Coverdell Education Savings Accounts

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You may be able to contribute to a Coverdell Education Savings Account (ESA) to finance a beneficiary's qualified education expenses. The contribution is NOT deductible.

A Coverdell ESA is a trust or custodial account set up in the United States solely for the purpose of paying qualified education expenses for the designated beneficiary of the account. Qualified higher education expenses include expenses for tuition, fees, books, supplies, and equipment required for enrollment or attendance. If the designated beneficiary is enrolled at least half time at an eligible educational institution, certain room and board expenses are qualified education expenses. Expenses also include amounts contributed to a qualified tuition program for the same designated beneficiary. Qualified expenses include public, private and religious elementary and secondary school expenses.

The designated beneficiary must be under the age of 18 when the account is established. Any balance in a Coverdell ESA must be distributed within 30 days after the date the beneficiary reaches age 30. These age limits do not apply to beneficiaries with special needs.

There is no limit to the number of Coverdell ESAs that can be established for one beneficiary. The contributions can only be made in cash and the total contributions made to all Coverdell ESAs for any beneficiary in one tax year cannot be greater than $2,000. If contributions for 2004 exceed $2,000, there will be an additional tax on the excess contribution unless the excess the excess (and earnings on that amount) for 2004 is withdrawn before June 1, 2005.

Any individual (including the beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income is less than $110,000 ($220,000 if the individual is filing a joint return). The $2,000 maximum contribution per beneficiary is gradually reduced if the contributor's modified adjusted gross income is between $95,000 and $110,000 ($190,000 and $220,000 if the contributor is filing a joint return).

Modified adjusted gross income for the purpose of determining your maximum contribution limit is the adjusted gross income shown on your tax return increased by the following exclusion from your income:
  1. Foreign earned income of U.S. citizens or residents living abroad.
  2. Housing costs of U.S. citizens or residents living abroad.
  3. Income from sources within:
    • Puerto Rico,
    • American Samoa

In general, the designated beneficiary of a Coverdell ESA can receive tax free distributions to pay qualified education expenses. The distributions are tax free to the extent the amount of the distributions do not exceed the beneficiary's qualified education expenses. If a distribution does exceed the beneficiary's qualified education expenses, a portion of the distribution is taxable. For information on how to determine the part of any distribution that is taxable earnings, refer to Publication 970, Tax Benefits for Education.

The Hope Credit or the Lifetime Learning Credit may be claimed for certain qualified higher education expenses in the same year in which the student receives a tax free distribution from a Coverdell ESA as long as the distribution is not used for the same educational expenses for which the credit was taken.

For more information, you may refer to Publication 970, Tax Benefits for Education.


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