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Taxslayer 2011

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Taxslayer 2011

Taxslayer 2011 7. Taxslayer 2011   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. Taxslayer 2011 For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Taxslayer 2011 There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Taxslayer 2011 However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Taxslayer 2011 See Contributions , later. Taxslayer 2011 This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Taxslayer 2011 What is the tax benefit of the Coverdell ESA. Taxslayer 2011   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Taxslayer 2011   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. Taxslayer 2011 See Tax-Free Distributions , later. Taxslayer 2011    Table 7-1 summarizes the main features of the Coverdell ESA. Taxslayer 2011 Table 7-1. Taxslayer 2011 Coverdell ESA at a Glance Do not rely on this table alone. Taxslayer 2011 It provides only general highlights. Taxslayer 2011 See the text for definitions of terms in bold type and for more complete explanations. Taxslayer 2011 Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Taxslayer 2011 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. Taxslayer 2011 Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Taxslayer 2011 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). Taxslayer 2011 Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Taxslayer 2011 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. Taxslayer 2011 When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Taxslayer 2011 To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Taxslayer 2011 The document creating and governing the account must be in writing and must satisfy the following requirements. Taxslayer 2011 The trustee or custodian must be a bank or an entity approved by the IRS. Taxslayer 2011 The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Taxslayer 2011 The contribution is in cash. Taxslayer 2011 The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Taxslayer 2011 The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Taxslayer 2011 Money in the account cannot be invested in life insurance contracts. Taxslayer 2011 Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Taxslayer 2011 The balance in the account generally must be distributed within 30 days after the earlier of the following events. Taxslayer 2011 The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Taxslayer 2011 The beneficiary's death. Taxslayer 2011 Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Taxslayer 2011 For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Taxslayer 2011 Designated beneficiary. Taxslayer 2011   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Taxslayer 2011 Contributions to a qualified tuition program (QTP). Taxslayer 2011   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Taxslayer 2011 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. Taxslayer 2011 See chapter 8, Qualified Tuition Program . Taxslayer 2011 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. Taxslayer 2011 Eligible postsecondary school. Taxslayer 2011   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Taxslayer 2011 S. Taxslayer 2011 Department of Education. Taxslayer 2011 It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Taxslayer 2011 The educational institution should be able to tell you if it is an eligible educational institution. Taxslayer 2011   Certain educational institutions located outside the United States also participate in the U. Taxslayer 2011 S. Taxslayer 2011 Department of Education's Federal Student Aid (FSA) programs. Taxslayer 2011 Eligible elementary or secondary school. Taxslayer 2011   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Taxslayer 2011 Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Taxslayer 2011 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. Taxslayer 2011 The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Taxslayer 2011 Tuition and fees. Taxslayer 2011 Books, supplies, and equipment. Taxslayer 2011 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. Taxslayer 2011 Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Taxslayer 2011 The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Taxslayer 2011 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. Taxslayer 2011 The actual amount charged if the student is residing in housing owned or operated by the school. Taxslayer 2011 Half-time student. Taxslayer 2011   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. Taxslayer 2011 Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Taxslayer 2011 As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Taxslayer 2011 There are special rules for computer-related expenses. Taxslayer 2011 The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Taxslayer 2011 Tuition and fees. Taxslayer 2011 Books, supplies, and equipment. Taxslayer 2011 Academic tutoring. Taxslayer 2011 Special needs services for a special needs beneficiary. Taxslayer 2011 The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Taxslayer 2011 Room and board. Taxslayer 2011 Uniforms. Taxslayer 2011 Transportation. Taxslayer 2011 Supplementary items and services (including extended day programs). Taxslayer 2011 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. Taxslayer 2011 (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Taxslayer 2011 ) 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. Taxslayer 2011 For individuals filing joint returns, that amount is $220,000. Taxslayer 2011 Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Taxslayer 2011 There is no requirement that an organization's income be below a certain level. Taxslayer 2011 Contributions must meet all of the following requirements. Taxslayer 2011 They must be in cash. Taxslayer 2011 They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Taxslayer 2011 They must be made by the due date of the contributor's tax return (not including extensions). Taxslayer 2011 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. Taxslayer 2011 Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Taxslayer 2011 Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Taxslayer 2011 When contributions considered made. Taxslayer 2011   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. Taxslayer 2011 They must be made by the due date (not including extensions) for filing your return for the preceding year. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Limit for each designated beneficiary. Taxslayer 2011   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. Taxslayer 2011 This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Taxslayer 2011 Rollovers are discussed under Rollovers and Other Transfers , later. Taxslayer 2011 Example. Taxslayer 2011 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. Taxslayer 2011 In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Taxslayer 2011 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. Taxslayer 2011 Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Taxslayer 2011 These contributions could be put into any of Maria's Coverdell ESA accounts. Taxslayer 2011 Limit for each contributor. Taxslayer 2011   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Taxslayer 2011 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. Taxslayer 2011 Example. Taxslayer 2011 The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Taxslayer 2011 If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Taxslayer 2011 Reduced limit. Taxslayer 2011   Your contribution limit may be reduced. Taxslayer 2011 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). Taxslayer 2011 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. Taxslayer 2011 Table 7-2. Taxslayer 2011 Coverdell ESA Contributions at a Glance Do not rely on this table alone. Taxslayer 2011 It provides only general highlights. Taxslayer 2011 See the text for more complete explanations. Taxslayer 2011 Question Answer Are contributions deductible? No. Taxslayer 2011 What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Can contributions other than cash be made to a Coverdell ESA? No. Taxslayer 2011 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. Taxslayer 2011 Modified adjusted gross income (MAGI). Taxslayer 2011   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Taxslayer 2011 MAGI when using Form 1040A. Taxslayer 2011   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Taxslayer 2011 MAGI when using Form 1040. Taxslayer 2011   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. Taxslayer 2011 MAGI when using Form 1040NR. Taxslayer 2011   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Taxslayer 2011 MAGI when using Form 1040NR-EZ. Taxslayer 2011   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Taxslayer 2011   If you have any of these adjustments, you can use Worksheet 7-1. Taxslayer 2011 MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Taxslayer 2011 Worksheet 7-1. Taxslayer 2011 MAGI for a Coverdell ESA 1. Taxslayer 2011 Enter your adjusted gross income  (Form 1040, line 38)   1. Taxslayer 2011   2. Taxslayer 2011 Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Taxslayer 2011       3. Taxslayer 2011 Enter your foreign housing deduction (Form 2555, line 50)   3. Taxslayer 2011         4. Taxslayer 2011 Enter the amount of income from Puerto Rico you are excluding   4. Taxslayer 2011       5. Taxslayer 2011 Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Taxslayer 2011       6. Taxslayer 2011 Add lines 2, 3, 4, and 5   6. Taxslayer 2011   7. Taxslayer 2011 Add lines 1 and 6. Taxslayer 2011 This is your  modified adjusted gross income   7. Taxslayer 2011   Figuring the limit. Taxslayer 2011    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Taxslayer 2011 The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Taxslayer 2011 The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Taxslayer 2011 Subtract the result from $2,000. Taxslayer 2011 This is the amount you can contribute for each beneficiary. Taxslayer 2011 You can use Worksheet 7-2. Taxslayer 2011 Coverdell ESA Contribution Limit to figure the limit on contributions. Taxslayer 2011    Worksheet 7-2. Taxslayer 2011 Coverdell ESA Contribution Limit 1. Taxslayer 2011 Maximum contribution   1. Taxslayer 2011 $2,000 2. Taxslayer 2011 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. Taxslayer 2011   3. Taxslayer 2011 Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Taxslayer 2011   4. Taxslayer 2011 Subtract line 3 from line 2. Taxslayer 2011 If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Taxslayer 2011   5. Taxslayer 2011 Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Taxslayer 2011     Note. Taxslayer 2011 If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Taxslayer 2011 You are not allowed to contribute to a Coverdell ESA for 2013. Taxslayer 2011       6. Taxslayer 2011 Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Taxslayer 2011 . Taxslayer 2011 7. Taxslayer 2011 Multiply line 1 by line 6   7. Taxslayer 2011   8. Taxslayer 2011 Subtract line 7 from line 1   8. Taxslayer 2011   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Taxslayer 2011 Example. Taxslayer 2011 Paul, who is single, had a MAGI of $96,500 for 2013. Taxslayer 2011 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. Taxslayer 2011 Worksheet 7-2. Taxslayer 2011 Coverdell ESA Contribution Limit—Illustrated 1. Taxslayer 2011 Maximum contribution   1. Taxslayer 2011 $2,000 2. Taxslayer 2011 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. Taxslayer 2011 96,500 3. Taxslayer 2011 Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Taxslayer 2011 95,000 4. Taxslayer 2011 Subtract line 3 from line 2. Taxslayer 2011 If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Taxslayer 2011 1,500 5. Taxslayer 2011 Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Taxslayer 2011 15,000   Note. Taxslayer 2011 If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Taxslayer 2011 You are not allowed to  contribute to a Coverdell ESA for 2013. Taxslayer 2011       6. Taxslayer 2011 Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Taxslayer 2011 . Taxslayer 2011 100 7. Taxslayer 2011 Multiply line 1 by line 6   7. Taxslayer 2011 200 8. Taxslayer 2011 Subtract line 7 from line 1   8. Taxslayer 2011 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Taxslayer 2011 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. Taxslayer 2011 Excess contributions are the total of the following two amounts. Taxslayer 2011 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). Taxslayer 2011 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. Taxslayer 2011 Exceptions. Taxslayer 2011   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). Taxslayer 2011   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Taxslayer 2011 You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Taxslayer 2011 Box 2 of that form will show the amount of earnings on your excess contributions. Taxslayer 2011 Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Taxslayer 2011 See Instructions for Recipient on the back of copy B of your Form 1099-Q. Taxslayer 2011 Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Taxslayer 2011 For more information, see Taxable Distributions , later. Taxslayer 2011   The excise tax does not apply to any rollover contribution. Taxslayer 2011 Note. Taxslayer 2011 Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Taxslayer 2011 Example. Taxslayer 2011 In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 (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. Taxslayer 2011 Figuring and reporting the additional tax. Taxslayer 2011   You figure this excise tax in Part V of Form 5329. Taxslayer 2011 Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Taxslayer 2011 Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Taxslayer 2011 The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Taxslayer 2011 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. Taxslayer 2011 This age limitation does not apply if the new beneficiary is a special needs beneficiary. Taxslayer 2011 An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Taxslayer 2011 Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Taxslayer 2011 These are not taxable distributions. Taxslayer 2011 Members of the beneficiary's family. Taxslayer 2011   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Taxslayer 2011 Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Taxslayer 2011 Brother, sister, stepbrother, or stepsister. Taxslayer 2011 Father or mother or ancestor of either. Taxslayer 2011 Stepfather or stepmother. Taxslayer 2011 Son or daughter of a brother or sister. Taxslayer 2011 Brother or sister of father or mother. Taxslayer 2011 Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Taxslayer 2011 The spouse of any individual listed above. Taxslayer 2011 First cousin. Taxslayer 2011 Example. Taxslayer 2011 When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Taxslayer 2011 He wanted to give this money to his younger sister, who was still in high school. Taxslayer 2011 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. Taxslayer 2011 Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Taxslayer 2011 This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Taxslayer 2011 Military death gratuity. Taxslayer 2011   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). Taxslayer 2011 Such payments are made to an eligible survivor upon the death of a member of the armed forces. Taxslayer 2011 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. Taxslayer 2011   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Taxslayer 2011 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. Taxslayer 2011   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. Taxslayer 2011 See Distributions , later. Taxslayer 2011 The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Taxslayer 2011 Changing the Designated Beneficiary The designated beneficiary can be changed. Taxslayer 2011 See Members of the beneficiary's family , earlier. Taxslayer 2011 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. Taxslayer 2011 Example. Taxslayer 2011 Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Taxslayer 2011 Example. Taxslayer 2011 In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Taxslayer 2011 In this process, the account was transferred into her name. Taxslayer 2011 Peg now treats the funds in this Coverdell ESA as if she were the original owner. Taxslayer 2011 Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Taxslayer 2011 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. Taxslayer 2011 See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Taxslayer 2011 Table 7-3. Taxslayer 2011 Coverdell ESA Distributions at a Glance Do not rely on this table alone. Taxslayer 2011 It provides only general highlights. Taxslayer 2011 See the text for definitions of terms in bold type and for more complete explanations. Taxslayer 2011 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. Taxslayer 2011 After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Taxslayer 2011 Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Taxslayer 2011 Also, certain transfers to members of the beneficiary's family are permitted. Taxslayer 2011 Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Taxslayer 2011 Adjusted qualified education expenses. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Taxslayer 2011 Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Taxslayer 2011 Do not report tax-free distributions (including qualifying rollovers) on your tax return. Taxslayer 2011 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. Taxslayer 2011 Excess distribution. Taxslayer 2011   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Taxslayer 2011 Earnings and basis. Taxslayer 2011   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Taxslayer 2011 The amount of your gross distribution will be shown in box 1. Taxslayer 2011 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. Taxslayer 2011 This will be shown in the blank box below boxes 5 and 6. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 Figure the taxable portion for 2013 as shown in the following steps. Taxslayer 2011 Multiply the total amount distributed by a fraction. Taxslayer 2011 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. Taxslayer 2011 Subtract the amount figured in (1) from the total amount distributed during 2013. Taxslayer 2011 The result is the amount of earnings included in the distribution(s). Taxslayer 2011 Multiply the amount of earnings figured in (2) by a fraction. Taxslayer 2011 The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Taxslayer 2011 Subtract the amount figured in (3) from the amount figured in (2). Taxslayer 2011 The result is the amount the beneficiary must include in income. Taxslayer 2011 The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Taxslayer 2011 Example. Taxslayer 2011 You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Taxslayer 2011 There were no contributions in 2013. Taxslayer 2011 This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Taxslayer 2011 The value (balance) of your account on December 31, 2013, was $950. Taxslayer 2011 You had $700 of adjusted qualified education expenses (AQEE) for the year. Taxslayer 2011 Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Taxslayer 2011   1. Taxslayer 2011 $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Taxslayer 2011 $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Taxslayer 2011 $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Taxslayer 2011 $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Taxslayer 2011 Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Taxslayer 2011 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). Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Example. Taxslayer 2011 Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Taxslayer 2011 He paid his college expenses from the following sources. Taxslayer 2011     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. Taxslayer 2011 Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Taxslayer 2011 Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Taxslayer 2011     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. Taxslayer 2011 The balance in Derek's account was $1,800 on December 31, 2013. Taxslayer 2011 Prior to 2013, $2,100 had been contributed to this account. Taxslayer 2011 Contributions for 2013 totaled $400. Taxslayer 2011 Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Taxslayer 2011   1. Taxslayer 2011 $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Taxslayer 2011 $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Taxslayer 2011 $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Taxslayer 2011 $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Taxslayer 2011 This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Taxslayer 2011 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. Taxslayer 2011 The following two examples illustrate possible allocations. Taxslayer 2011 Example 1. Taxslayer 2011 In 2013, Beatrice graduated from high school and began her first semester of college. Taxslayer 2011 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. Taxslayer 2011 To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Taxslayer 2011 No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Taxslayer 2011 She did not receive any tax-free educational assistance in 2013. Taxslayer 2011 Beatrice must allocate her total qualified education expenses between the two distributions. Taxslayer 2011 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. Taxslayer 2011 The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Taxslayer 2011 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). Taxslayer 2011 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. Taxslayer 2011 Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Taxslayer 2011 (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Taxslayer 2011 ) Example 2. Taxslayer 2011 Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Taxslayer 2011 In this case, she allocates her qualified education expenses as follows. Taxslayer 2011 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. Taxslayer 2011 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). Taxslayer 2011   $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). Taxslayer 2011 See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Taxslayer 2011   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Taxslayer 2011 The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Taxslayer 2011 However, you do not have to allocate your expenses in the same way. Taxslayer 2011 You can use any reasonable method. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Your basis is the total amount of contributions to that Coverdell ESA. Taxslayer 2011 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. Taxslayer 2011 If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Taxslayer 2011 ) from all such accounts in order to determine your taxable earnings for the year. Taxslayer 2011 By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Taxslayer 2011 For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Taxslayer 2011 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. Taxslayer 2011 Exceptions. Taxslayer 2011   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. Taxslayer 2011 Made because the designated beneficiary is disabled. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 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. Taxslayer 2011 Made on account of the attendance of the designated beneficiary at a U. Taxslayer 2011 S. Taxslayer 2011 military academy (such as the USMA at West Point). Taxslayer 2011 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. Taxslayer 2011 S. Taxslayer 2011 Code) attributable to such attendance. Taxslayer 2011 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). Taxslayer 2011 Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Taxslayer 2011 The distributed earnings must be included in gross income for the year in which the excess contribution was made. Taxslayer 2011 Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Taxslayer 2011 Figuring the additional tax. Taxslayer 2011    Use Part II of Form 5329, to figure any additional tax. Taxslayer 2011 Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Taxslayer 2011 When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Taxslayer 2011 The designated beneficiary reaches age 30. Taxslayer 2011 In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Taxslayer 2011 However, this rule does not apply if the beneficiary is a special needs beneficiary. Taxslayer 2011 The designated beneficiary dies before reaching age 30. Taxslayer 2011 In this case, the remaining assets must generally be distributed within 30 days after the date of death. Taxslayer 2011 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. Taxslayer 2011 (“Family member” was defined earlier under Rollovers . Taxslayer 2011 ) 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. Taxslayer 2011 This age limitation does not apply if the new beneficiary is a special needs beneficiary. Taxslayer 2011 There are no tax consequences as a result of the transfer. Taxslayer 2011 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. Taxslayer 2011 You determine these earnings as shown in the following two steps. Taxslayer 2011 Multiply the amount distributed by a fraction. Taxslayer 2011 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. Taxslayer 2011 Subtract the amount figured in (1) from the total amount distributed during 2013. Taxslayer 2011 The result is the amount of earnings included in the distribution. Taxslayer 2011 For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Taxslayer 2011 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. Taxslayer 2011 Worksheet 7-3 Instructions. Taxslayer 2011 Coverdell ESA—Taxable Distributions and Basis Line G. Taxslayer 2011 Enter the total distributions received from all Coverdell ESAs during 2013. Taxslayer 2011 Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Taxslayer 2011 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. Taxslayer 2011 Line 2. Taxslayer 2011 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. Taxslayer 2011   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. Taxslayer 2011 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. Taxslayer 2011 For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Taxslayer 2011 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. Taxslayer 2011 Line 4. Taxslayer 2011 Enter the total distributions received from this Coverdell ESA in 2013. Taxslayer 2011 Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Taxslayer 2011   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. Taxslayer 2011 Line 7. Taxslayer 2011 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. Taxslayer 2011 A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Taxslayer 2011   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Taxslayer 2011 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. Taxslayer 2011 Worksheet 7-3. Taxslayer 2011 Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Taxslayer 2011 • • • Complete Part I, lines A through H, on only one worksheet. Taxslayer 2011  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Taxslayer 2011  Complete Part III, the Summary (line 16), on only one worksheet. Taxslayer 2011 Part I. Taxslayer 2011 Qualified Education Expenses (Complete for total expenses)       A. Taxslayer 2011 Enter your total qualified education expenses for 2013   A. Taxslayer 2011   B. Taxslayer 2011 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. Taxslayer 2011         C. Taxslayer 2011 Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Taxslayer 2011 Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Taxslayer 2011         D. Taxslayer 2011 Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Taxslayer 2011         E. Taxslayer 2011 Add lines B, C, and D   D. Taxslayer 2011   F. Taxslayer 2011 Subtract line E from line A. Taxslayer 2011 This is your adjusted qualified education expense for 2013   E. Taxslayer 2011   G. Taxslayer 2011 Enter your total distributions from all Coverdell ESAs during 2013. Taxslayer 2011 Do not include rollovers  or the return of excess contributions (see instructions)   F. Taxslayer 2011   H. Taxslayer 2011 Divide line F by line G. Taxslayer 2011 Enter the result as a decimal (rounded to at least 3 places). Taxslayer 2011 If the  result is 1. Taxslayer 2011 000 or more, enter 1. Taxslayer 2011 000   G. Taxslayer 2011 . Taxslayer 2011 Part II. Taxslayer 2011 Taxable Distributions and Basis (Complete separately for each account) 1. Taxslayer 2011 Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Taxslayer 2011 Do not include rollovers or the return of excess contributions   1. Taxslayer 2011   2. Taxslayer 2011 Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Taxslayer 2011   3. Taxslayer 2011 Add lines 1 and 2   3. Taxslayer 2011   4. Taxslayer 2011 Enter the total distributions from this Coverdell ESA during 2013. Taxslayer 2011 Do not include rollovers  or the return of excess contributions (see instructions)   4. Taxslayer 2011   5. Taxslayer 2011 Multiply line 4 by line H. Taxslayer 2011 This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Taxslayer 2011         6. Taxslayer 2011 Subtract line 5 from line 4   6. Taxslayer 2011         7. Taxslayer 2011 Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Taxslayer 2011         8. Taxslayer 2011 Add lines 4 and 7   8. Taxslayer 2011         9. Taxslayer 2011 Divide line 3 by line 8. Taxslayer 2011 Enter the result as a decimal (rounded to  at least 3 places). Taxslayer 2011 If the result is 1. Taxslayer 2011 000 or more, enter 1. Taxslayer 2011 000   9. Taxslayer 2011 . Taxslayer 2011       10. Taxslayer 2011 Multiply line 4 by line 9. Taxslayer 2011 This is the amount of basis allocated to your  distributions, and is tax free   10. Taxslayer 2011     Note. Taxslayer 2011 If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Taxslayer 2011       11. Taxslayer 2011 Subtract line 10 from line 4   11. Taxslayer 2011   12. Taxslayer 2011 Divide line 5 by line 4. Taxslayer 2011 Enter the result as a decimal (rounded to  at least 3 places). Taxslayer 2011 If the result is 1. Taxslayer 2011 000 or more, enter 1. Taxslayer 2011 000   12. Taxslayer 2011 . Taxslayer 2011       13. Taxslayer 2011 Multiply line 11 by line 12. Taxslayer 2011 This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Taxslayer 2011   14. Taxslayer 2011 Subtract line 13 from line 11. Taxslayer 2011 This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Taxslayer 2011   15. Taxslayer 2011 Subtract line 10 from line 3. Taxslayer 2011 This is your basis in this Coverdell ESA as of December 31, 2013   15. Taxslayer 2011   Part III. Taxslayer 2011 Summary (Complete only once)       16. Taxslayer 2011 Taxable amount. Taxslayer 2011 Add together all amounts on line 14 for all your Coverdell ESAs. Taxslayer 2011 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. Taxslayer 2011   Prev  Up  Next   Home   More Online Publications
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Questions and Answers on 501(c) Organizations

May 15, 2013

The IRS has received a variety of questions related to the exempt organization issues recently raised. Here are some basics on the issue.

1. What are the issues raised in the recent Treasury Inspector General for Tax Administration (“TIGTA”) report?

The issues relate to the application process for organizations seeking tax-exempt status. Part of the IRS’s responsibility is to review applications of organizations seeking tax-exempt status. Section 501(c)(3) organizations are required to get IRS approval. Others, including section 501(c)(4) organizations, are not required to get IRS approval, but often seek it.

2. Do the issues raised in the recent report relate to audits/ examinations?

No, the issues relate to the approval process of organizations that applied to the IRS for recognition of tax-exempt status. 

3. What does the IRS look for in the approval process? 

The IRS’s role is to determine whether organization meets the legal requirements for tax-exempt status. One requirement relates to the amount of political campaign intervention (“political activity”) that tax-exempt organizations may engage in. Section 501(c)(3) organizations are prohibited from engaging in any political activity. Other organizations, including section 501(c)(4) organizations, may only engage in a limited amount of political activity. 

4. Where does an organization send its application for tax-exemption?

All applications are sent to the IRS Determinations Office in Cincinnati. This office receives approximately 70,000 applications for tax-exempt status of all kinds each year. This includes applications from section 501(c)(3) and section 501(c)(4) organizations. This office, which includes fewer than 200 people working directly on applications, is primarily responsible for working determination applications. Determinations staff may consult with tax law specialists in Washington on how the law applies to their case. 

5. Has the IRS seen an increase in the number of applications in which the organization is potentially engaged in political activity?

Yes, the IRS has seen an increase in the number of section 501(c)(4) applications in general. The number of applications has more than doubled in recent years. In addition, the IRS has seen an increase in the number of tax-exempt organization applications in which the organization is potentially engaged in political activity. This includes both section 501(c)(3) and section 501(c)(4) organizations.

6. How did the IRS handle the increase in the number of applications from organizations that appeared to be engaged in political activity?

As done in the past in other situations, such as credit counseling and down payment assistance), the IRS selected cases using identified criteria so that cases needing further review would be worked consistently. This means that cases meeting the selection criteria were centralized and assigned to designated employees developing expertise in the area so that they could be worked in a fair and consistent manner. 

7. How are decisions made regarding what cases should be centralized in this area?

Cases are selected for centralization if there are indications in the application that the organization may engage in political campaign intervention, lobbying, or advocacy. This was done to ensure that the legal requirements related to these activities are applied in a fair and consistent manner. The set of criteria was revised at a later point in order to avoid centralizing pure lobbying organizations that did not require follow-on development. During certain periods (August 2010 to July 2011 and January 2012 to June 2012), specific names, terms and policies (such as Tea Party and Patriot) were inappropriately used as criteria in determining which cases should be centralized. However, case selection during these periods was not limited to these criteria. 

8. What cases were centralized?

The TIGTA report reflects that 300 cases were centralized. Approximately 70 of those cases included the name Tea Party. The remaining cases included organizations of all political views. The current number of centralized cases is approximately 470.

9. Why did IRS employees look at Tea Party organizations?

IRS employees had seen cases of organizations with the name Tea Party in which political activity was an issue that needed to be reviewed for compliance with legal requirements. Because of the increased inventory of applications, this inappropriate criterion was used as a shortcut to centralize similar cases.

10. Would organizations with Tea Party in the name have been centralized if only appropriate selection criteria had been used?

Yes, in most cases the organization would have been centralized based on the information included in the application. The IRS should have focused on this information instead of using a shortcut.

11. Were centralized cases worked differently depending on which selection criteria was used?

No, centralized cases were not worked differently depending on which selection criteria was used.

12. Did mistakes occur in working the centralized cases?

Yes. Applicants whose cases were centralized unfortunately experienced inappropriate delays and over-expansive information requests in some cases. This was caused by ineffective processes and not related to the selection criteria used for the centralization of a case.

13. Is there any evidence of political bias in selecting cases for centralization or in working those cases?

The TIGTA report included no findings of political bias. In addition, the IRS has found no indication of political bias. 

14. How many centralized applications have been approved?

Since centralization, more than 175 applications have been approved to date. As with all applications for tax-exempt status that are approved, the names of organizations whose applications have been approved are publicly available. 

Page Last Reviewed or Updated: 04-Sep-2013

The Taxslayer 2011

Taxslayer 2011 Index A Adjusted basis, Adjusted Basis Assessments For local benefits, Assessments for local benefits. Taxslayer 2011 Homeowners association, Homeowners association assessments. Taxslayer 2011 Assistance (see Tax help) B Basis, Basis C Certificate, mortgage credit, Who qualifies. Taxslayer 2011 Construction, Construction. Taxslayer 2011 Cooperatives, Special Rules for Cooperatives, Cooperative apartment. Taxslayer 2011 Cost basis, Cost as Basis Credit Mortgage interest, Mortgage Interest Credit D Deduction Home mortgage interest, Deductible Mortgage Interest Real estate taxes, Deductible Real Estate Taxes E Emergency Homeowners' Loan Program, Hardest Hit Fund and Emergency Homeowners' Loan Programs Escrow accounts, Escrow accounts. Taxslayer 2011 F Fire insurance premiums, Items not added to basis and not deductible. Taxslayer 2011 Form 1098, Mortgage Interest Statement 8396, How to claim the credit. Taxslayer 2011 , Figuring the Credit Free tax services, Free help with your tax return. Taxslayer 2011 G Gift of home, Gift Ground rent, Ground rent. Taxslayer 2011 H Help (see Tax help) HFA Hardest Hit Fund, Hardest Hit Fund and Emergency Homeowners' Loan Programs Home Acquisition debt, Home Acquisition Debt Inherited, Inheritance Mortgage interest, Home Mortgage Interest Purchase of, Purchase. Taxslayer 2011 Received as gift, Gift Homeowners association assessments, Homeowners association assessments. Taxslayer 2011 House payment, Your house payment. Taxslayer 2011 Housing allowance, minister or military, Minister's or military housing allowance. Taxslayer 2011 I Improvements, Improvements. Taxslayer 2011 Inheritance, Inheritance Insurance, Nondeductible payments. Taxslayer 2011 , Items not added to basis and not deductible. Taxslayer 2011 Interest Home mortgage, Home Mortgage Interest Prepaid, Prepaid interest. Taxslayer 2011 K Keeping records, Keeping Records L Late payment charge, Late payment charge on mortgage payment. Taxslayer 2011 Local benefits, assessments for, Assessments for local benefits. Taxslayer 2011 M MCC (Mortgage credit certificate), Who qualifies. Taxslayer 2011 Minister's or military housing allowance, Minister's or military housing allowance. Taxslayer 2011 Mortgage credit certificate (MCC), Who qualifies. Taxslayer 2011 Mortgage debt forgiveness, Discharges of qualified principal residence indebtedness. Taxslayer 2011 Mortgage insurance premiums, Mortgage Insurance Premiums Mortgage interest Credit, Mortgage Interest Credit Deduction, Deductible Mortgage Interest Late payment charge, Late payment charge on mortgage payment. Taxslayer 2011 Paid at settlement, Mortgage Interest Paid at Settlement Refund, Refund of home mortgage interest. Taxslayer 2011 , Refund of overpaid interest. Taxslayer 2011 Statement, Mortgage Interest Statement Mortgage prepayment penalty, Mortgage prepayment penalty. Taxslayer 2011 N Nondeductible payments, Nondeductible payments. Taxslayer 2011 , Items not added to basis and not deductible. Taxslayer 2011 P Points, Points Prepaid interest, Prepaid interest. Taxslayer 2011 Publications (see Tax help) R Real estate taxes, Real Estate Taxes Deductible, Deductible Real Estate Taxes Paid at settlement or closing, Real estate taxes paid at settlement or closing. Taxslayer 2011 , Real estate taxes. Taxslayer 2011 Refund or rebate, Refund or rebate of real estate taxes. Taxslayer 2011 Recordkeeping, Keeping Records Refund of Mortgage interest, Refund of home mortgage interest. Taxslayer 2011 , Refund of overpaid interest. Taxslayer 2011 Real estate taxes, Refund or rebate of real estate taxes. Taxslayer 2011 Repairs, Repairs versus improvements. Taxslayer 2011 S Sales taxes, Sales Taxes Settlement or closing costs Basis of home, Settlement or closing costs. Taxslayer 2011 Mortgage interest, Mortgage Interest Paid at Settlement Real estate taxes, Real estate taxes paid at settlement or closing. Taxslayer 2011 , Real estate taxes. Taxslayer 2011 Stamp taxes, Transfer taxes (or stamp taxes). Taxslayer 2011 Statement, mortgage interest, Mortgage Interest Statement T Tax help, How To Get Tax Help Taxes Real estate, Real Estate Taxes, Refund of real estate taxes. Taxslayer 2011 Transfer taxes, Transfer taxes (or stamp taxes). Taxslayer 2011 W What you can and cannot deduct, What You Can and Cannot Deduct Prev  Up     Home   More Online Publications