Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income (MAGI) (defined later under Contribution Limits
) for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.
Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. There is no requirement that an organization's income be below a certain level.
Contributions must meet all of the following requirements.
- They must be in cash.
- They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary, and
- They must be made by the due date of the contributor's tax 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.
Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary.
Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. taxmap/pubs/p970-034.htm#en_us_publink1000120110
Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. They must be made by the due date (not including extensions) for filing your return for the preceding year.
For example, if you make a contribution to a Coverdell ESA in February 2009, and you designate it as a contribution for 2008, you are considered to have made that contribution on December 31, 2008.taxmap/pubs/p970-034.htm#en_us_publink100020996
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.
For 2008, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Rollovers are discussed under Rollovers and Other Transfers
Table 7-2. Coverdell ESA Contributions at a Glance
Do not rely on this table alone. It provides only general highlights. See the text for more complete explanations.
|Are contributions deductible?||No. |
|Why should someone contribute to a Coverdell ESA?||Earnings on the account grow tax free until distributed. |
|What is the annual contribution limit per designated beneficiary? ||$2,000 for each designated beneficiary. |
|What if more than one Coverdell ESA has been opened for the same designated beneficiary?||The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. |
|What if more than one individual makes contributions for the same designated beneficiary?||The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. |
|Can contributions other than cash be made to a Coverdell ESA?||No. |
|When must contributions stop?||No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. |
When Maria Luna was born in 2007, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. In 2008, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. These contributions could be put into any of Maria's Coverdell ESA accounts.taxmap/pubs/p970-034.htm#en_us_publink100020999
Generally, you can contribute up to $2,000 for each designated beneficiary for 2008. 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. taxmap/pubs/p970-034.htm#en_us_publink100021000
The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2008, he could also contribute $2,000 to Edgar's Coverdell ESA.taxmap/pubs/p970-034.htm#en_us_publink100021001
Your contribution limit may be reduced. If your modified adjusted gross income (MAGI) (defined below) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit
, later). If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA.
For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return.taxmap/pubs/p970-034.htm#en_us_publink100021003
If you file Form 1040A, your MAGI is the AGI on line 22 of that form.taxmap/pubs/p970-034.htm#en_us_publink100021004
If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any:
- Foreign earned income exclusion,
- Foreign housing exclusion,
- Foreign housing deduction,
- Exclusion of income for bona fide residents of American Samoa, and
- Exclusion of income for bona fide residents of Puerto Rico.
If you file Form 1040NR, your MAGI is the AGI on line 36 of that form.taxmap/pubs/p970-034.htm#en_us_publink100021006
If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form.
You can use Worksheet 7-1 to figure your MAGI.taxmap/pubs/p970-034.htm#en_us_publink1000115371
Worksheet 7-1. MAGI for a Coverdell ESA
|1.||Enter your adjusted gross income |
(Form 1040, line 38)
| ||1.|| |
|2.||Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)|| ||2.|| || || |
|3.||Enter your foreign housing deduction (Form 2555, line 50)|| ||3.|| || || || |
|4.||Enter the amount of income from Puerto Rico you are excluding|| ||4.|| || || |
|5.||Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)|| ||5.|| || || |
|6.||Add lines 2, 3, 4, and 5|| ||6.|| |
|7.||Add lines 1 and 6. This is your |
modified adjusted gross income
| ||7.|| |
To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Subtract the result from $2,000. This is the amount you can contribute for each beneficiary. You can use Worksheet 7-2 to figure the limit on your contributions.
Worksheet 7-2. Coverdell ESA Contribution Limit
|1.||Maximum contribution|| ||1.||$ 2,000|
|2.||Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1 earlier) || ||2.|| |
|3.||Enter $190,000 if married filing jointly; $95,000 for all other filers|| ||3.|| |
|4.||Subtract line 3 from line 2. If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8|| ||4.|| |
|5.||Enter $30,000 if married filing jointly; $15,000 for all other filers|| ||5.|| |
| ||Note. If the amount on line 4 is greater than or equal to the amount on line 5, stop here. You are not allowed to contribute to a Coverdell ESA for 2008. || || || |
|6.||Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)|| ||6.|| .|
|7.||Multiply line 1 by line 6|| ||7.|| |
|8.||Subtract line 7 from line 1|| ||8.|| |
|Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. |
Paul, who is single, had MAGI of $96,500 for 2008. Paul can contribute up to $1,800 in 2008 for each beneficiary, as shown in the illustrated Worksheet 7-2. taxmap/pubs/p970-034.htm#w25221v0702i
Worksheet 7-2. Coverdell ESA Contribution Limit—Illustrated
|1.||Maximum contribution|| ||1.||$ 2,000|
|2.||Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1 earlier) || ||2.||96,500|
|3.||Enter $190,000 if married filing jointly; $95,000 for all other filers|| ||3.||95,000|
|4.||Subtract line 3 from line 2. If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8|| ||4.||1,500|
|5.||Enter $30,000 if married filing jointly; $15,000 for all other filers|| ||5.||15,000|
| ||Note. If the amount on line 4 is greater than or equal to the amount on line 5, |
stop here. You are not allowed to
contribute to a Coverdell ESA for 2008.
| || || |
|6.||Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)|| ||6.|| .100|
|7.||Multiply line 1 by line 6|| ||7.||200|
|8.||Subtract line 7 from line 1|| ||8.||1,800|
|Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. |taxmap/pubs/p970-034.htm#en_us_publink100021010
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. Excess contributions are the total of the following two amounts.
- Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier).
- Excess contributions for the preceding year, reduced by the total of the following two amounts:
- Distributions (other than those rolled over as discussed later) during the year, and
- The contribution limit for the current year minus the amount contributed for the current year.
The excise tax does not apply if excess contributions made during 2008 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2009, for a calendar year taxpayer).
However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. You should receive Form 1099-Q, Payments From Qualified Education Programs (Under Sections 529 and 530), from each institution from which excess contributions were distributed. Box 2 of that form will show the amount of earnings on your excess contributions. Code "2" or "3" entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. See Instructions for Recipient
on the back of copy B of your Form 1099-Q. Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. For more information, see Taxable Distributions
The excise tax does not apply to any rollover contribution.
Contributions made in one year for the preceding taxable year are considered to have been made on the last day of the preceding year.
In 2007, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Because Greta did not withdraw the excess before June 1, 2008, she had to pay an additional tax of $18 (6% × $300) when she filed her 2007 tax return.
In 2008, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Using the steps shown under Additional Tax on Excess Contributions
, Greta figures the excess contribution in her account at the end of 2008 as follows.
|(1)|| ||$500 excess contributions made in 2008|| || |
|+ (2)|| ||$300 excess contributions in ESA at end of 2007|| || |
|− (2a)|| ||$250 distribution during 2008|| || |
| || ||$550 excess at end of 2008|| ||× 6% = $33|
| || || || || |
If Greta limits 2009 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2008), she will not owe any additional tax in 2009 for excess contributions.
You figure this excise tax in Part V of Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Report the additional tax on Form 1040, line 59 (or Form 1040NR, line 54).