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Tax Return Preparation State Income Taxes

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Tax Return Preparation State Income Taxes

Tax return preparation state income taxes 7. Tax return preparation state income taxes   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Tax return preparation state income taxes For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Tax return preparation state income taxes There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Tax return preparation state income taxes However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Tax return preparation state income taxes See Contributions , later. Tax return preparation state income taxes This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Tax return preparation state income taxes What is the tax benefit of the Coverdell ESA. Tax return preparation state income taxes   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Tax return preparation state income taxes   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Tax return preparation state income taxes See Tax-Free Distributions , later. Tax return preparation state income taxes    Table 7-1 summarizes the main features of the Coverdell ESA. Tax return preparation state income taxes Table 7-1. Tax return preparation state income taxes Coverdell ESA at a Glance Do not rely on this table alone. Tax return preparation state income taxes It provides only general highlights. Tax return preparation state income taxes See the text for definitions of terms in bold type and for more complete explanations. Tax return preparation state income taxes Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Tax return preparation state income taxes Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Tax return preparation state income taxes Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Tax return preparation state income taxes Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Tax return preparation state income taxes Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Tax return preparation state income taxes What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Tax return preparation state income taxes When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Tax return preparation state income taxes To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Tax return preparation state income taxes The document creating and governing the account must be in writing and must satisfy the following requirements. Tax return preparation state income taxes The trustee or custodian must be a bank or an entity approved by the IRS. Tax return preparation state income taxes The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Tax return preparation state income taxes The contribution is in cash. Tax return preparation state income taxes The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Tax return preparation state income taxes The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Tax return preparation state income taxes Money in the account cannot be invested in life insurance contracts. Tax return preparation state income taxes Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Tax return preparation state income taxes The balance in the account generally must be distributed within 30 days after the earlier of the following events. Tax return preparation state income taxes The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Tax return preparation state income taxes The beneficiary's death. Tax return preparation state income taxes Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Tax return preparation state income taxes For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Tax return preparation state income taxes Designated beneficiary. Tax return preparation state income taxes   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Tax return preparation state income taxes Contributions to a qualified tuition program (QTP). Tax return preparation state income taxes   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Tax return preparation state income taxes In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Tax return preparation state income taxes See chapter 8, Qualified Tuition Program . Tax return preparation state income taxes Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Tax return preparation state income taxes Eligible postsecondary school. Tax return preparation state income taxes   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Tax return preparation state income taxes S. Tax return preparation state income taxes Department of Education. Tax return preparation state income taxes It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Tax return preparation state income taxes The educational institution should be able to tell you if it is an eligible educational institution. Tax return preparation state income taxes   Certain educational institutions located outside the United States also participate in the U. Tax return preparation state income taxes S. Tax return preparation state income taxes Department of Education's Federal Student Aid (FSA) programs. Tax return preparation state income taxes Eligible elementary or secondary school. Tax return preparation state income taxes   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Tax return preparation state income taxes Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Tax return preparation state income taxes As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Tax return preparation state income taxes The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Tax return preparation state income taxes Tuition and fees. Tax return preparation state income taxes Books, supplies, and equipment. Tax return preparation state income taxes Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Tax return preparation state income taxes Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Tax return preparation state income taxes The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Tax return preparation state income taxes The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Tax return preparation state income taxes The actual amount charged if the student is residing in housing owned or operated by the school. Tax return preparation state income taxes Half-time student. Tax return preparation state income taxes   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Tax return preparation state income taxes Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Tax return preparation state income taxes As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Tax return preparation state income taxes There are special rules for computer-related expenses. Tax return preparation state income taxes The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Tax return preparation state income taxes Tuition and fees. Tax return preparation state income taxes Books, supplies, and equipment. Tax return preparation state income taxes Academic tutoring. Tax return preparation state income taxes Special needs services for a special needs beneficiary. Tax return preparation state income taxes The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Tax return preparation state income taxes Room and board. Tax return preparation state income taxes Uniforms. Tax return preparation state income taxes Transportation. Tax return preparation state income taxes Supplementary items and services (including extended day programs). Tax return preparation state income taxes The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Tax return preparation state income taxes (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Tax return preparation state income taxes ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Tax return preparation state income taxes For individuals filing joint returns, that amount is $220,000. Tax return preparation state income taxes Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Tax return preparation state income taxes There is no requirement that an organization's income be below a certain level. Tax return preparation state income taxes Contributions must meet all of the following requirements. Tax return preparation state income taxes They must be in cash. Tax return preparation state income taxes They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Tax return preparation state income taxes They must be made by the due date of the contributor's tax return (not including extensions). Tax return preparation state income taxes Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Tax return preparation state income taxes Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Tax return preparation state income taxes Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Tax return preparation state income taxes When contributions considered made. Tax return preparation state income taxes   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Tax return preparation state income taxes They must be made by the due date (not including extensions) for filing your return for the preceding year. Tax return preparation state income taxes   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Tax return preparation state income taxes Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Tax return preparation state income taxes Limit for each designated beneficiary. Tax return preparation state income taxes   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Tax return preparation state income taxes This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Tax return preparation state income taxes Rollovers are discussed under Rollovers and Other Transfers , later. Tax return preparation state income taxes Example. Tax return preparation state income taxes When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Tax return preparation state income taxes In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Tax return preparation state income taxes For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Tax return preparation state income taxes Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Tax return preparation state income taxes These contributions could be put into any of Maria's Coverdell ESA accounts. Tax return preparation state income taxes Limit for each contributor. Tax return preparation state income taxes   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Tax return preparation state income taxes This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Tax return preparation state income taxes Example. Tax return preparation state income taxes The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Tax return preparation state income taxes If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Tax return preparation state income taxes Reduced limit. Tax return preparation state income taxes   Your contribution limit may be reduced. Tax return preparation state income taxes If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Tax return preparation state income taxes If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Tax return preparation state income taxes Table 7-2. Tax return preparation state income taxes Coverdell ESA Contributions at a Glance Do not rely on this table alone. Tax return preparation state income taxes It provides only general highlights. Tax return preparation state income taxes See the text for more complete explanations. Tax return preparation state income taxes Question Answer Are contributions deductible? No. Tax return preparation state income taxes What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Tax return preparation state income taxes What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Tax return preparation state income taxes What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Tax return preparation state income taxes Can contributions other than cash be made to a Coverdell ESA? No. Tax return preparation state income taxes When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Tax return preparation state income taxes Modified adjusted gross income (MAGI). Tax return preparation state income taxes   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Tax return preparation state income taxes MAGI when using Form 1040A. Tax return preparation state income taxes   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Tax return preparation state income taxes MAGI when using Form 1040. Tax return preparation state income taxes   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Tax return preparation state income taxes MAGI when using Form 1040NR. Tax return preparation state income taxes   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Tax return preparation state income taxes MAGI when using Form 1040NR-EZ. Tax return preparation state income taxes   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Tax return preparation state income taxes   If you have any of these adjustments, you can use Worksheet 7-1. Tax return preparation state income taxes MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Tax return preparation state income taxes Worksheet 7-1. Tax return preparation state income taxes MAGI for a Coverdell ESA 1. Tax return preparation state income taxes Enter your adjusted gross income  (Form 1040, line 38)   1. Tax return preparation state income taxes   2. Tax return preparation state income taxes Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Tax return preparation state income taxes       3. Tax return preparation state income taxes Enter your foreign housing deduction (Form 2555, line 50)   3. Tax return preparation state income taxes         4. Tax return preparation state income taxes Enter the amount of income from Puerto Rico you are excluding   4. Tax return preparation state income taxes       5. Tax return preparation state income taxes Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Tax return preparation state income taxes       6. Tax return preparation state income taxes Add lines 2, 3, 4, and 5   6. Tax return preparation state income taxes   7. Tax return preparation state income taxes Add lines 1 and 6. Tax return preparation state income taxes This is your  modified adjusted gross income   7. Tax return preparation state income taxes   Figuring the limit. Tax return preparation state income taxes    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Tax return preparation state income taxes The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Tax return preparation state income taxes The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Tax return preparation state income taxes Subtract the result from $2,000. Tax return preparation state income taxes This is the amount you can contribute for each beneficiary. Tax return preparation state income taxes You can use Worksheet 7-2. Tax return preparation state income taxes Coverdell ESA Contribution Limit to figure the limit on contributions. Tax return preparation state income taxes    Worksheet 7-2. Tax return preparation state income taxes Coverdell ESA Contribution Limit 1. Tax return preparation state income taxes Maximum contribution   1. Tax return preparation state income taxes $2,000 2. Tax return preparation state income taxes Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Tax return preparation state income taxes   3. Tax return preparation state income taxes Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Tax return preparation state income taxes   4. Tax return preparation state income taxes Subtract line 3 from line 2. Tax return preparation state income taxes If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Tax return preparation state income taxes   5. Tax return preparation state income taxes Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Tax return preparation state income taxes     Note. Tax return preparation state income taxes If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Tax return preparation state income taxes You are not allowed to contribute to a Coverdell ESA for 2013. Tax return preparation state income taxes       6. Tax return preparation state income taxes Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Tax return preparation state income taxes . Tax return preparation state income taxes 7. Tax return preparation state income taxes Multiply line 1 by line 6   7. Tax return preparation state income taxes   8. Tax return preparation state income taxes Subtract line 7 from line 1   8. Tax return preparation state income taxes   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Tax return preparation state income taxes Example. Tax return preparation state income taxes Paul, who is single, had a MAGI of $96,500 for 2013. Tax return preparation state income taxes Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Tax return preparation state income taxes Worksheet 7-2. Tax return preparation state income taxes Coverdell ESA Contribution Limit—Illustrated 1. Tax return preparation state income taxes Maximum contribution   1. Tax return preparation state income taxes $2,000 2. Tax return preparation state income taxes Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Tax return preparation state income taxes 96,500 3. Tax return preparation state income taxes Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Tax return preparation state income taxes 95,000 4. Tax return preparation state income taxes Subtract line 3 from line 2. Tax return preparation state income taxes If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Tax return preparation state income taxes 1,500 5. Tax return preparation state income taxes Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Tax return preparation state income taxes 15,000   Note. Tax return preparation state income taxes If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Tax return preparation state income taxes You are not allowed to  contribute to a Coverdell ESA for 2013. Tax return preparation state income taxes       6. Tax return preparation state income taxes Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Tax return preparation state income taxes . Tax return preparation state income taxes 100 7. Tax return preparation state income taxes Multiply line 1 by line 6   7. Tax return preparation state income taxes 200 8. Tax return preparation state income taxes Subtract line 7 from line 1   8. Tax return preparation state income taxes 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Tax return preparation state income taxes Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Tax return preparation state income taxes Excess contributions are the total of the following two amounts. Tax return preparation state income taxes Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Tax return preparation state income taxes Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Tax return preparation state income taxes Exceptions. Tax return preparation state income taxes   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Tax return preparation state income taxes   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Tax return preparation state income taxes You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Tax return preparation state income taxes Box 2 of that form will show the amount of earnings on your excess contributions. Tax return preparation state income taxes Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Tax return preparation state income taxes See Instructions for Recipient on the back of copy B of your Form 1099-Q. Tax return preparation state income taxes Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Tax return preparation state income taxes For more information, see Taxable Distributions , later. Tax return preparation state income taxes   The excise tax does not apply to any rollover contribution. Tax return preparation state income taxes Note. Tax return preparation state income taxes Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Tax return preparation state income taxes Example. Tax return preparation state income taxes In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Tax return preparation state income taxes Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Tax return preparation state income taxes In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Tax return preparation state income taxes Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Tax return preparation state income taxes (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Tax return preparation state income taxes Figuring and reporting the additional tax. Tax return preparation state income taxes   You figure this excise tax in Part V of Form 5329. Tax return preparation state income taxes Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Tax return preparation state income taxes Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Tax return preparation state income taxes The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Tax return preparation state income taxes Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Tax return preparation state income taxes This age limitation does not apply if the new beneficiary is a special needs beneficiary. Tax return preparation state income taxes An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Tax return preparation state income taxes Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Tax return preparation state income taxes These are not taxable distributions. Tax return preparation state income taxes Members of the beneficiary's family. Tax return preparation state income taxes   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Tax return preparation state income taxes Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Tax return preparation state income taxes Brother, sister, stepbrother, or stepsister. Tax return preparation state income taxes Father or mother or ancestor of either. Tax return preparation state income taxes Stepfather or stepmother. Tax return preparation state income taxes Son or daughter of a brother or sister. Tax return preparation state income taxes Brother or sister of father or mother. Tax return preparation state income taxes Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Tax return preparation state income taxes The spouse of any individual listed above. Tax return preparation state income taxes First cousin. Tax return preparation state income taxes Example. Tax return preparation state income taxes When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Tax return preparation state income taxes He wanted to give this money to his younger sister, who was still in high school. Tax return preparation state income taxes In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Tax return preparation state income taxes Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Tax return preparation state income taxes This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Tax return preparation state income taxes Military death gratuity. Tax return preparation state income taxes   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Tax return preparation state income taxes Such payments are made to an eligible survivor upon the death of a member of the armed forces. Tax return preparation state income taxes The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Tax return preparation state income taxes   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Tax return preparation state income taxes The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Tax return preparation state income taxes   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Tax return preparation state income taxes See Distributions , later. Tax return preparation state income taxes The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Tax return preparation state income taxes Changing the Designated Beneficiary The designated beneficiary can be changed. Tax return preparation state income taxes See Members of the beneficiary's family , earlier. Tax return preparation state income taxes There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Tax return preparation state income taxes Example. Tax return preparation state income taxes Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Tax return preparation state income taxes Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Tax return preparation state income taxes Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Tax return preparation state income taxes After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Tax return preparation state income taxes Example. Tax return preparation state income taxes In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Tax return preparation state income taxes In this process, the account was transferred into her name. Tax return preparation state income taxes Peg now treats the funds in this Coverdell ESA as if she were the original owner. Tax return preparation state income taxes Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Tax return preparation state income taxes Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Tax return preparation state income taxes See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Tax return preparation state income taxes Table 7-3. Tax return preparation state income taxes Coverdell ESA Distributions at a Glance Do not rely on this table alone. Tax return preparation state income taxes It provides only general highlights. Tax return preparation state income taxes See the text for definitions of terms in bold type and for more complete explanations. Tax return preparation state income taxes Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Tax return preparation state income taxes After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Tax return preparation state income taxes Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Tax return preparation state income taxes Also, certain transfers to members of the beneficiary's family are permitted. Tax return preparation state income taxes Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Tax return preparation state income taxes Adjusted qualified education expenses. Tax return preparation state income taxes   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Tax return preparation state income taxes Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Tax return preparation state income taxes The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Tax return preparation state income taxes Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Tax return preparation state income taxes Do not report tax-free distributions (including qualifying rollovers) on your tax return. Tax return preparation state income taxes Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Tax return preparation state income taxes Excess distribution. Tax return preparation state income taxes   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Tax return preparation state income taxes Earnings and basis. Tax return preparation state income taxes   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Tax return preparation state income taxes The amount of your gross distribution will be shown in box 1. Tax return preparation state income taxes For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Tax return preparation state income taxes This will be shown in the blank box below boxes 5 and 6. Tax return preparation state income taxes   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Tax return preparation state income taxes Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Tax return preparation state income taxes Figure the taxable portion for 2013 as shown in the following steps. Tax return preparation state income taxes Multiply the total amount distributed by a fraction. Tax return preparation state income taxes The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Tax return preparation state income taxes Subtract the amount figured in (1) from the total amount distributed during 2013. Tax return preparation state income taxes The result is the amount of earnings included in the distribution(s). Tax return preparation state income taxes Multiply the amount of earnings figured in (2) by a fraction. Tax return preparation state income taxes The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Tax return preparation state income taxes Subtract the amount figured in (3) from the amount figured in (2). Tax return preparation state income taxes The result is the amount the beneficiary must include in income. Tax return preparation state income taxes The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Tax return preparation state income taxes Example. Tax return preparation state income taxes You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Tax return preparation state income taxes There were no contributions in 2013. Tax return preparation state income taxes This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Tax return preparation state income taxes The value (balance) of your account on December 31, 2013, was $950. Tax return preparation state income taxes You had $700 of adjusted qualified education expenses (AQEE) for the year. Tax return preparation state income taxes Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Tax return preparation state income taxes   1. Tax return preparation state income taxes $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Tax return preparation state income taxes $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Tax return preparation state income taxes $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Tax return preparation state income taxes $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Tax return preparation state income taxes Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Tax return preparation state income taxes Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Tax return preparation state income taxes Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Tax return preparation state income taxes This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Tax return preparation state income taxes Example. Tax return preparation state income taxes Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Tax return preparation state income taxes He paid his college expenses from the following sources. Tax return preparation state income taxes     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Tax return preparation state income taxes Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Tax return preparation state income taxes Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Tax return preparation state income taxes     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Tax return preparation state income taxes The balance in Derek's account was $1,800 on December 31, 2013. Tax return preparation state income taxes Prior to 2013, $2,100 had been contributed to this account. Tax return preparation state income taxes Contributions for 2013 totaled $400. Tax return preparation state income taxes Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Tax return preparation state income taxes   1. Tax return preparation state income taxes $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Tax return preparation state income taxes $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Tax return preparation state income taxes $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Tax return preparation state income taxes $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Tax return preparation state income taxes This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Tax return preparation state income taxes Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Tax return preparation state income taxes The following two examples illustrate possible allocations. Tax return preparation state income taxes Example 1. Tax return preparation state income taxes In 2013, Beatrice graduated from high school and began her first semester of college. Tax return preparation state income taxes That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Tax return preparation state income taxes To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Tax return preparation state income taxes No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Tax return preparation state income taxes She did not receive any tax-free educational assistance in 2013. Tax return preparation state income taxes Beatrice must allocate her total qualified education expenses between the two distributions. Tax return preparation state income taxes Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Tax return preparation state income taxes The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Tax return preparation state income taxes Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Tax return preparation state income taxes She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Tax return preparation state income taxes Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Tax return preparation state income taxes (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Tax return preparation state income taxes ) Example 2. Tax return preparation state income taxes Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Tax return preparation state income taxes In this case, she allocates her qualified education expenses as follows. Tax return preparation state income taxes Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Tax return preparation state income taxes Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Tax return preparation state income taxes   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Tax return preparation state income taxes See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Tax return preparation state income taxes   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Tax return preparation state income taxes The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Tax return preparation state income taxes However, you do not have to allocate your expenses in the same way. Tax return preparation state income taxes You can use any reasonable method. Tax return preparation state income taxes Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Tax return preparation state income taxes You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Tax return preparation state income taxes Your basis is the total amount of contributions to that Coverdell ESA. Tax return preparation state income taxes You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Tax return preparation state income taxes If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Tax return preparation state income taxes ) from all such accounts in order to determine your taxable earnings for the year. Tax return preparation state income taxes By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Tax return preparation state income taxes For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Tax return preparation state income taxes Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Tax return preparation state income taxes Exceptions. Tax return preparation state income taxes   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Tax return preparation state income taxes Made because the designated beneficiary is disabled. Tax return preparation state income taxes A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Tax return preparation state income taxes A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Tax return preparation state income taxes Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Tax return preparation state income taxes Made on account of the attendance of the designated beneficiary at a U. Tax return preparation state income taxes S. Tax return preparation state income taxes military academy (such as the USMA at West Point). Tax return preparation state income taxes This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Tax return preparation state income taxes S. Tax return preparation state income taxes Code) attributable to such attendance. Tax return preparation state income taxes Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Tax return preparation state income taxes Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Tax return preparation state income taxes The distributed earnings must be included in gross income for the year in which the excess contribution was made. Tax return preparation state income taxes Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Tax return preparation state income taxes Figuring the additional tax. Tax return preparation state income taxes    Use Part II of Form 5329, to figure any additional tax. Tax return preparation state income taxes Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Tax return preparation state income taxes When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Tax return preparation state income taxes The designated beneficiary reaches age 30. Tax return preparation state income taxes In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Tax return preparation state income taxes However, this rule does not apply if the beneficiary is a special needs beneficiary. Tax return preparation state income taxes The designated beneficiary dies before reaching age 30. Tax return preparation state income taxes In this case, the remaining assets must generally be distributed within 30 days after the date of death. Tax return preparation state income taxes 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. Tax return preparation state income taxes (“Family member” was defined earlier under Rollovers . Tax return preparation state income taxes ) 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. Tax return preparation state income taxes This age limitation does not apply if the new beneficiary is a special needs beneficiary. Tax return preparation state income taxes There are no tax consequences as a result of the transfer. Tax return preparation state income taxes How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Tax return preparation state income taxes You determine these earnings as shown in the following two steps. Tax return preparation state income taxes Multiply the amount distributed by a fraction. Tax return preparation state income taxes The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Tax return preparation state income taxes Subtract the amount figured in (1) from the total amount distributed during 2013. Tax return preparation state income taxes The result is the amount of earnings included in the distribution. Tax return preparation state income taxes For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Tax return preparation state income taxes The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Tax return preparation state income taxes Worksheet 7-3 Instructions. Tax return preparation state income taxes Coverdell ESA—Taxable Distributions and Basis Line G. Tax return preparation state income taxes Enter the total distributions received from all Coverdell ESAs during 2013. Tax return preparation state income taxes Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Tax return preparation state income taxes 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. Tax return preparation state income taxes Line 2. Tax return preparation state income taxes Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Tax return preparation state income taxes   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Tax return preparation state income taxes For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Tax return preparation state income taxes For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Tax return preparation state income taxes You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Tax return preparation state income taxes Line 4. Tax return preparation state income taxes Enter the total distributions received from this Coverdell ESA in 2013. Tax return preparation state income taxes Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Tax return preparation state income taxes   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 of the contributions. Tax return preparation state income taxes Line 7. Tax return preparation state income taxes Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Tax return preparation state income taxes A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Tax return preparation state income taxes   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Tax return preparation state income taxes An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Tax return preparation state income taxes Worksheet 7-3. Tax return preparation state income taxes Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Tax return preparation state income taxes • • • Complete Part I, lines A through H, on only one worksheet. Tax return preparation state income taxes  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Tax return preparation state income taxes  Complete Part III, the Summary (line 16), on only one worksheet. Tax return preparation state income taxes Part I. Tax return preparation state income taxes Qualified Education Expenses (Complete for total expenses)       A. Tax return preparation state income taxes Enter your total qualified education expenses for 2013   A. Tax return preparation state income taxes   B. Tax return preparation state income taxes Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Tax return preparation state income taxes         C. Tax return preparation state income taxes Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Tax return preparation state income taxes Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Tax return preparation state income taxes         D. Tax return preparation state income taxes Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Tax return preparation state income taxes         E. Tax return preparation state income taxes Add lines B, C, and D   D. Tax return preparation state income taxes   F. Tax return preparation state income taxes Subtract line E from line A. Tax return preparation state income taxes This is your adjusted qualified education expense for 2013   E. Tax return preparation state income taxes   G. Tax return preparation state income taxes Enter your total distributions from all Coverdell ESAs during 2013. Tax return preparation state income taxes Do not include rollovers  or the return of excess contributions (see instructions)   F. Tax return preparation state income taxes   H. Tax return preparation state income taxes Divide line F by line G. Tax return preparation state income taxes Enter the result as a decimal (rounded to at least 3 places). Tax return preparation state income taxes If the  result is 1. Tax return preparation state income taxes 000 or more, enter 1. Tax return preparation state income taxes 000   G. Tax return preparation state income taxes . Tax return preparation state income taxes Part II. Tax return preparation state income taxes Taxable Distributions and Basis (Complete separately for each account) 1. Tax return preparation state income taxes Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Tax return preparation state income taxes Do not include rollovers or the return of excess contributions   1. Tax return preparation state income taxes   2. Tax return preparation state income taxes Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Tax return preparation state income taxes   3. Tax return preparation state income taxes Add lines 1 and 2   3. Tax return preparation state income taxes   4. Tax return preparation state income taxes Enter the total distributions from this Coverdell ESA during 2013. Tax return preparation state income taxes Do not include rollovers  or the return of excess contributions (see instructions)   4. Tax return preparation state income taxes   5. Tax return preparation state income taxes Multiply line 4 by line H. Tax return preparation state income taxes This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Tax return preparation state income taxes         6. Tax return preparation state income taxes Subtract line 5 from line 4   6. Tax return preparation state income taxes         7. Tax return preparation state income taxes Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Tax return preparation state income taxes         8. Tax return preparation state income taxes Add lines 4 and 7   8. Tax return preparation state income taxes         9. Tax return preparation state income taxes Divide line 3 by line 8. Tax return preparation state income taxes Enter the result as a decimal (rounded to  at least 3 places). Tax return preparation state income taxes If the result is 1. Tax return preparation state income taxes 000 or more, enter 1. Tax return preparation state income taxes 000   9. Tax return preparation state income taxes . Tax return preparation state income taxes       10. Tax return preparation state income taxes Multiply line 4 by line 9. Tax return preparation state income taxes This is the amount of basis allocated to your  distributions, and is tax free   10. Tax return preparation state income taxes     Note. Tax return preparation state income taxes If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Tax return preparation state income taxes       11. Tax return preparation state income taxes Subtract line 10 from line 4   11. Tax return preparation state income taxes   12. Tax return preparation state income taxes Divide line 5 by line 4. Tax return preparation state income taxes Enter the result as a decimal (rounded to  at least 3 places). Tax return preparation state income taxes If the result is 1. Tax return preparation state income taxes 000 or more, enter 1. Tax return preparation state income taxes 000   12. Tax return preparation state income taxes . Tax return preparation state income taxes       13. Tax return preparation state income taxes Multiply line 11 by line 12. Tax return preparation state income taxes This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Tax return preparation state income taxes   14. Tax return preparation state income taxes Subtract line 13 from line 11. Tax return preparation state income taxes This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Tax return preparation state income taxes   15. Tax return preparation state income taxes Subtract line 10 from line 3. Tax return preparation state income taxes This is your basis in this Coverdell ESA as of December 31, 2013   15. Tax return preparation state income taxes   Part III. Tax return preparation state income taxes Summary (Complete only once)       16. Tax return preparation state income taxes Taxable amount. Tax return preparation state income taxes Add together all amounts on line 14 for all your Coverdell ESAs. Tax return preparation state income taxes Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Tax return preparation state income taxes   Prev  Up  Next   Home   More Online Publications
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Letter 2603C Frequently Asked Questions (FAQs)

What is the letter telling me?

The letter is informing you that we accepted your installment agreement and we will file a Federal Tax Lien on your personal property.

What do I have to do?

Make your monthly installment agreement payments.

How much time do I have?

The letter provides you the date the lien will be filed.

What happens if I don't take any action?

The lien will be filed that will become part of public record.

Who should I contact?

If you have any questions about this letter, call us at the number printed in the letter. The person who answers the phone will assist you.

What if I don't agree or have already taken corrective action?

If you do not agree with this letter, call us immediately at the number included. We will do our best to help you. If you have called us about this matter before, but we did not correct the problem, you may want to contact the Office of the Taxpayer Advocate.

Page Last Reviewed or Updated: 30-Jan-2014

The Tax Return Preparation State Income Taxes

Tax return preparation state income taxes 5. Tax return preparation state income taxes   Ministers and Church Employees Table of Contents Alternative Limit for Church Employees Changes to Includible Compensation for Most Recent Year of ServiceChanges to Includible Compensation Changes to Years of Service Self-employed ministers and church employees who participate in 403(b) plans generally follow the same rules as other 403(b) plan participants. Tax return preparation state income taxes This means that if you are a self-employed minister or a church employee, your MAC generally is the lesser of: Your limit on annual additions, or Your limit on elective deferrals. Tax return preparation state income taxes For most ministers and church employees, the limit on annual additions is figured without any changes. Tax return preparation state income taxes This means that if you are a minister or church employee, your limit on annual additions generally is the lesser of: $51,000 for 2013 and $52,000 for 2014, or Your includible compensation for your most recent year of service. Tax return preparation state income taxes Although, in general, the same limit applies, church employees can choose an alternative limit and there are changes in how church employees, foreign missionaries, and self-employed ministers figure includible compensation for the most recent year of service. Tax return preparation state income taxes This chapter will explain the alternative limit and the changes. Tax return preparation state income taxes Who is a church employee?   A church employee is anyone who is an employee of a church or a convention or association of churches, including an employee of a tax-exempt organization controlled by or associated with a church or a convention or association of churches. Tax return preparation state income taxes Alternative Limit for Church Employees If you are a church employee, you can choose to use $10,000 a year as your limit on annual additions, even if your annual additions computed under the general rule is less. Tax return preparation state income taxes Total contributions over your lifetime under this choice cannot be more than $40,000. Tax return preparation state income taxes Changes to Includible Compensation for Most Recent Year of Service There are two types of changes in determining includible compensation for the most recent year of service. Tax return preparation state income taxes They are: Changes in how the includible compensation of foreign missionaries and self-employed ministers is figured, and A change to the years that are counted when figuring the most recent year of service for church employees and self-employed ministers. Tax return preparation state income taxes Changes to Includible Compensation Includible compensation is figured differently for foreign missionaries and self-employed ministers. Tax return preparation state income taxes Foreign missionary. Tax return preparation state income taxes   If you are a foreign missionary, your includible compensation includes foreign earned income that may otherwise be excludable from your gross income under section 911. Tax return preparation state income taxes   If you are a foreign missionary, and your adjusted gross income is $17,000 or less, contributions to your 403(b) account will not be treated as exceeding the limit on annual additions if the contributions are not in excess of $3,000. Tax return preparation state income taxes   You are a foreign missionary if you are either a layperson or a duly ordained, commissioned, or licensed minister of a church and you meet both of the following requirements. Tax return preparation state income taxes You are an employee of a church or convention or association of churches. Tax return preparation state income taxes You are performing services for the church outside the United States. Tax return preparation state income taxes Self-employed minister. Tax return preparation state income taxes   If you are a self-employed minister, you are treated as an employee of a tax-exempt organization that is a qualified employer. Tax return preparation state income taxes Your includible compensation is your net earnings from your ministry minus the contributions made to the retirement plan on your behalf and the deductible portion of your self-employment tax. Tax return preparation state income taxes Changes to Years of Service Generally, only service with the employer who maintains your 403(b) account can be counted when figuring your limit on annual additions. Tax return preparation state income taxes Church employees. Tax return preparation state income taxes   If you are a church employee, treat all of your years of service as an employee of a church or a convention or association of churches as years of service with one employer. Tax return preparation state income taxes Self-employed minister. Tax return preparation state income taxes   If you are a self-employed minister, your years of service include full and part years during which you were self-employed. Tax return preparation state income taxes Prev  Up  Next   Home   More Online Publications