Publication 970
taxmap/pubs/p970036.htm#en_us_publink1000178462
The designated beneficiary of a Coverdell ESA can take a distribution at any
time. Whether the distributions are tax free depends, in part, on whether the
distributions are equal to or less than the amount of
adjusted qualified education expenses (defined below) that the beneficiary has in the same tax year.
Table 73. Coverdell ESA Distributions
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.
Question  Answer 
Is a distribution from a Coverdell ESA to pay for a designated
beneficiary's qualified education expenses tax free?  Generally, yes, to the extent the amount of the distribution
is not more than the designated beneficiary's adjusted qualified education
expenses.

After the designated beneficiary completes his or her education
at an
eligible educational institution, can amounts remaining in the Coverdell ESA be distributed?
 Yes. Amounts
must
be distributed when the designated beneficiary reaches age 30, unless he or she
is a special needs beneficiary. Also, certain transfers to
members of the beneficiary's family are permitted.

Does the designated beneficiary need to be enrolled for a
minimum number of courses to take a taxfree distribution?  No.

taxmap/pubs/p970036.htm#en_us_publink1000178464To determine if total distributions for the year are more than
the amount of qualified education expenses, reduce total qualified education
expenses by any taxfree educational assistance. Taxfree educational assistance
includes:
 The taxfree part of scholarships and fellowships (see
chapter 1),
 Veterans' educational assistance (see
chapter 1),
 Pell grants (see
chapter 1),
 Employerprovided educational assistance (see
chapter 11), and
 Any other nontaxable (taxfree) payments (other than gifts
or inheritances) received as educational assistance.
The amount you get by subtracting taxfree educational assistance
from your total qualified education expenses is your adjusted qualified
education expenses.
taxmap/pubs/p970036.htm#en_us_publink1000178469Generally, distributions are tax free if they are not more than
the beneficiary's adjusted qualified education expenses for the year. Do not
report taxfree distributions (including qualifying rollovers) on your tax
return.
taxmap/pubs/p970036.htm#en_us_publink1000178471A portion of the distributions is generally taxable to the beneficiary
if the total distributions are more than the beneficiary's adjusted qualified
education expenses for the year.
taxmap/pubs/p970036.htm#en_us_publink1000178472This is the part of the total distribution that is more than
the beneficiary's adjusted qualified education expenses for the year.
taxmap/pubs/p970036.htm#en_us_publink1000178473You will receive a Form 1099Q for each of the Coverdell ESAs
from which money was distributed in 2010. The amount of your gross distribution
will be shown in box 1. For 2010, instead of dividing the gross distribution
between your earnings (box 2) and your basis (alreadytaxed amount) (box 3), the
payer or trustee may report the fair market value (account balance) of the
Coverdell ESA as of December 31, 2010. This will be shown in the blank box below
boxes 5 and 6.
The amount contributed from survivor benefits (see
Military death gratuity, earlier) is treated as part of your basis and will not be
taxed when distributed.
taxmap/pubs/p970036.htm#en_us_publink1000178474The taxable portion is the amount of the excess distribution
that represents earnings that have accumulated tax free in the account. Figure
the taxable portion for 2010 as shown in the following steps.
 Multiply the total amount distributed by a fraction. The numerator
is the basis (contributions not previously distributed) at the end of 2009 plus
total contributions for 2010 and the denominator is the value (balance) of the
account at the end of 2010 plus the amount distributed during 2010.
 Subtract the amount figured in (1) from the total amount distributed
during 2010 . The result is the amount of earnings included in the
distribution(s).
 Multiply the amount of earnings figured in (2) by a fraction.
The numerator is the adjusted qualified education expenses paid during 2010 and
the denominator is the total amount distributed during 2010.
 Subtract the amount figured in (3) from the amount figured
in (2). The result is the amount the beneficiary must include in income.
The taxable amount must be reported on Form 1040 or Form 1040NR,
line 21.
taxmap/pubs/p970036.htm#en_us_publink1000178475You received an $850 distribution from your Coverdell ESA, to
which $1,500 had been contributed before 2010. There were no contributions in
2010. This is your first distribution from the account, so your basis in the
account on December 31, 2009, was $1,500. The value (balance) of your account on
December 31, 2010, was $950. You had $700 of adjusted qualified education
expenses (AQEE) for the year. Using the steps above, figure the taxable portion
of your distribution as follows.
 1.  $850 (distribution)  ×  $1,500 basis + $0 contributions $950 value + $850 distribution
 
  = $708 (basis portion of distribution)  
 2.  $850 (distribution) − $708 (basis portion
of distribution) 
  = $142 (earnings included in distribution) 
 3.  $142 (earnings)  ×  $700 AQEE $850 distribution
   
  = $117 (taxfree earnings)  
 4.  $142 (earnings) − $117 (taxfree earnings) = $25
(taxable earnings) 
       
You must include $25 in income as distributed earnings not used
for qualified education expenses. Report this amount on Form 1040, line 21,
listing the type and amount of income on the dotted line.
Worksheet 73, at the end of this chapter, can help you figure your adjusted
qualified education expenses, how much of your distribution must be included in
income, and the remaining basis in your Coverdell ESA(s).
taxmap/pubs/p970036.htm#en_us_publink1000178480
The American opportunity or lifetime learning credit can be claimed in the same
year the beneficiary takes a taxfree distribution from a Coverdell ESA, as long
as the same expenses are not used for both benefits. This means the beneficiary
must reduce qualified higher education expenses by taxfree educational
assistance, and then further reduce them by any expenses taken into account in
determining an American opportunity or lifetime learning credit.
taxmap/pubs/p970036.htm#en_us_publink1000178481Derek Green had $5,800 of qualified higher education expenses
for 2010, his first year in college. He paid his college expenses from the
following sources.
 Partial tuition scholarship (tax free)  $1,500  
 Coverdell ESA distribution  1,000  
 Gift from parents  2,100  
 Earnings from parttime job  1,200  
   
Of his $5,800 of qualified higher education expenses, $4,000
was tuition and related expenses that also qualified for an American opportunity
credit. Derek's parents claimed a $2,500 American opportunity credit (based on
$4,000 expenses) on their tax return.
Before Derek can determine the taxable portion of his Coverdell
ESA distribution, he must reduce his total qualified higher education
expenses.
 Total qualified higher education expenses  $5,800  
 Minus: Taxfree educational assistance  −1,500  
 Minus: Expenses taken into account in
figuring American opportunity credit
 −4,000  
 Equals: Adjusted qualified higher education
expenses (AQHEE)
 $ 300  
   
Since the adjusted qualified higher education expenses ($300)
are less than the Coverdell ESA distribution ($1,000), part of the distribution
will be taxable. The balance in Derek's account was $1,800 on December 31, 2010.
Prior to 2010, $2,100 had been contributed to this account. Contributions for
2010 totaled $400. Using the four steps outlined earlier, Derek figures the
taxable portion of his distribution as shown below.
 1.  $1,000 (distribution)  ×  $2,100 basis + $400 contributions $1,800 value + $1,000 distribution
   
  = $893 (basis portion of distribution)  
 2.  $1,000 (distribution) − $893 (basis portion
of distribution) 
  = $107 (earnings included in distribution) 
 3.  $107 (earnings)  ×  $300 AQHEE $1,000 distribution
 
  = $32 (taxfree earnings)  
 4.  $107 (earnings) − $32 (taxfree earnings) = $75
(taxable earnings) 
       
Derek must include $75 in income (Form 1040, line 21). This
is the amount of distributed earnings not used for adjusted qualified higher
education expenses.
taxmap/pubs/p970036.htm#en_us_publink1000178488If a designated beneficiary receives distributions from both
a Coverdell ESA and a QTP in the same year, and the total distribution is more
than the beneficiary's adjusted qualified higher education expenses, those
expenses must be allocated between the distribution from the Coverdell ESA and
the distribution from the QTP before figuring how much of each distribution is
taxable. The following two examples illustrate possible allocations.
taxmap/pubs/p970036.htm#en_us_publink1000178489In 2010, Beatrice graduated from high school and began her first
semester of college. That year, she had $1,000 of qualified elementary and
secondary education expenses (QESEE) for high school and $3,000 of qualified
higher education expenses (QHEE) for college. To pay these expenses, Beatrice
withdrew $800 from her Coverdell ESA and $4,200 from her QTP. No one claimed
Beatrice as a dependent, nor was she eligible for an education credit. She did
not receive any taxfree educational assistance in 2010. Beatrice must allocate
her total qualified education expenses between the two distributions.
 1.  Beatrice knows that taxfree treatment will be avail able if she applies her $800 Coverdell ESA distribution
toward her $1,000 of qualified education expenses for high school. The qualified
expenses are greater than the distribution, making the $800 Coverdell ESA
distribution tax free.

 2.  Next, Beatrice matches her $4,200 QTP distribution to her
$3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200
QTP − $3,000 QHEE). She cannot use the extra $200 of high school expenses
(from (1) above) against the QTP distribution because those expenses do not
qualify a QTP for taxfree treatment.

 3.  Finally, Beatrice figures the taxable and taxfree portions
of her QTP distribution based on her $3,000 of QHEE. (See
Figuring the Taxable Portion of a Distribution in
chapter 8 for more information.)

taxmap/pubs/p970036.htm#en_us_publink1000178493Assume the same facts as in
Example 1, except that Beatrice withdrew $1,800 from her Coverdell ESA
and $3,200 from her QTP. In this case, she allocates her qualified education
expenses as follows.
 Using the same reasoning as in
Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution
to her $1,000 of QESEE—she has $800 of her distribution remaining.
 Because higher education expenses can also qualify a Coverdell
ESA distribution for taxfree treatment, Beatrice allocates her $3,000 of QHEE
between the remaining $800 Coverdell ESA and the $3,200 QTP distributions
($4,000 total).
 $3,000 QHEE  ×  $800 ESA distribution $4,000 total distribution
 =  $600 QHEE (ESA)
 
 $3,000 QHEE  ×  $3,200 QTP distribution $4,000 total distribution
 =  $2,400 QHEE (QTP)
 
 Beatrice then figures the taxable part of her:
 Coverdell ESA distribution based on qualified education
expenses of $1,600 ($1,000 QESEE + $600 QHEE). See
Figuring the Taxable Portion of a Distribution, earlier in this chapter.
 QTP distribution based on her $2,400 of QHEE (see
Figuring the Taxable Portion of a Distribution in
chapter 8).
 The above examples show two types of allocation between distributions
from a Coverdell ESA and a QTP. However, you do not have to allocate your
expenses in the same way. You can use any reasonable method. 
taxmap/pubs/p970036.htm#en_us_publink1000178501If you have a loss on your investment in a Coverdell ESA, you
may be able to deduct the loss on your income tax return. You can deduct the
loss only when all amounts from that account have been distributed and the total
distributions are less than your unrecovered basis. Your basis is the total
amount of contributions to that Coverdell ESA. You claim the loss as a
miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A
(Form 1040NR), line 11), subject to the 2%ofadjusted grossincome limit.
If you have distributions from more than one Coverdell ESA account
during a year, you must combine the information (amount of distribution, basis,
etc.) from all such accounts in order to determine your taxable earnings for the
year. By doing this, the loss from one ESA account reduces the distributed
earnings (if any) from any other ESA account. For examples of the calculation,
see
Losses on QTP Investments in
chapter 8 under
Figuring the Taxable Portion of a Distribution.
taxmap/pubs/p970036.htm#en_us_publink1000178503Generally, if you receive a taxable distribution, you also must
pay a 10% additional tax on the amount included in income.
taxmap/pubs/p970036.htm#en_us_publink1000178504 The 10% additional tax does not apply to distributions:
 Paid to a beneficiary (or to the estate of the designated
beneficiary) on or after the death of the designated beneficiary.
 Made because the designated beneficiary is disabled. A person
is considered to be disabled if he or she shows proof that he or she cannot do
any substantial gainful activity because of his or her physical or mental
condition. A physician must determine that his or her condition can be expected
to result in death or to be of longcontinued and indefinite duration.
 Included in income because the designated beneficiary received:
 A taxfree scholarship or fellowship (see
chapter 1),
 Veterans' educational assistance (see
chapter 1),
 Employerprovided educational assistance (see
chapter 11), or
 Any other nontaxable (taxfree) payments (other than gifts
or inheritances) received as educational assistance.
 Made on account of the attendance of the designated beneficiary
at a U.S. military academy (such as the USMA at West Point). This exception
applies only to the extent that the amount of the distribution does not exceed
the costs of advanced education (as defined in section 2005(d)(3) of title 10 of
the U.S. Code) attributable to such attendance.
 Included in income only because the qualified education expenses
were taken into account in determining the American opportunity or lifetime
learning credit (see
Coordination With American Opportunity and Lifetime Learning
Credits, earlier).
 Made before June 1, 2011, of an excess 2010 contribution (and
any earnings on it). The distributed earnings must be included in gross income
for the year in which the excess contribution was made.
Exception (3) applies only to the extent the distribution is
not more than the scholarship, allowance, or payment.
taxmap/pubs/p970036.htm#en_us_publink1000178509
Use Part II of Form 5329, Additional Taxes on Qualified Plans (Including IRAs)
and Other TaxFavored Accounts, to figure any additional tax. Report the amount
on Form 1040, line 58, or Form 1040NR, line 56.
taxmap/pubs/p970036.htm#en_us_publink1000178510Any assets remaining in a Coverdell ESA must be distributed when
either one of the following two events occurs.
 The designated beneficiary reaches age 30. In this case, the
remaining assets must be distributed within 30 days after the beneficiary
reaches age 30. However, this rule does not apply if the beneficiary is a
special needs beneficiary.
 The designated beneficiary dies before reaching age 30. In
this case, the remaining assets must generally be distributed within 30 days
after the date of death.
taxmap/pubs/p970036.htm#en_us_publink1000178511If a Coverdell ESA is transferred to a surviving spouse or other
family member as the result of the death of the designated beneficiary, the
Coverdell ESA retains its status. ("Family member" was defined earlier under
Rollovers.) This means the spouse or other family member can treat the
Coverdell ESA as his or her own and does not need to withdraw the assets until
he or she reaches age 30. This age limitation does not apply if the new
beneficiary is a special needs beneficiary. There are no tax consequences as a
result of the transfer.
taxmap/pubs/p970036.htm#en_us_publink1000178512When a total distribution is made because the designated beneficiary
either reached age 30 or died, the earnings that accumulated tax free in the
account must be included in taxable income. You determine these earnings as
shown in the following two steps.
 Multiply the amount distributed by a fraction. The numerator
is the basis (contributions not previously distributed) at the end of 2009 plus
total contributions for 2010 and the denominator is the balance in the account
at the end of 2010 plus the amount distributed during 2010.
 Subtract the amount figured in (1) from the total amount distributed
during 2010. The result is the amount of earnings included in the distribution.
For an example, see steps (1) and (2) of the
Example under
Figuring the Taxable Portion of a Distribution, earlier.
The beneficiary or other person receiving the distribution must report this
amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and
amount of income on the dotted line.
taxmap/pubs/p970036.htm#en_us_publink1000255432
Worksheet 73 Instructions. Coverdell ESA—Taxable
Distributions and Basis
Line G.  Enter the total distributions received from
all
Coverdell ESAs during 2010. Do not include amounts rolled over to another ESA
within 60 days (only one rollover is allowed during any 12month period). Also,
do not include excess contributions that were distributed with the related
earnings (or less any loss) before the first day of the sixth month of the tax
year following the year for which the contributions were made.
 Line 2.  Your basis (amount already taxed) in
this Coverdell ESA as of December 31, 2009, is the total
of:
  • All contributions to this Coverdell
ESA before 2010 • Minus the taxfree portion of any
distributions from this Coverdell ESA before 2010.
  If your last distribution from this Coverdell ESA was
before 2010, you must start with the basis in your account as of the end of the
last year in which you took a distribution. For years before 2002, you can find
that amount on the last line of the worksheet in the Instructions for Form 8606,
Nondeductible IRAs, that you completed for that year. For years after 2001, you
can find that amount by using the ending basis from the worksheet in Publication
970 for that year. You can determine your basis in this Coverdell ESA as of
December 31, 2009, by adding to the basis as of the end of that year any
contributions made to that account after the year of the distribution and before
2010.
 Line 4.  Enter the total distributions received from
this
Coverdell ESA in 2010. Do not include amounts rolled over to another Coverdell
ESA within 60 days (only one rollover is allowed during any 12month period).
  Also, do not include excess contributions that were distributed
with the related earnings (or less any loss) before the first day of the sixth
month of the tax year following the year of the contributions.
 Line 7.  Enter the total value of
this
Coverdell ESA as of December 31, 2010, plus any outstanding rollovers
contributed to the account after 2009, but before the end of the 60day rollover
period. A statement should be sent to you by January 31, 2011, for this
Coverdell ESA showing the value on December 31, 2010.
  A
rollover
is a taxfree withdrawal from one Coverdell ESA that is contributed to another
Coverdell ESA. An
outstanding rollover
is any amount withdrawn within 60 days before the end of 2010 (November 2
through December 31) that was rolled over after December 31, 2010, but within
the 60day rollover period.


taxmap/pubs/p970036.htm#en_us_publink1000178514  Worksheet 73. Coverdell ESA—Taxable Distributions
and Basis How to complete this worksheet.
 • • •
 Complete Part I, lines A through H, on only one worksheet. Complete a separate Part II, lines 1 through 15, for
each of your Coverdell ESAs. Complete Part III, the Summary (line 16), on only one
worksheet.
 Part I. Qualified Education Expenses (Complete for total expenses)
    A.  Enter your total qualified education expenses for 2010   A.   B.  Enter those qualified education expenses paid for with
taxfree educational assistance (for example, taxfree scholarships, veterans'
educational benefits, Pell grants, employerprovided educational assistance)
  B.      C.  Enter those qualified
higher education expenses deducted on
Schedule C or CEZ (Form 1040), Schedule F (Form 1040),
or as
a miscellaneous itemized deduction on Schedule A (Form
1040 or 1040NR)
  C.      D.  Enter those qualified
higher education expenses on which
an American opportunity or lifetime learning credit
was based
  D.      E.  Add lines B, C, and D   E.   F.  Subtract line E from line A. This is your adjusted qualified
education expense for 2010   F.   G.  Enter your total distributions from
all Coverdell ESAs during 2010. Do not include rollovers
or the return of excess contributions (see instructions)
  G.   H.  Divide line F by line G. Enter the result as a decimal
(rounded to at least 3 places). If the
result is 1.000 or more, enter 1.000
  H.  .
 Part II. Taxable Distributions and Basis (Complete separately for each account)
 1.  Enter the amount contributed to
this
Coverdell ESA for 2010, including contributions made for 2010 from January 1,
2011, through April 15, 2011. Do
not include rollovers or the return of excess contributions
  1.   2.  Enter your basis in
this Coverdell ESA as of December 31, 2009 (see instructions)
  2.   3.  Add lines 1 and 2   3.   4.  Enter the total distributions from
this Coverdell ESA during 2010. Do
not include rollovers
or the return of excess contributions (see instructions)
  4.   5.  Multiply line 4 by line H. This is the amount of adjusted
qualified
education expense attributable to this Coverdell ESA
  5.      6.  Subtract line 5 from line 4   6.      7.  Enter the total value of
this Coverdell ESA as of December 31, 2010,
plus any outstanding rollovers (see instructions)
  7.      8.  Add lines 4 and 7   8.      9.  Divide line 3 by line 8. Enter the result as a decimal
(rounded to
at least 3 places). If the result is 1.000 or more,
enter 1.000
  9.  .
    10.  Multiply line 4 by line 9. This is the amount of basis
allocated to your
distributions, and is tax free
  10.    Note.
If line 6 is zero, skip lines 11 through 13, enter 0
on line 14, and go to line 15.     11.  Subtract line 10 from line 4
  11.   12.  Divide line 5 by line 4. Enter the result as a decimal
(rounded to
at least 3 places). If the result is 1.000 or more,
enter 1.000
  12.  .
    13.  Multiply line 11 by line 12. This is the amount of qualified
education
expenses allocated to your distributions, and is tax
free
  13.   14.  Subtract line 13 from line 11. This is the
portion of the distributions from this
Coverdell ESA in 2010 that you must include in income   14.   15.  Subtract line 10 from line 3. This is your
basis in this Coverdell ESA as of December 31, 2010   15.   Part III. Summary (Complete only once)
    16.  Taxable amount.
Add together all amounts on line 14 for all your Coverdell ESAs.
Enter here
and include on Form 1040, line 21, or
Form 1040NR, line 21, listing the type and amount of income on the dotted
line
  16.  
