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1 To be eligible for favorable tax treatment afforded to any earnings portion of withdrawals from Coverdell ESAs, withdrawals must be used for "qualified higher education expenses" or "qualified elementary and secondary education expenses," as defined in the Internal Revenue Code. Any earnings withdrawn that are not used for such expenses are subject to federal income tax and may be subject to a 10% additional federal tax as well as state and local income taxes. Unless extended, certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 will expire after December 31, 2012, resulting in changes affecting Coverdell ESAs. These changes would include the following (among others): (1) distributions for elementary and secondary education expenses would no longer be federal income tax-free; (2) expenses for academic tutoring, uniforms, transportation, supplementary items, and expenses incurred by special needs beneficiaries would no longer be qualified expenses; and (3) contributions would not be permitted to both a Section 529 account and a Coverdell ESA in the same year for the same beneficiary, and an excise tax would apply.
2 The eligibility limit for contributors depends on the individual's tax-return filing status and modified adjusted gross income ("MAGI"). There is a phase-out on the ability to contribute for individual taxpayers with MAGI between $95,000 and $110,000 and for joint-return tax-payers with MAGI between $190,000 and $220,000. If your MAGI is $110,000 (single) or $220,000 (joint) or more, you cannot contribute to an educational savings account.
3 This does not apply to special-needs beneficiaries. An education savings account may be established and funded for a special-needs beneficiary of any age, and there is no requirement to close the account once the beneficiary turns age 30.
4 Financial aid rules may change, and the rules in effect at the time the beneficiary applies may be different. For more complete information visit the Department of Education Web site at
www.ed.gov.
5 The account owner can change the beneficiary to another member of the family of the original beneficiary, without penalty provided the beneficiary is under age 30 or is a special needs beneficiary. Please refer to the Internal Revenue Code definition of "member of the family." If assets are contributed from an UGMA/UTMA account, the custodian may not change the designated minor, except as permitted by applicable law.
6 The beneficiary must be attending an accredited institution at least half time for room and board to be considered an eligible expense.
7 The first $950 of a child's income is tax-exempt, and unearned income over $1,900 generally is taxed at the parent's rate if, at the end of the year, the child is under age 19 or is a full-time student under age 24. Unearned income above $1,900 is taxable at the parent’s marginal tax rate if at least one parent is living at the end of the tax year and the child is not filing a joint return for the tax year.