Description
Parents (and others) may open Coverdell Education Savings Accounts (ESAs)
on behalf of beneficiaries who are under age 18 (no age limit in the case of
special need beneficiaries). The maximum total contribution to all accounts
established for the beneficiary is $2,000 per year. The annual deadline for
contributions is the due date for returns for the tax year (i.e., April 15,
2019, for 2018 contributions). Withdrawals may be used for qualifying elementary and secondary expenses, as
well as for post-secondary expenses. Qualifying expenses include tuition and
fees, books, supplies, and room and board expenses (limited to the college's
posted charges or $2,500 for students living off-campus). An account may be
rolled over to an immediate family member, and the balance in an account must be
fully withdrawn within 30 days of the beneficiary's 30th birthday (no
requirement that an account be fully used in the case of special needs beneficiaries).
Tax benefits
No tax deduction is allowed for amounts contributed to accounts. Investment
earnings on accounts are exempt from federal and state individual income tax.
Withdrawals that are spent on qualifying education expenses are exempt from
federal and state individual income tax.
Interaction with other programs
Students (or their parents) may also claim an American Opportunity credit or
Lifetime Learning credit and the deduction allowed for interest earned on
Education Savings Bonds, but only for qualifying higher education expenses
that are not paid for with withdrawals from a Coverdell ESA. Taxpayers may
contribute interest earned on Education Savings Bonds to a Coverdell ESA
and count the contribution as a qualifying higher education expense in claiming
the tax deduction for the interest. Students may pay for expenses not funded
with withdrawals from a Coverdell ESA with a student loan, with the
interest on the loan allowed as an income tax deduction at the time the loan is
repaid. Contributions to a qualified tuition program (QTP) made with amounts withdrawn
from a Coverdell ESA count as qualifying education expenses and are exempt from
income tax. Taxpayers may contribute to a Coverdell ESA and a QTP in the same
year for the same beneficiary.
Eligibility
Any individual may open an account on behalf of a beneficiary, but
eligibility to contribute to a Coverdell ESA is subject to an income-based
phase-out. The maximum annual contribution amount of $2,000 is phased out for
married taxpayers with modified adjusted gross income (AGI) between $190,000 and
$220,000, and for single filers and heads of household with modified AGI between
$95,000 and $110,000. Taxpayers with modified adjusted gross income above the
phase-out may not make contributions to a Coverdell ESA. The limits are not
adjusted annually for inflation. Modified adjusted gross
income equals adjusted gross income plus foreign earned income, housing costs of
individuals living abroad, and income from sources within Puerto Rico and U.S.
territories.
March 2019