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The Coverdell Education Savings Accounts (ESA) provide families the opportunity to save up to $2,000 per student annually. Generally, the beneficiary of the account must be under age 18 when the contributions are made, but in special need cases, contributions may be made for students over age 18. Withdrawals are tax-free when used to pay for qualified educational expenses.
Who can contribute to an ESA?
Single taxpayers with incomes below $110,000 ($220,000 for joint filers) may contribute for a child under the age of 18. Parents, grandparents, other family members or the child designated as the beneficiary may contribute to the account, provided the total contributions from all sources do not exceed the $2,000 limit.
Is a contribution to an ESA tax-deductible?
No, contributors may not take a tax deduction for
contributions made to an ESA.
Are the funds subject to taxation when they are withdrawn?
If the funds are withdrawn to pay for qualified educational expenses, then the funds are not subject to federal or state tax. Withdrawals that exceed the student’s qualified education expenses are generally subject to income tax and an additional tax of 10%. However, only the earnings on an ESA are subject to tax since the contributions were not tax deductible.
Can the American Opportunity or Lifetime Learning Tax Credit be taken in the same year as withdrawals from the ESA?
The American Opportunity or Lifetime Learning tax credits may be taken in the same year as withdrawals from the ESA as long as the tax credit is not claimed for the same expenses covered by the ESA.
Can contributions be made to an ESA and a 529 qualified
state tuition program in the same calendar year?
Yes, as a result of the Economic Growth and Tax Relief
Reconciliation Act of 2001, taxpayers may contribute to both types
of accounts in the same calendar year.
Click here for details from the Internal
Revenue Service website about the Coverdell ESA.
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