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. However, total contributions made to all Coverdell
ESAs for any beneficiary in one tax year cannot be greater than $2,000.
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 Chapter 7, Publication 970, Tax
Benefits for Education.
