Taxpayers may contribute up to $2,000 per year into an Education Savings Account for a child under age 18. Parents, grandparents, other family members, friends, and the child may contribute to the Child's account, provided that the total contributions for the child during the taxable year do not exceed the $2,000 limit. Taxpayers may contribute to a child's Coverdell Education Savings account if their modified adjusted gross income is less than $95,000 as a single tax filer, or $190,000 as a married couple filing jointly in the tax year they contribute. The $2,000 maximum contribution per child is gradually reduced for individuals with modified adjusted gross income between $95,000 and $110,000 (between $190,000 and $220,000 for married taxpayers filing jointly).
The law allows funds to be used for elementary and secondary school education expenses. Such expenses may include tuition fees, academic tutoring, special needs services, books, supplies, equipment, room and board expenses, uniforms, transportation, educational computer technology or equipment, and Internet access.
The final date on which you can make contributions to a Coverdell Education Savings Account (Coverdell ESA) for any year is April 15, or the due date of your return for that year (not including extensions).
Coverdell Education Savings Account (Coverdell ESA) Questions and Answers
Q. What is a Coverdell ESA?
A. 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 of the account.
Q. For whom may a Coverdell ESA be established?
A. Generally, when the account is established, the designated beneficiary must be under age 18. The designated beneficiary can be 18 or older if he or she is a special needs beneficiary.
Q. Where may an individual open a Coverdell ESA?
A. It can be opened in any Mutual Fund company, bank or other IRS-approved entity in the United States that offers a Coverdell ESA.
Q. How much may be contributed to a Coverdell ESA?
A. The maximum annual contribution is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary.
Q. What happens if more than $2,000 is contributed to a Coverdell ESA?
A. The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the taxable year.
Q. May contributors take a deduction for contributions made to a Coverdell ESA?
A. No.
Q. Are there any restrictions on who can contribute to a Coverdell ESA?
A. Any individual may contribute up to $2,000 to a Coverdell ESA if the individual's modified adjusted gross income for the taxable year is no more than $95,000 ($190,000 for married taxpayers filing jointly).
Q. May a child contribute to his/her own Coverdell ESA?
A. Yes.
Q. Does a taxpayer have to be related to the designated beneficiary in order to contribute to the designated beneficiary's Coverdell ESA?
A. No.
Q. Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free withdrawal?
A. No.
Q. What are "qualified education expenses"?
A. These are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution Qualified education expenses include tuition and fees, the cost of books, supplies, equipment, amounts contributed to a qualified state tuition program, the cost of room and board if the designated beneficiary is at least a half-time student at an eligible institution. The expense for room and board is limited to one of the following two amounts, the school's posted room and board or $2,500 each year for students living off campus and not at home. You can also use withdrawals for certain elementary and secondary education expenses.
Q. Is a withdrawal from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax-free?
A. Generally, yes, to the extent the amount of the withdrawal is not more than the designated beneficiary's qualified education expenses.
Q. Is a distribution from a Coverdell ESA taxable if the distribution is contributed to another Coverdell ESA?
A. Any amount withdrawn from a Coverdell ESA and rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family who is under age 30 is not taxable. An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the withdrawal.
Q. After the designated beneficiary completes his or her education at an eligible educational institution, may amounts remaining in the Coverdell ESA be withdrawn?
A. Yes. Amounts must be withdrawn when the designated beneficiary reaches age 30. This does not apply to special needs beneficiary. Also certain transfers to members of the beneficiary's family are permitted.
Q. May a student or the student's parents claim the Hope Scholarship Credit or Lifetime Learning Credit for the student's expenses in a taxable year in which the student receives money from a Coverdell ESA on a tax-free basis?
A. You can claim the Hope or lifetime learning credit in the same year you take a tax-free distribution from a Coverdell ESA, provided that the distribution from the Coverdell ESA is not used for the same expenses for which the credit is claimed.
Q. May contributions be made to both a qualified state tuition program and a Coverdell ESA on behalf of the same designated beneficiary in the same taxable year?
A. Yes you can make contributions to Coverdell ESAs and qualified institution programs in the same year for the same beneficiary.
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