Corporate Coverdell ESA Tax Liability

Is distribution from Coverdell ESA taxable?

In general, the designated beneficiary of a Coverdell ESA can receive tax-free distributions to pay qualified education expenses. The distributions are tax-free to the extent the amount of the distributions doesn’t exceed the beneficiary’s qualified education expenses.

What is the basis for Coverdell?

Your basis is the total amount of your Coverdell contributions minus the amount you withdraw that is not taxable.

Who owns the assets in a Coverdell?

The trust or custodian is the party that establishes and controls the funds in the ESA for the student beneficiary, who must be under the age of 18 at the time of designation. Funds within the account are not considered to be owned by the custodian nor the beneficiary unless they are the same individual.

How do I report a Coverdell distribution on my tax return?

If you used all the money you withdrew from your QTP or Coverdell ESA to pay for qualified education expenses, and meet other IRS requirements, the distributions aren’t taxable and you don’t need to report them as income. Just file your 1099-Q with your tax records.

How are Coverdell accounts taxed?

Coverdell ESA contributions are not tax deductible, but, like a Roth IRA, amounts deposited in the accounts grow tax-free until withdrawn. Withdrawals from Coverdell ESAs generally are tax-free to the extent that the amount of the withdrawal is not more than the beneficiary’s qualified education expenses.

What part of 1099-Q is taxable?

Typically, Box 1 of a Form 1099-Q lists the total distribution, Box 2 includes the earnings portion of the distribution and Box 3 includes the basis, which is the contribution portion of the distribution. The earnings portion of a non-qualified 529 plan distribution is subject to income tax and a 10% penalty.

Are Coverdell contributions pre tax?

Contributions to a Coverdell account are not tax-deductible. Earnings on the account are not taxable. The distributions from a Coverdell are tax-exempt as long as they are used to cover qualifying education expenses.