings must be included in gross income for the year in which the excess contribution was made. Free state return efile Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Free state return efile Figuring the additional tax. Free state return efile    Use Part II of Form 5329, to figure any additional tax. Free state return efile Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Free state return efile When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Free state return efile The designated beneficiary reaches age 30. Free state return efile In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Free state return efile However, this rule does not apply if the beneficiary is a special needs beneficiary. Free state return efile The designated beneficiary dies before reaching age 30. Free state return efile In this case, the remaining assets must generally be distributed within 30 days after the date of death. Free state return efile 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. Free state return efile (“Family member” was defined earlier under Rollovers . Free state return efile ) 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. Free state return efile This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free state return efile There are no tax consequences as a result of the transfer. Free state return efile 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. Free state return efile You determine these earnings as shown in the following two steps. Free state return efile Multiply the amount distributed by a fraction. Free state return efile 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. Free state return efile Subtract the amount figured in (1) from the total amount distributed during 2013. Free state return efile The result is the amount of earnings included in the distribution. Free state return efile For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Free state return efile 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. Free state return efile Worksheet 7-3 Instructions. Free state return efile Coverdell ESA—Taxable Distributions and Basis Line G. Free state return efile Enter the total distributions received from all Coverdell ESAs during 2013. Free state return efile Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Free state return efile 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. Free state return efile Line 2. Free state return efile 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. Free state return efile   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. Free state return efile 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. Free state return efile For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Free state return efile 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. Free state return efile Line 4. Free state return efile Enter the total distributions received from this Coverdell ESA in 2013. Free state return efile Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Free state return efile   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. Free state return efile Line 7. Free state return efile 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. Free state return efile A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Free state return efile   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Free state return efile 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. Free state return efile Worksheet 7-3. Free state return efile Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Free state return efile • • • Complete Part I, lines A through H, on only one worksheet. Free state return efile  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Free state return efile  Complete Part III, the Summary (line 16), on only one worksheet. Free state return efile Part I. Free state return efile Qualified Education Expenses (Complete for total expenses)       A. Free state return efile Enter your total qualified education expenses for 2013   A. Free state return efile   B. Free state return efile 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. Free state return efile         C. Free state return efile Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Free state return efile Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Free state return efile         D. Free state return efile Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Free state return efile         E. Free state return efile Add lines B, C, and D   D. Free state return efile   F. Free state return efile Subtract line E from line A. Free state return efile This is your adjusted qualified education expense for 2013   E. Free state return efile   G. Free state return efile Enter your total distributions from all Coverdell ESAs during 2013. Free state return efile Do not include rollovers  or the return of excess contributions (see instructions)   F. Free state return efile   H. Free state return efile Divide line F by line G. Free state return efile Enter the result as a decimal (rounded to at least 3 places). Free state return efile If the  result is 1. Free state return efile 000 or more, enter 1. Free state return efile 000   G. Free state return efile . Free state return efile Part II. Free state return efile Taxable Distributions and Basis (Complete separately for each account) 1. Free state return efile Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Free state return efile Do not include rollovers or the return of excess contributions   1. Free state return efile   2. Free state return efile Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Free state return efile   3. Free state return efile Add lines 1 and 2   3. Free state return efile   4. Free state return efile Enter the total distributions from this Coverdell ESA during 2013. Free state return efile Do not include rollovers  or the return of excess contributions (see instructions)   4. Free state return efile   5. Free state return efile Multiply line 4 by line H. Free state return efile This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Free state return efile         6. Free state return efile Subtract line 5 from line 4   6. Free state return efile         7. Free state return efile Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Free state return efile         8. Free state return efile Add lines 4 and 7   8. Free state return efile         9. Free state return efile Divide line 3 by line 8. Free state return efile Enter the result as a decimal (rounded to  at least 3 places). Free state return efile If the result is 1. Free state return efile 000 or more, enter 1. Free state return efile 000   9. Free state return efile . Free state return efile       10. Free state return efile Multiply line 4 by line 9. Free state return efile This is the amount of basis allocated to your  distributions, and is tax free   10. Free state return efile     Note. Free state return efile If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Free state return efile       11. Free state return efile Subtract line 10 from line 4   11. Free state return efile   12. Free state return efile Divide line 5 by line 4. Free state return efile Enter the result as a decimal (rounded to  at least 3 places). Free state return efile If the result is 1. Free state return efile 000 or more, enter 1. Free state return efile 000   12. Free state return efile . Free state return efile       13. Free state return efile Multiply line 11 by line 12. Free state return efile This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Free state return efile   14. Free state return efile Subtract line 13 from line 11. Free state return efile This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Free state return efile   15. Free state return efile Subtract line 10 from line 3. Free state return efile This is your basis in this Coverdell ESA as of December 31, 2013   15. Free state return efile   Part III. Free state return efile Summary (Complete only once)       16. Free state return efile Taxable amount. Free state return efile Add together all amounts on line 14 for all your Coverdell ESAs. Free state return efile 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. Free state return efile   Prev  Up  Next   Home   More Online Publications