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previous page Previous Page: Publication 970 - Tax Benefits for Education - Illustrated Example
next page Next Page: Publication 970 - Tax Benefits for Education - Contributions
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication
taxmap/pubs/p970-033.htm#en_us_publink100020980

Chapter 7
Coverdell Education Savings Account (ESA)(p43)

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What's New(p43)


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taxmap/pubs/p970-033.htm#en_us_publink1000115373

Contribution of military death gratuity to Coverdell ESA.(p43)

The families of soldiers killed in the line of duty may contribute, subject to certain limitations, up to 100 percent of survivor benefits to education savings accounts. See Military death gratuity under Rollovers and Other Transfers, later, for more information.
taxmap/pubs/p970-033.htm#en_us_publink1000115374

Withdrawal of economic stimulus payment from a Coverdell ESA.(p43)

If your economic stimulus payment was directly deposited to your ESA and you withdraw the payment by the later of June 1, 2009, or the due date of your return (including extensions), the amount withdrawn will not be taxed and no additional tax or penalty will apply. See Tax-Free Distributions, later.

taxmap/pubs/p970-033.htm#TXMP16ea6d35Introduction

If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return.
There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. See Contributions, later.
Deposit
This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses.
taxmap/pubs/p970-033.htm#en_us_publink100020982

What is the tax benefit of the Coverdell ESA.(p43)


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Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed.
If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. See Tax-Free Distributions, later.
Table 7-1 summarizes the main features of the Coverdell ESA.
taxmap/pubs/p970-033.htm#en_us_publink100020983

What Is a Coverdell ESA(p43)


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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.

Table 7-1. Coverdell ESA at a Glance

Do not rely on this table alone. It provides only general highlights. See the text for definitions of terms in bold type and for
more complete explanations.
QuestionAnswer
What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary.
Where can it be established?It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs.
Who can have a Coverdell ESA?Any beneficiary who is under age 18 or is a special needs beneficiary.
Who can contribute to a Coverdell ESA?Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return).
Are distributions tax free?Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year.
When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary.
To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created.
The document creating and governing the account must be in writing and must satisfy the following requirements.
  1. The trustee or custodian must be a bank or an entity approved by the IRS.
  2. The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions.
    1. The contribution is in cash.
    2. The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary.
    3. The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000.
  3. Money in the account cannot be invested in life insurance contracts.
  4. Money in the account cannot be combined with other property except in a common trust fund or common investment fund.
  5. The balance in the account generally must be distributed within 30 days after the earlier of the following events.
    1. The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.
    2. The beneficiary's death.
EIC
As of this printing, regulations defining a "special needs beneficiary" have not been released. If available, the definition will be included in Publication 553, Highlights of 2008 Tax Changes, available in early 2009.
taxmap/pubs/p970-033.htm#en_us_publink100020985

Qualified Education Expenses(p44)


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Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses.
taxmap/pubs/p970-033.htm#en_us_publink100020986

Designated beneficiary.(p44)


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This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account.
taxmap/pubs/p970-033.htm#en_us_publink100020987

Eligible Educational Institution(p44)


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For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school.
taxmap/pubs/p970-033.htm#en_us_publink100020988

Eligible postsecondary school.(p44)


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This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The educational institution should be able to tell you if it is an eligible educational institution.
Certain educational institutions located outside the United States also participate in the U.S. Department of Education's Federal Student Aid (FSA) programs.
taxmap/pubs/p970-033.htm#en_us_publink100020989

Eligible elementary or secondary school.(p44)


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This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law.
taxmap/pubs/p970-033.htm#en_us_publink100020990

Qualified Higher Education Expenses(p44)


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These are expenses related to enrollment or attendance at an eligible postsecondary school. As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Contributions to qualified tuition programs can be qualified education expenses (see item 4 in the following list).
  1. The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school.
    1. Tuition and fees.
    2. Books, supplies, and equipment.
  2. Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. (See Caution earlier.)
  3. Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below).The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.
    1. The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.
    2. The actual amount charged if the student is residing in housing owned or operated by the school.

  4. Any contribution to a qualified tuition program (QTP) must be on behalf of the designated beneficiary of the Coverdell ESA. In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. (See chapter 8, Qualified Tuition Program (QTP).)
taxmap/pubs/p970-033.htm#en_us_publink100020991

Half-time student.(p44)


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A student is enrolled "at least half-time" if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled.
taxmap/pubs/p970-033.htm#en_us_publink100020992

Qualified Elementary and  
Secondary Education Expenses(p44)


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Qualified Elementary and Secondary Education Expenses

These are expenses related to enrollment or attendance at an eligible elementary or secondary school. As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. There are special rules for computer-related expenses.
  1. The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school.
    1. Tuition and fees.
    2. Books, supplies, and equipment.
    3. Academic tutoring.
    4. Special needs services for a special needs beneficiary. (See Caution earlier.)
  2. The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school.
    1. Room and board.
    2. Uniforms.
    3. Transportation.
    4. Supplementary items and services (including extended day programs).
  3. The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.)
previous pagePrevious Page: Publication 970 - Tax Benefits for Education - Illustrated Example
next pageNext Page: Publication 970 - Tax Benefits for Education - Contributions
 Use previous pagenext page to find additional occurrences of topic items.Index for this Publication