Contributions

Any individual (including the designated beneficiary for whose benefit the account is established) can contribute to a Coverdell ESA if the individual's modified adjusted gross income for the year is less than $110,000. For individuals filing joint returns, that amount is $160,000 for 2001 and $220,000 for 2002.

Organizations, such as corporations, can also contribute to Coverdell ESAs. There is no requirement that an organization's income be below a certain level.

Contributions must be in cash.

For 2001, contributions:

1. Cannot be made after the beneficiary reaches age 18, and
2. Must be made by December 31, 2001.

For 2002, contributions:

1. Can be made after the beneficiary reaches age 18 if the beneficiary is a special needs beneficiary, and
2. Must be made by the due date of the return (not including extensions).

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.

For 2001, no contributions can be made to a Coverdell ESA on behalf of a designated beneficiary if any amount is contributed during the year to a qualified state tuition program on behalf of the same beneficiary. Beginning in 2002, contributions can be made to a Coverdell ESA and a qualified tuition program in the same year for the same beneficiary without penalty.

Modified adjusted gross income. For most taxpayers, modified adjusted gross income (MAGI) is adjusted gross income (AGI) as figured on their federal income tax return.

MAGI when using Form 1040A. If you file Form 1040A, your MAGI is the AGI on line 19 of that form.

MAGI when using Form 1040. If you file Form 1040, your MAGI is the AGI on line 33 of that form, modified by adding back any:

1. Foreign earned income exclusion,
2. Foreign housing exclusion,
3. Exclusion of income for bona fide residents of American Samoa, and
4. Exclusion of income from Puerto Rico.

Worksheet 4-1, can be used to figure your MAGI.

Worksheet 4-1. MAGI for a Coverdell ESA

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.

Limit for each designated beneficiary. The total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $500 in 2001 ($2,000 for 2002). This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Rollovers are discussed under Rollovers and Other Transfers, later.

Limit for each contributor. You can contribute up to $500 for each designated beneficiary for 2001 ($2,000 for 2002). 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. However, this limit may be reduced as explained below.

Coverdell ESA Contributions at a Glance

In 2001, if your modified adjusted gross income (defined earlier) is between $95,000 and $110,000 (between $150,000 and $160,000 if filing a joint return), the $500 limit for each designated beneficiary is gradually reduced (see Figuring the limit, next). If your modified adjusted gross income is $110,000 or more ($160,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA.

For 2002, if you file a joint return, the limit for each designated beneficiary ($2,000 for 2002) is gradually reduced if your modified adjusted gross income is more than $190,000 but less than $220,000. If your modified adjusted gross income is $220,000 or more, you cannot contribute to anyone's Coverdell ESA for 2002.

Figuring the limit. To figure the limit for 2001 on the amount you can contribute for each designated beneficiary, multiply $500 by a fraction. The numerator (top number) is your modified adjusted gross income minus $95,000 ($150,000 if filing a joint return). The denominator (bottom number) is $15,000 ($10,000 if filing a joint return). Subtract the result from $500. This is the amount you can contribute for each beneficiary.

To figure the limit for 2002, substitute $2,000 for $500 and, if filing a joint return, substitute $190,000 for $150,000 and $30,000 for $10,000.

Example. Paul, who is single, had modified adjusted gross income of $96,500 for 2001. Paul can contribute up to $450 in 2001 for each child, figured as follows.

1. $96,500 - $95,000 = $1,500
2. $1,500 × $15,000 = 10%
3. 10% × $500 = $50
4. $500 - $50 = $450

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. For 2001, excess contributions are the total of the following three amounts.

1. Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $500 (or, if less, the total of each contributor's limit for the year, as discussed earlier).
2. All contributions to a designated beneficiary's Coverdell ESA for the year if any amount is also contributed during the year to a qualified state tuition program on behalf of the same beneficiary.
3. Excess contributions for the preceding year, reduced by the total of the following two amounts:
1. Withdrawals (other than those rolled over as discussed later) made during the year, and
2. The contribution limit for the current year minus the amount contributed for the current year.

Exceptions. For 2001, the excise tax does not apply if the excess contributions (and any earnings on them) are withdrawn before the due date of the beneficiary's tax return (including extensions).

If the beneficiary does not have to file a return, the tax does not apply if the excess contributions (and the earnings) are withdrawn by April 15, 2002.

The withdrawn earnings must be included in the beneficiary's income for the year in which the excess contribution is made.

The excise tax does not apply to any rollover contribution.

How to Figure. You figure this excise tax in Part V, Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. You report it on line 55, Form 1040.

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