Coverdell Education Savings Accounts
were created as an incentive to help parents and students
save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used
to pay a student’s eligible k-12 expenses, as well as post-secondary
expenses. On the other hand, income limits apply to contributors, and the
total contributions for the beneficiary of this account cannot be more than
$2,000 in any year, no matter how many accounts have been established. A
beneficiary is someone who is under age 18 or is a special needs
beneficiary.Contributions to
a Coverdell ESA are not deductible, but amounts deposited in the account
grow tax free until distributed. The beneficiary will not owe tax on the
distributions if they are less than a beneficiary’s qualified education
expenses at an eligible institution. This benefit applies to qualified
higher education expenses as well as to qualified elementary and secondary
education expenses.
Distributions
from Coverdell Education Savings
Accounts are tax-free as long
as they are used for qualified education expenses, such as tuition and fees,
required books, supplies and equipment and qualified expenses for room and
board.There is no tax on distributions if they are for enrollment or
attendance at an eligible educational institution. This includes any public,
private or religious school that provides elementary or secondary education
as determined under state law. Virtually all accredited public, nonprofit
and proprietary (privately owned profit-making) post-secondary institutions
are eligible.Education tax
credits 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.If the
distribution exceeds qualified education expenses, a portion will be taxable
to the beneficiary and will usually be subject to an additional 10% tax.
Exceptions to the additional 10% tax include the death or disability of the
beneficiary or if the beneficiary receives a qualified scholarship.
A scholarship is generally an amount paid or
allowed to, or for the benefit of, a student at an educational institution
to aid in the pursuit of studies. The student may be either an undergraduate
or a graduate. A fellowship is generally an amount paid for the benefit of
an individual to aid in the pursuit of study or research. Generally, whether
the amount is tax free or taxable depends on the expense paid with the
amount and whether you are a degree candidate.A scholarship or fellowship is tax
free only if you are a candidate for a degree at an
eligible educational institution, ifou use the scholarship
or fellowship to pay qualified education expenses and if it is for qualified
Education Expenses.
For purposes of tax-free scholarships and
fellowships, these are expenses for tuition
and fees required to enroll at or attend an eligible educational institution,
and for course-related expenses, such as fees, books, supplies,
and equipment that are required for the courses at the eligible educational
institution. These items must be required of all students in your course of
instruction.However, in
order for these to be qualified education expenses, the terms of the
scholarship or fellowship cannot require that it be used for other purposes,
such as room and board, or specify that it cannot be used for tuition or
course-related expenses. Qualified education expenses do not include the
cost ofroom and board,
travel, research,
clerical help or equipment
and other expenses that are not required for enrollment in or attendance at
an eligible educational institution.
This is true even if the fee must be paid to the
institution as a condition of enrollment or attendance. Scholarship or
fellowship amounts used to pay these costs are taxable.
