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Free tax filing for seniors 7. Free tax filing for seniors   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 tax filing for seniors For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Free tax filing for seniors There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Free tax filing for seniors However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Free tax filing for seniors See Contributions , later. Free tax filing for seniors This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Free tax filing for seniors What is the tax benefit of the Coverdell ESA. Free tax filing for seniors   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Free tax filing for seniors   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 tax filing for seniors See Tax-Free Distributions , later. Free tax filing for seniors    Table 7-1 summarizes the main features of the Coverdell ESA. Free tax filing for seniors Table 7-1. Free tax filing for seniors Coverdell ESA at a Glance Do not rely on this table alone. Free tax filing for seniors It provides only general highlights. Free tax filing for seniors See the text for definitions of terms in bold type and for more complete explanations. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Free tax filing for seniors 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 tax filing for seniors Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Free tax filing for seniors 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 tax filing for seniors When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Free tax filing for seniors To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Free tax filing for seniors The document creating and governing the account must be in writing and must satisfy the following requirements. Free tax filing for seniors The trustee or custodian must be a bank or an entity approved by the IRS. Free tax filing for seniors The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Free tax filing for seniors The contribution is in cash. Free tax filing for seniors The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free tax filing for seniors The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Free tax filing for seniors Money in the account cannot be invested in life insurance contracts. Free tax filing for seniors Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Free tax filing for seniors The balance in the account generally must be distributed within 30 days after the earlier of the following events. Free tax filing for seniors The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Free tax filing for seniors The beneficiary's death. Free tax filing for seniors Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Free tax filing for seniors For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Free tax filing for seniors Designated beneficiary. Free tax filing for seniors   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 tax filing for seniors Contributions to a qualified tuition program (QTP). Free tax filing for seniors   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 tax filing for seniors 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 tax filing for seniors See chapter 8, Qualified Tuition Program . Free tax filing for seniors 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 tax filing for seniors Eligible postsecondary school. Free tax filing for seniors   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 tax filing for seniors S. Free tax filing for seniors Department of Education. Free tax filing for seniors It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free tax filing for seniors The educational institution should be able to tell you if it is an eligible educational institution. Free tax filing for seniors   Certain educational institutions located outside the United States also participate in the U. Free tax filing for seniors S. Free tax filing for seniors Department of Education's Federal Student Aid (FSA) programs. Free tax filing for seniors Eligible elementary or secondary school. Free tax filing for seniors   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Free tax filing for seniors Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Free tax filing for seniors 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 tax filing for seniors The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Free tax filing for seniors Tuition and fees. Free tax filing for seniors Books, supplies, and equipment. Free tax filing for seniors 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 tax filing for seniors Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors The actual amount charged if the student is residing in housing owned or operated by the school. Free tax filing for seniors Half-time student. Free tax filing for seniors   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 tax filing for seniors Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Free tax filing for seniors As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Free tax filing for seniors There are special rules for computer-related expenses. Free tax filing for seniors The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Free tax filing for seniors Tuition and fees. Free tax filing for seniors Books, supplies, and equipment. Free tax filing for seniors Academic tutoring. Free tax filing for seniors Special needs services for a special needs beneficiary. Free tax filing for seniors 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 tax filing for seniors Room and board. Free tax filing for seniors Uniforms. Free tax filing for seniors Transportation. Free tax filing for seniors Supplementary items and services (including extended day programs). Free tax filing for seniors 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 tax filing for seniors (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Free tax filing for seniors ) 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 tax filing for seniors For individuals filing joint returns, that amount is $220,000. Free tax filing for seniors Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Free tax filing for seniors There is no requirement that an organization's income be below a certain level. Free tax filing for seniors Contributions must meet all of the following requirements. Free tax filing for seniors They must be in cash. Free tax filing for seniors They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free tax filing for seniors They must be made by the due date of the contributor's tax return (not including extensions). Free tax filing for seniors 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 tax filing for seniors Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Free tax filing for seniors Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Free tax filing for seniors When contributions considered made. Free tax filing for seniors   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 tax filing for seniors They must be made by the due date (not including extensions) for filing your return for the preceding year. Free tax filing for seniors   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 tax filing for seniors 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 tax filing for seniors Limit for each designated beneficiary. Free tax filing for seniors   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 tax filing for seniors This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Free tax filing for seniors Rollovers are discussed under Rollovers and Other Transfers , later. Free tax filing for seniors Example. Free tax filing for seniors 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 tax filing for seniors In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Free tax filing for seniors 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 tax filing for seniors Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Free tax filing for seniors These contributions could be put into any of Maria's Coverdell ESA accounts. Free tax filing for seniors Limit for each contributor. Free tax filing for seniors   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Free tax filing for seniors 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 tax filing for seniors Example. Free tax filing for seniors The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Free tax filing for seniors 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 tax filing for seniors Reduced limit. Free tax filing for seniors   Your contribution limit may be reduced. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Table 7-2. Free tax filing for seniors Coverdell ESA Contributions at a Glance Do not rely on this table alone. Free tax filing for seniors It provides only general highlights. Free tax filing for seniors See the text for more complete explanations. Free tax filing for seniors Question Answer Are contributions deductible? No. Free tax filing for seniors What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Can contributions other than cash be made to a Coverdell ESA? No. Free tax filing for seniors 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 tax filing for seniors Modified adjusted gross income (MAGI). Free tax filing for seniors   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free tax filing for seniors MAGI when using Form 1040A. Free tax filing for seniors   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free tax filing for seniors MAGI when using Form 1040. Free tax filing for seniors   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 tax filing for seniors MAGI when using Form 1040NR. Free tax filing for seniors   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Free tax filing for seniors MAGI when using Form 1040NR-EZ. Free tax filing for seniors   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Free tax filing for seniors   If you have any of these adjustments, you can use Worksheet 7-1. Free tax filing for seniors MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Free tax filing for seniors Worksheet 7-1. Free tax filing for seniors MAGI for a Coverdell ESA 1. Free tax filing for seniors Enter your adjusted gross income  (Form 1040, line 38)   1. Free tax filing for seniors   2. Free tax filing for seniors Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free tax filing for seniors       3. Free tax filing for seniors Enter your foreign housing deduction (Form 2555, line 50)   3. Free tax filing for seniors         4. Free tax filing for seniors Enter the amount of income from Puerto Rico you are excluding   4. Free tax filing for seniors       5. Free tax filing for seniors Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free tax filing for seniors       6. Free tax filing for seniors Add lines 2, 3, 4, and 5   6. Free tax filing for seniors   7. Free tax filing for seniors Add lines 1 and 6. Free tax filing for seniors This is your  modified adjusted gross income   7. Free tax filing for seniors   Figuring the limit. Free tax filing for seniors    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Free tax filing for seniors The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Free tax filing for seniors The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Free tax filing for seniors Subtract the result from $2,000. Free tax filing for seniors This is the amount you can contribute for each beneficiary. Free tax filing for seniors You can use Worksheet 7-2. Free tax filing for seniors Coverdell ESA Contribution Limit to figure the limit on contributions. Free tax filing for seniors    Worksheet 7-2. Free tax filing for seniors Coverdell ESA Contribution Limit 1. Free tax filing for seniors Maximum contribution   1. Free tax filing for seniors $2,000 2. Free tax filing for seniors 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 tax filing for seniors   3. Free tax filing for seniors Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free tax filing for seniors   4. Free tax filing for seniors Subtract line 3 from line 2. Free tax filing for seniors If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free tax filing for seniors   5. Free tax filing for seniors Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free tax filing for seniors     Note. Free tax filing for seniors If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Free tax filing for seniors You are not allowed to contribute to a Coverdell ESA for 2013. Free tax filing for seniors       6. Free tax filing for seniors Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free tax filing for seniors . Free tax filing for seniors 7. Free tax filing for seniors Multiply line 1 by line 6   7. Free tax filing for seniors   8. Free tax filing for seniors Subtract line 7 from line 1   8. Free tax filing for seniors   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free tax filing for seniors Example. Free tax filing for seniors Paul, who is single, had a MAGI of $96,500 for 2013. Free tax filing for seniors 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 tax filing for seniors Worksheet 7-2. Free tax filing for seniors Coverdell ESA Contribution Limit—Illustrated 1. Free tax filing for seniors Maximum contribution   1. Free tax filing for seniors $2,000 2. Free tax filing for seniors 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 tax filing for seniors 96,500 3. Free tax filing for seniors Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free tax filing for seniors 95,000 4. Free tax filing for seniors Subtract line 3 from line 2. Free tax filing for seniors If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free tax filing for seniors 1,500 5. Free tax filing for seniors Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free tax filing for seniors 15,000   Note. Free tax filing for seniors If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Free tax filing for seniors You are not allowed to  contribute to a Coverdell ESA for 2013. Free tax filing for seniors       6. Free tax filing for seniors Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free tax filing for seniors . Free tax filing for seniors 100 7. Free tax filing for seniors Multiply line 1 by line 6   7. Free tax filing for seniors 200 8. Free tax filing for seniors Subtract line 7 from line 1   8. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Excess contributions are the total of the following two amounts. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Exceptions. Free tax filing for seniors   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 tax filing for seniors   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Free tax filing for seniors You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Free tax filing for seniors Box 2 of that form will show the amount of earnings on your excess contributions. Free tax filing for seniors Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Free tax filing for seniors See Instructions for Recipient on the back of copy B of your Form 1099-Q. Free tax filing for seniors Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Free tax filing for seniors For more information, see Taxable Distributions , later. Free tax filing for seniors   The excise tax does not apply to any rollover contribution. Free tax filing for seniors Note. Free tax filing for seniors 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 tax filing for seniors Example. Free tax filing for seniors In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors (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 tax filing for seniors Figuring and reporting the additional tax. Free tax filing for seniors   You figure this excise tax in Part V of Form 5329. Free tax filing for seniors Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Free tax filing for seniors Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Free tax filing for seniors The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Free tax filing for seniors 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 tax filing for seniors This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free tax filing for seniors An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Free tax filing for seniors Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Free tax filing for seniors These are not taxable distributions. Free tax filing for seniors Members of the beneficiary's family. Free tax filing for seniors   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Free tax filing for seniors Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Free tax filing for seniors Brother, sister, stepbrother, or stepsister. Free tax filing for seniors Father or mother or ancestor of either. Free tax filing for seniors Stepfather or stepmother. Free tax filing for seniors Son or daughter of a brother or sister. Free tax filing for seniors Brother or sister of father or mother. Free tax filing for seniors Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Free tax filing for seniors The spouse of any individual listed above. Free tax filing for seniors First cousin. Free tax filing for seniors Example. Free tax filing for seniors When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Free tax filing for seniors He wanted to give this money to his younger sister, who was still in high school. Free tax filing for seniors 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 tax filing for seniors Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Free tax filing for seniors This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Free tax filing for seniors Military death gratuity. Free tax filing for seniors   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 tax filing for seniors Such payments are made to an eligible survivor upon the death of a member of the armed forces. Free tax filing for seniors 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 tax filing for seniors   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Free tax filing for seniors 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 tax filing for seniors   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 tax filing for seniors See Distributions , later. Free tax filing for seniors 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 tax filing for seniors Changing the Designated Beneficiary The designated beneficiary can be changed. Free tax filing for seniors See Members of the beneficiary's family , earlier. Free tax filing for seniors 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 tax filing for seniors Example. Free tax filing for seniors Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Free tax filing for seniors Example. Free tax filing for seniors In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Free tax filing for seniors In this process, the account was transferred into her name. Free tax filing for seniors Peg now treats the funds in this Coverdell ESA as if she were the original owner. Free tax filing for seniors Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Free tax filing for seniors 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 tax filing for seniors See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Free tax filing for seniors Table 7-3. Free tax filing for seniors Coverdell ESA Distributions at a Glance Do not rely on this table alone. Free tax filing for seniors It provides only general highlights. Free tax filing for seniors See the text for definitions of terms in bold type and for more complete explanations. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Free tax filing for seniors Also, certain transfers to members of the beneficiary's family are permitted. Free tax filing for seniors Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Free tax filing for seniors Adjusted qualified education expenses. Free tax filing for seniors   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 tax filing for seniors 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 tax filing for seniors The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Free tax filing for seniors 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 tax filing for seniors Do not report tax-free distributions (including qualifying rollovers) on your tax return. Free tax filing for seniors 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 tax filing for seniors Excess distribution. Free tax filing for seniors   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Free tax filing for seniors Earnings and basis. Free tax filing for seniors   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Free tax filing for seniors The amount of your gross distribution will be shown in box 1. Free tax filing for seniors 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 tax filing for seniors This will be shown in the blank box below boxes 5 and 6. Free tax filing for seniors   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 tax filing for seniors 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 tax filing for seniors Figure the taxable portion for 2013 as shown in the following steps. Free tax filing for seniors Multiply the total amount distributed by a fraction. Free tax filing for seniors 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 tax filing for seniors Subtract the amount figured in (1) from the total amount distributed during 2013. Free tax filing for seniors The result is the amount of earnings included in the distribution(s). Free tax filing for seniors Multiply the amount of earnings figured in (2) by a fraction. Free tax filing for seniors The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Free tax filing for seniors Subtract the amount figured in (3) from the amount figured in (2). Free tax filing for seniors The result is the amount the beneficiary must include in income. Free tax filing for seniors The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Free tax filing for seniors Example. Free tax filing for seniors You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Free tax filing for seniors There were no contributions in 2013. Free tax filing for seniors This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Free tax filing for seniors The value (balance) of your account on December 31, 2013, was $950. Free tax filing for seniors You had $700 of adjusted qualified education expenses (AQEE) for the year. Free tax filing for seniors Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Free tax filing for seniors   1. Free tax filing for seniors $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Free tax filing for seniors $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Free tax filing for seniors $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Free tax filing for seniors $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 tax filing for seniors Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Example. Free tax filing for seniors Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Free tax filing for seniors He paid his college expenses from the following sources. Free tax filing for seniors     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 tax filing for seniors Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Free tax filing for seniors Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Free tax filing for seniors     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 tax filing for seniors The balance in Derek's account was $1,800 on December 31, 2013. Free tax filing for seniors Prior to 2013, $2,100 had been contributed to this account. Free tax filing for seniors Contributions for 2013 totaled $400. Free tax filing for seniors Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Free tax filing for seniors   1. Free tax filing for seniors $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Free tax filing for seniors $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Free tax filing for seniors $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Free tax filing for seniors $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Free tax filing for seniors This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Free tax filing for seniors 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 tax filing for seniors The following two examples illustrate possible allocations. Free tax filing for seniors Example 1. Free tax filing for seniors In 2013, Beatrice graduated from high school and began her first semester of college. Free tax filing for seniors 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 tax filing for seniors To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Free tax filing for seniors No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Free tax filing for seniors She did not receive any tax-free educational assistance in 2013. Free tax filing for seniors Beatrice must allocate her total qualified education expenses between the two distributions. Free tax filing for seniors 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 tax filing for seniors The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Free tax filing for seniors (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Free tax filing for seniors ) Example 2. Free tax filing for seniors 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 tax filing for seniors In this case, she allocates her qualified education expenses as follows. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors   $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 tax filing for seniors See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Free tax filing for seniors   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Free tax filing for seniors The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Free tax filing for seniors However, you do not have to allocate your expenses in the same way. Free tax filing for seniors You can use any reasonable method. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Your basis is the total amount of contributions to that Coverdell ESA. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors ) from all such accounts in order to determine your taxable earnings for the year. Free tax filing for seniors By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Free tax filing for seniors For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Free tax filing for seniors 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 tax filing for seniors Exceptions. Free tax filing for seniors   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 tax filing for seniors Made because the designated beneficiary is disabled. Free tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors 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 tax filing for seniors Made on account of the attendance of the designated beneficiary at a U. Free tax filing for seniors S. Free tax filing for seniors military academy (such as the USMA at West Point). Free tax filing for seniors 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 tax filing for seniors S. Free tax filing for seniors Code) attributable to such attendance. Free tax filing for seniors 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 tax filing for seniors Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Free tax filing for seniors The distributed earnings must be included in gross income for the year in which the excess contribution was made. Free tax filing for seniors Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Free tax filing for seniors Figuring the additional tax. Free tax filing for seniors    Use Part II of Form 5329, to figure any additional tax. Free tax filing for seniors Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Free tax filing for seniors 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 tax filing for seniors The designated beneficiary reaches age 30. Free tax filing for seniors In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Free tax filing for seniors However, this rule does not apply if the beneficiary is a special needs beneficiary. Free tax filing for seniors The designated beneficiary dies before reaching age 30. Free tax filing for seniors In this case, the remaining assets must generally be distributed within 30 days after the date of death. Free tax filing for seniors 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 tax filing for seniors (“Family member” was defined earlier under Rollovers . Free tax filing for seniors ) 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 tax filing for seniors This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free tax filing for seniors There are no tax consequences as a result of the transfer. Free tax filing for seniors 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 tax filing for seniors You determine these earnings as shown in the following two steps. Free tax filing for seniors Multiply the amount distributed by a fraction. Free tax filing for seniors 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 tax filing for seniors Subtract the amount figured in (1) from the total amount distributed during 2013. Free tax filing for seniors The result is the amount of earnings included in the distribution. Free tax filing for seniors For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Free tax filing for seniors 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 tax filing for seniors Worksheet 7-3 Instructions. Free tax filing for seniors Coverdell ESA—Taxable Distributions and Basis Line G. Free tax filing for seniors Enter the total distributions received from all Coverdell ESAs during 2013. Free tax filing for seniors Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Free tax filing for seniors 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 tax filing for seniors Line 2. Free tax filing for seniors 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 tax filing for seniors   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 tax filing for seniors 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 tax filing for seniors For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Free tax filing for seniors 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 tax filing for seniors Line 4. Free tax filing for seniors Enter the total distributions received from this Coverdell ESA in 2013. Free tax filing for seniors Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Free tax filing for seniors   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 tax filing for seniors Line 7. Free tax filing for seniors 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 tax filing for seniors A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Free tax filing for seniors   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Free tax filing for seniors 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 tax filing for seniors Worksheet 7-3. Free tax filing for seniors Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Free tax filing for seniors • • • Complete Part I, lines A through H, on only one worksheet. Free tax filing for seniors  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Free tax filing for seniors  Complete Part III, the Summary (line 16), on only one worksheet. Free tax filing for seniors Part I. Free tax filing for seniors Qualified Education Expenses (Complete for total expenses)       A. Free tax filing for seniors Enter your total qualified education expenses for 2013   A. Free tax filing for seniors   B. Free tax filing for seniors 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 tax filing for seniors         C. Free tax filing for seniors Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Free tax filing for seniors Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Free tax filing for seniors         D. Free tax filing for seniors Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Free tax filing for seniors         E. Free tax filing for seniors Add lines B, C, and D   D. Free tax filing for seniors   F. Free tax filing for seniors Subtract line E from line A. Free tax filing for seniors This is your adjusted qualified education expense for 2013   E. Free tax filing for seniors   G. Free tax filing for seniors Enter your total distributions from all Coverdell ESAs during 2013. Free tax filing for seniors Do not include rollovers  or the return of excess contributions (see instructions)   F. Free tax filing for seniors   H. Free tax filing for seniors Divide line F by line G. Free tax filing for seniors Enter the result as a decimal (rounded to at least 3 places). Free tax filing for seniors If the  result is 1. Free tax filing for seniors 000 or more, enter 1. Free tax filing for seniors 000   G. Free tax filing for seniors . Free tax filing for seniors Part II. Free tax filing for seniors Taxable Distributions and Basis (Complete separately for each account) 1. Free tax filing for seniors Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Free tax filing for seniors Do not include rollovers or the return of excess contributions   1. Free tax filing for seniors   2. Free tax filing for seniors Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Free tax filing for seniors   3. Free tax filing for seniors Add lines 1 and 2   3. Free tax filing for seniors   4. Free tax filing for seniors Enter the total distributions from this Coverdell ESA during 2013. Free tax filing for seniors Do not include rollovers  or the return of excess contributions (see instructions)   4. Free tax filing for seniors   5. Free tax filing for seniors Multiply line 4 by line H. Free tax filing for seniors This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Free tax filing for seniors         6. Free tax filing for seniors Subtract line 5 from line 4   6. Free tax filing for seniors         7. Free tax filing for seniors Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Free tax filing for seniors         8. Free tax filing for seniors Add lines 4 and 7   8. Free tax filing for seniors         9. Free tax filing for seniors Divide line 3 by line 8. Free tax filing for seniors Enter the result as a decimal (rounded to  at least 3 places). Free tax filing for seniors If the result is 1. Free tax filing for seniors 000 or more, enter 1. Free tax filing for seniors 000   9. Free tax filing for seniors . Free tax filing for seniors       10. Free tax filing for seniors Multiply line 4 by line 9. Free tax filing for seniors This is the amount of basis allocated to your  distributions, and is tax free   10. Free tax filing for seniors     Note. Free tax filing for seniors If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Free tax filing for seniors       11. Free tax filing for seniors Subtract line 10 from line 4   11. Free tax filing for seniors   12. Free tax filing for seniors Divide line 5 by line 4. Free tax filing for seniors Enter the result as a decimal (rounded to  at least 3 places). Free tax filing for seniors If the result is 1. Free tax filing for seniors 000 or more, enter 1. Free tax filing for seniors 000   12. Free tax filing for seniors . Free tax filing for seniors       13. Free tax filing for seniors Multiply line 11 by line 12. Free tax filing for seniors This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Free tax filing for seniors   14. Free tax filing for seniors Subtract line 13 from line 11. Free tax filing for seniors This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Free tax filing for seniors   15. Free tax filing for seniors Subtract line 10 from line 3. Free tax filing for seniors This is your basis in this Coverdell ESA as of December 31, 2013   15. Free tax filing for seniors   Part III. Free tax filing for seniors Summary (Complete only once)       16. Free tax filing for seniors Taxable amount. Free tax filing for seniors Add together all amounts on line 14 for all your Coverdell ESAs. Free tax filing for seniors 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 tax filing for seniors   Prev  Up  Next   Home   More Online Publications
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Understanding your CP01H Notice

You received a CP 01H notice because we were unable to process your tax return. The IRS has locked your account because the Social Security Administration informed us that the Social Security number (SSN) of the primary or secondary taxpayer on the return belongs to someone who was deceased prior to the current tax year (before January 1, 2010 for a 2010 tax return).

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

If you think our records are in error, contact the Social Security Administration to correct the situation. If the account is corrected, they will provide you with a Letter SSA 2458 showing the correction. Once the information has been corrected, follow the instructions shown on your CP 01H notice to file your return.


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Answers to Common Questions

Why am I getting this notice?
You are receiving this notice because the Social Security Administration identified that an SSN used on the federal income tax you filed belongs to an individual who was deceased prior to January 1 of the current tax year (not calendar year). The account was locked by the IRS to prevent identity theft by the misuse of this number.

How can I get the account unlocked?
If the person to whom the Social Security number belongs is erroneously identified as deceased:

  1. Contact the Social Security Administration and have them remove the date of death.
  2. Obtain an SSA 2458 letter showing the account has been corrected.
  3. Follow the instructions for sending the SSA letter along with other information requested on the CP 01H to the IRS Service Center where you filed your original return.

Tips for next year

Be sure to use the correct Social Security numbers when preparing next year's tax return.

Page Last Reviewed or Updated: 05-Mar-2014

The Free Tax Filing For Seniors

Free tax filing for seniors 3. Free tax filing for seniors   Abandonments Table of Contents You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else. Free tax filing for seniors Whether an abandonment has occurred is determined in light of all the facts and circumstances. Free tax filing for seniors You must both show an intention to abandon the property and affirmatively act to abandon the property. Free tax filing for seniors A voluntary conveyance of the property in lieu of foreclosure is not an abandonment and is treated as the exchange of property to satisfy a debt. Free tax filing for seniors For more information, see Sales and Exchanges in Publication 544. Free tax filing for seniors The tax consequences of abandonment of property that secures a debt depend on whether you were personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Free tax filing for seniors See Publication 544 if you abandoned property that did not secure debt. Free tax filing for seniors This publication only discusses the tax consequences of abandoning property that secured a debt. Free tax filing for seniors Abandonment of property securing recourse debt. Free tax filing for seniors    In most cases, if you abandon property that secures debt for which you are personally liable (recourse debt), you do not have gain or loss until the later foreclosure is completed. Free tax filing for seniors For details on figuring gain or loss on the foreclosure, see chapter 2. Free tax filing for seniors Example 1—abandonment of personal-use property securing recourse debt. Free tax filing for seniors In 2009, Anne purchased a home for $200,000. Free tax filing for seniors She borrowed the entire purchase price, for which she was personally liable, and gave the bank a mortgage on the home. Free tax filing for seniors In 2013, Anne lost her job and was unable to continue making her mortgage loan payments. Free tax filing for seniors Because her mortgage loan balance was $185,000 and the FMV of her home was only $150,000, Anne decided to abandon her home by permanently moving out on August 1, 2013. Free tax filing for seniors Because Anne was personally liable for the debt and the bank did not complete a foreclosure of the property in 2013, Anne has neither gain nor loss in tax year 2013 from abandoning the home. Free tax filing for seniors If the bank sells the house at a foreclosure sale in 2014, Anne will have to figure her gain or nondeductible loss for tax year 2014 as discussed earlier in chapter 2. Free tax filing for seniors Example 2—abandonment of business or investment property securing recourse debt. Free tax filing for seniors In 2009, Sue purchased business property for $200,000. Free tax filing for seniors She borrowed the entire purchase price, for which she was personally liable, and gave the lender a security interest in the property. Free tax filing for seniors In 2013, Sue was unable to continue making her loan payments. Free tax filing for seniors Because her loan balance was $185,000 and the FMV of the property was only $150,000, Sue abandoned the property on August 1, 2013. Free tax filing for seniors Because Sue was personally liable for the debt and the lender did not complete a foreclosure of the property in 2013, Sue has neither gain nor loss in tax year 2013 from abandoning the property. Free tax filing for seniors If the lender sells the property at a foreclosure sale in 2014, Sue will have to figure her gain or deductible loss for tax year 2014 as discussed earlier in chapter 2. Free tax filing for seniors Abandonment of property securing nonrecourse debt. Free tax filing for seniors    If you abandon property that secures debt for which you are not personally liable (nonrecourse debt), the abandonment is treated as a sale or exchange. Free tax filing for seniors   The amount you realize on the abandonment of property that secured nonrecourse debt is the amount of the nonrecourse debt. Free tax filing for seniors If the amount you realize is more than your adjusted basis, then you have a gain. Free tax filing for seniors If your adjusted basis is more than the amount you realize, then you have a loss. Free tax filing for seniors For more information on how to figure gain and loss, see Gain or Loss from Sales or Exchanges in Publication 544. Free tax filing for seniors   Loss from abandonment of business or investment property is deductible as a loss. Free tax filing for seniors The character of the loss depends on the character of the property. Free tax filing for seniors The amount of deductible capital loss may be limited. Free tax filing for seniors For more information, see Treatment of Capital Losses in Publication 544. Free tax filing for seniors You cannot deduct any loss from abandonment of your home or other property held for personal use. Free tax filing for seniors Example 1—abandonment of personal-use property securing nonrecourse debt. Free tax filing for seniors In 2009, Timothy purchased a home for $200,000. Free tax filing for seniors He borrowed the entire purchase price, for which he was not personally liable, and gave the bank a mortgage on the home. Free tax filing for seniors In 2013, Timothy lost his job and was unable to continue making his mortgage loan payments. Free tax filing for seniors Because his mortgage loan balance was $185,000 and the FMV of his home was only $150,000, Timothy decided to abandon his home by permanently moving out on August 1, 2013. Free tax filing for seniors Because Timothy was not personally liable for the debt, the abandonment is treated as a sale or exchange of the home in tax year 2013. Free tax filing for seniors Timothy's amount realized is $185,000 and his adjusted basis in the home is $200,000. Free tax filing for seniors Timothy has a $15,000 nondeductible loss in tax year 2013. Free tax filing for seniors (Had Timothy’s adjusted basis been less than the amount realized, Timothy would have had a gain that he would have to include in gross income. Free tax filing for seniors ) The bank sells the house at a foreclosure sale in 2014. Free tax filing for seniors Timothy has neither gain nor loss from the foreclosure sale. Free tax filing for seniors Because he was not personally liable for the debt, he also has no cancellation of debt income. Free tax filing for seniors Example 2—abandonment of business or investment property securing nonrecourse debt. Free tax filing for seniors In 2009, Robert purchased business property for $200,000. Free tax filing for seniors He borrowed the entire purchase price, for which he was not personally liable, and gave the lender a security interest in the property. Free tax filing for seniors In 2013, Robert was unable to continue making his loan payments. Free tax filing for seniors Because his loan balance was $185,000 and the FMV of the property was only $150,000, Robert decided to abandon the property on August 1, 2013. Free tax filing for seniors Because Robert was not personally liable for the debt, the abandonment is treated as a sale or exchange of the property in tax year 2013. Free tax filing for seniors Robert's amount realized is $185,000 and his adjusted basis in the property is $180,000 (as a result of $20,000 of depreciation deductions on the property). Free tax filing for seniors Robert has a $5,000 gain in tax year 2013. Free tax filing for seniors (Had Robert’s adjusted basis been greater than the amount realized, he would have had a deductible loss. Free tax filing for seniors ) The lender sells the property at a foreclosure sale in 2014. Free tax filing for seniors Robert has neither gain nor loss from the foreclosure sale. Free tax filing for seniors Because he was not personally liable for the debt, he also has no cancellation of debt income. Free tax filing for seniors Canceled debt. Free tax filing for seniors    If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Free tax filing for seniors This income is separate from any amount realized from abandonment of the property. Free tax filing for seniors You must report this income on your return unless one of the exceptions or exclusions described in chapter 1 applies. Free tax filing for seniors See chapter 1 for more details. Free tax filing for seniors Forms 1099-A and 1099-C. Free tax filing for seniors    In most cases, if you abandon real property (such as a home), intangible property, or tangible personal property held (wholly or partly) for use in a trade or business or for investment, that secures a loan and the lender knows the property has been abandoned, the lender should send you Form 1099-A showing information you need to figure your gain or loss from the abandonment. Free tax filing for seniors Also, if your debt is canceled and the lender must file Form 1099-C, the lender can include the information about the abandonment on that form instead of on Form 1099-A. Free tax filing for seniors The lender must file Form 1099-C and send you a copy if the amount of debt canceled is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Free tax filing for seniors For abandonments of property and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Free tax filing for seniors Prev  Up  Next   Home   More Online Publications