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

There are a variety of credits and deductions for individual and business taxpayers. 

The Earned Income Tax Credit, and the Child and Dependent Care Credit help millions of families every year. There are also a number of credits for small and large businesses. You may have taken deductions when you prepared your annual tax return. In addition to the standard deduction for individuals, common deductions include home mortgage interest, state and local tax, and charitable contributions. Many business expenses are deductible as well.

 Individual Credits

 

 Business Credits

 
 

 Individual Deductions

 

Business Deductions

 

 

 

 

Page Last Reviewed or Updated: 27-Aug-2013

The State Tax Free

State tax free Publication 4492 - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Introduction This publication explains the major provisions of the Katrina Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act of 2005. State tax free Useful Items - You may want to see: Publication 526 Charitable Contributions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 547 Casualties, Disasters, and Thefts 946 How To Depreciate Property Form (and Instructions) 4506Request for Copy of Tax Return 4506-TRequest for Transcript of Tax Return 4684Casualties and Thefts 5884Work Opportunity Credit 5884-ACredits for Employers Affected by Hurricane Katrina, Rita, or Wilma 8863Education Credits (Hope and Lifetime Learning Credits) 8914Exemption Amount for Taxpayers Housing Individuals Displaced by Hurricane Katrina 8915Qualified Hurricane Retirement Plan Distributions and Repayments Prev  Up  Next   Home   More Online Publications