FEDTAX * IRS * HOME * PUB_970

Publication 970
Tax Benefits for Education

For use in preparing 2002 Returns

When Assets Must Be Withdrawn

Any assets remaining in a Coverdell ESA must be withdrawn when either one of the following two events occurs.

  1. The designated beneficiary reaches age 30. In this case, the designated beneficiary must withdraw the remaining assets within 30 days after reaching age 30. This rule does not apply if the beneficiary is a special needs beneficiary.
  2. The designated beneficiary dies before reaching age 30. In this case, the remaining assets must generally be withdrawn within 30 days after the date of death.

Exception for Transfer to Surviving Spouse or Family Member

If 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 does not need to withdraw the assets until he or she reaches age 30. This age limitation does not apply if the new beneficiary is a special needs beneficiary. There are no tax consequences as a result of the transfer.

How To Figure the Taxable Earnings

Upon withdrawal, 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.

  1. Multiply the amount withdrawn by a fraction. The numerator is the total contributions in the account and the denominator is the total balance in the account before the withdrawal(s).
  2. Subtract the amount figured in (1) from the total amount withdrawn during the year. The result is the amount of earnings included in the withdrawal. The beneficiary or other person receiving the withdrawal must include this amount in income.
Worksheet 5-3.  Coverdell ESA - Taxable Withdrawals and Basis   (Keep for your records)
Complete lines A through H on only one worksheet. Complete lines 1 through 15 separately for each of your Coverdell ESAs. Complete the Summary (line 16) on only one worksheet.
Qualified Education Expenses (Complete for total expenses)
 A. Enter your total qualified education expenses for 2002  A.       
 B. Enter those qualified education expenses paid for with tax-free education benefits (for example, scholarships excluded from income, veterans' educational benefits, Pell grants, employer- provided educational assistance)  B.            
 C. Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040), Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040)  C.            
 D. Enter those qualified higher education expenses on which a Hope 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 2002  F.       
 G. Enter your total withdrawals from all Coverdell ESAs during 2002. Do not 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. .   
Taxable Withdrawals and Basis (Complete separately for each account)
 1. Enter the amount contributed to this Coverdell ESA for 2002, including contributions made for 2002 from January 1, 2003, through April 15, 2003. Do not include rollovers or the return of excess contributions  1.       
 2. Enter your basis in this Coverdell ESA as of December 31, 2001 (see instructions)  2.       
 3. Add lines 1 and 2  3.       
 4. Enter the total withdrawals from this Coverdell ESA during 2002. Do not 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, 2002, 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 withdrawals, 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 withdrawals, and is tax free 13.       
14. Subtract line 13 from line 11. This is the portion of the withdrawals from this Coverdell ESA in 2002 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, 2002 15.       
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, listing the type and amount of income on the dotted line 16.       

Worksheet 5-3 Instructions.  Coverdell ESA - Taxable Withdrawals and Basis
Line G. Enter the total withdrawals received from all Coverdell ESAs during 2002. Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Also, do not 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, 2001, is the total of:  · All contributions to this Coverdell ESA before 2002  · Minus the tax-free portion of any withdrawals from this Coverdell ESA before 2002. If you previously made a withdrawal from this Coverdell ESA, your basis in this account as of the end of the last year in which you took a withdrawal is shown on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs and Coverdell ESAs, that you completed for that year. You can determine your basis in this Coverdell ESA as of December 31, 2001, by adding to the basis as of the end of that year any contributions made to that account after the year of the withdrawal and before 2002.
Line 4. Enter the total Coverdell ESA withdrawals received in 2002. Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Also, do not include excess contributions that were withdrawn 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, 2002, plus any outstanding rollovers contributed to the account after 2001, but before the end of the 60-day rollover period. You should receive a statement by January 31, 2003, for each Coverdell ESA showing the value on December 31, 2002. A rollover is a tax-free 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 2002 (November 2 through December 31) that was rolled over after December 31, 2002, but within the 60-day rollover period.

- Continue -