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Education Savings Accounts (ESAs)

Coverdell education savings accounts (ESAs) are tax-advantaged accounts that allow you to save money for education

Advantages of the Coverdell ESA include:

  • The earnings are tax-free if used for qualified education expenses.
  • You can use it:
    • To pay for education expenses at eligible schools
    • For every level of education -- from kindergarten to graduate school
  • Qualified distributions are tax-free.

You can’t deduct contributions to Coverdell ESAs, so don’t report them on your return.

You open a Coverdell ESA for the benefit of another person (the beneficiary), usually your child. However, the beneficiary doesn't have to be your child or even a relative.

The beneficiary usually must be under age 18 at the time of the contribution. However, the age limit is waived for certain special-needs beneficiaries. This includes individuals who require more time to complete their education because of:

  • Learning disabilities
  • Certain physical, mental, or emotional conditions

Here are the rules for contributing to an ESA:

  • You can contribute to as many Coverdell ESAs as you want. You can contribute up to $2,000 per child per year. This is true no matter how many accounts exist or how many people contribute.
  • The $2,000 contribution limit is an overall limit on contributions per child. However:
    • You must contribute less if your modified AGI is more than:
      • $95,000 on a single return
      • $190,000 if married filing jointly
    • If your modified AGI is $110,000 or more -- or $220,000 if married filing jointly -- you can’t make contributions. Modified AGI for this purpose is AGI plus income excluded since it’s:
      • Subject to the foreign earned-income exclusion
      • Subject to a foreign housing exclusion or deduction
      • Excluded income of bona fide residents of American Samoa or Puerto Rico
  • You must make your contribution by your return’s due date (usually April 15).
  • You can contribute to both an ESA and a qualified state tuition plan for the same child in the same year.
  • When a beneficiary reaches age 30 or dies, you must roll over assets remaining in the ESA to another qualified beneficiary within 30 days. However, this doesn't apply to special-needs beneficiaries.
  • If you qualify, you can claim an education credit the same year you make an ESA withdrawal.
  • You can change the ESA beneficiary without tax consequences. You might want to do this if a child graduates or reaches age 30, and there's still money in the account. The new beneficiary must be:
    • A member of the same family as the former beneficiary
    • Under age 30 or a special-needs beneficiary at the time of the change

        You can change the ESA beneficiary by one of these means:

    • Having the trustee change the name on the account, if permitted under the plan rules
    • Rolling the ESA over into another ESA of an eligible beneficiary

Eligible educational institutions

For ESA purposes, a postsecondary eligible educational institution must be:

  • An accredited public or private institution
  • Eligible to participate in U.S. Department of Education Federal Student Aid programs

Institutions include:

  • College or university
  • Vocational school
  • Other postsecondary educational institutions
  • Foreign institutions listed at www.fafsa.ed.gov

An elementary and secondary educational institution:

  • Is a public, private, or religious school, as determined under state law
  • Provides elementary or secondary education (kindergarten through grade 12)

Qualified education expenses

For ESA purposes, the definition of “qualified education expenses” depends on if the expenses are for:

  • Elementary and secondary education
  • Postsecondary education

If the ESA distribution is for a postsecondary school, these expenses qualify for the deduction:

  • Expenses required for enrollment or attendance, like:
    • Tuition and fees
    • Books
    • Supplies and equipment
  • Special-needs services for a special-needs student incurred in connection with enrollment or attendance
  • Room and board incurred by a student enrolled for at least half the full-time academic workload. The costs must not be more than the greater of:
    • Allowance for room and board -- This is determined by the eligible educational institution for a particular academic period.
    • Amount charged if the student resides in housing owned or operated by the eligible educational institution

If the distribution is for an elementary or secondary school, these expenses qualify for the deduction:

  • Expenses incurred with enrollment or attendance:
    • Tuition and fees
    • Books
    • Supplies and equipment
    • Academic tutoring
    • Special-needs services for a special-needs student
  • Expenses required or provided with attendance or enrollment:
    • Room and board
    • Uniforms
    • Transportation
    • Supplementary items and services, including extended day programs
  • Computer technology purchases used by the child and the child's family during the years the child is in elementary or secondary school. This includes:
    • Equipment, like hardware
    • Software -- however, not software designed for sports, games, or hobbies, unless it’s mostly educational in nature.
    • Internet access
    • Related computer services

Subtract nontaxable education benefits the child receives from the qualified expenses you can use the ESA to pay for. This includes scholarships or Pell grants.  

If you'd like to learn more, see Publication 970: Tax Benefits for Education at www.irs.gov.

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