Publication 970
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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 later) the beneficiary has in the same tax year.
See
Table 73 for highlights.
Table 73. Coverdell ESA Distributions
at a Glance
Don't rely on this table alone. It provides only general highlights. See the text for definitions of terms 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 isn't 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 claim taxfree
distribution?  No.

taxmap/pubs/p970031.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 amount you get by subtracting taxfree educational assistance from your total qualified education expenses is your adjusted qualified education expenses.
taxmap/pubs/p970031.htm#en_us_publink1000178469Generally, distributions are tax free if they aren't more than the beneficiary's adjusted qualified education expenses for the year. Don't report taxfree distributions (including qualifying rollovers) on your tax
return.
taxmap/pubs/p970031.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/p970031.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/p970031.htm#en_us_publink1000178473You will receive a Form 1099Q for each of the Coverdell ESAs from which money was distributed in 2015. The amount of your gross distribution will be shown in box 1. For 2015, instead of dividing the gross distribution between your earnings (box 2) and your basis (amount already taxed) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2015. 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 won't be taxed when
distributed.
taxmap/pubs/p970031.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 2015 as shown in the following steps.
 Multiply the total amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2014 plus total contributions for 2015 and the denominator (bottom part) is the value (balance) of the account at the end of 2015 plus the amount distributed during
2015.
 Subtract the amount figured in (1) from the total amount distributed during 2015. 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 (top part) is the adjusted qualified education expenses paid during 2015 and the denominator (bottom part) is the total amount distributed during
2015.
 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/p970031.htm#en_us_publink1000178475You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2015. There were no contributions in 2015. This is your first distribution from the account, so your basis in the account on December 31, 2014, was $1,500. The value (balance) of your account on December 31, 2015, was $950. You had $700 of adjusted qualified education expenses (AQEE) for the year. Using the steps in
Figuring the Taxable Portion of a Distribution, earlier, 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).
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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 aren't 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/p970031.htm#en_us_publink1000178481Derek Green had $5,800 of qualified higher education expenses for 2015, 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, 2015. Prior to 2015, $2,100 had been contributed to this account. Contributions for 2015 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/p970031.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/p970031.htm#en_us_publink1000178489In 2015, 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 didn't receive any taxfree educational assistance in 2015. Beatrice must allocate her total qualified education expenses between the two
distributions.
 Beatrice knows that taxfree treatment will be available 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.
 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 can't use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses don't qualify a QTP for taxfree
treatment.
 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/p970031.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 the following.
 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 don't have to allocate your expenses in the same way. You can use any reasonable
method. 
taxmap/pubs/p970031.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 9), subject to the 2%ofadjustedgrossincome
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.
taxmap/pubs/p970031.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/p970031.htm#en_us_publink1000178504The 10% additional tax doesn't apply to the following 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 can't 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 grant (see
TaxFree Scholarships and Fellowship Grants in
chapter 1);
 Veterans' educational assistance (see
Veterans' Benefits in
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 doesn't 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, 2016, of an excess 2015 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 isn't more than the scholarship, allowance, or
payment.
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Use Part II of Form 5329, to figure any additional tax. Report the amount on
Form 1040, line 59, or Form 1040NR, line 57.
taxmap/pubs/p970031.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 doesn't 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/p970031.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 doesn't need to withdraw the assets until he or she reaches age 30. This age limitation doesn't apply if the new beneficiary is a special needs beneficiary. There are no tax consequences as a result of the transfer.
taxmap/pubs/p970031.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 (top part) is the basis (contributions not previously distributed) at the end of 2014 plus total contributions for 2015, and the denominator (bottom part) is the balance in the account at the end of 2015 plus the amount distributed during
2015.
 Subtract the amount figured in (1) from the total amount distributed during 2015. 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 or Form 1040NR, line 21, listing the type and amount of
income on the dotted line.
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Worksheet 73 Instructions. Coverdell ESA—Taxable Distributions and
Basis
Line G.
 Enter the total distributions received from
all
Coverdell ESAs during 2015. Don't include amounts rolled over to another ESA
within 60 days (only one rollover is allowed during any 12month period). Also,
don't 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, 2014, is the total of:

 • All contributions to this Coverdell ESA before
2015 • Minus the taxfree portion of any distributions from this Coverdell ESA before 2015.

 If your last distribution from this Coverdell ESA was before 2015, 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 Pub. 970 for that year. You can determine your basis in this Coverdell ESA as of December 31, 2014, 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 2015.

Line 4.
 Enter the total distributions received from
this
Coverdell ESA in 2015. Don't include amounts rolled over to another Coverdell
ESA within 60 days (only one rollover is allowed during any 12month period).

 Also, don't 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, 2015, plus any outstanding rollovers
contributed to the account after 2014, but before the end of the 60day rollover
period. A statement should be sent to you by February 1, 2016 (January 31 is a
Sunday), for this Coverdell ESA showing the value on December 31, 2015.

 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 2015 (November 2
through December 31) that was rolled over after December 31, 2015, but within
the 60day rollover period.

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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.

Caution.
If you had a distribution from a Qualified Tuition Program (QTP), see
Coordination With Qualified Tuition Program (QTP) Distributions. 
Part I. Qualified Education Expenses (Complete for total expenses.)
   
A.  Enter your total qualified education expenses for 2015   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
2015   F.  
G.  Enter your total distributions from
all Coverdell ESAs during 2015. Don't 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 2015, including contributions made for 2015 from January 1,
2016, through April 18, 2016.
Don't include rollovers or the return of excess contributions
  1.  
2.  Enter your basis in
this Coverdell ESA as of December 31, 2014 (see instructions)
  2.  
3.  Add lines 1 and 2   3.  
4.  Enter the total distributions from
this Coverdell ESA during 2015.
Don't 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, 2015,
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 2015 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, 2015   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.  