Coverdell (ineligible donor)
I was notified that an ineligible (due to income) Coverdell donor has been making over the course of multiple tax years contributions her son’s account.
Questions:
What is the correction method?
What are the tax consequences? Donor? Beneficiary?
What tracking mechanism(s)are available to the IRS preventing ineligible donors from making contributions?
Thank you
Permalink Submitted by Alan - IRA critic on Tue, 2013-07-30 19:58
This is handled very similar to IRA excess contributions. There is a 6% excise tax for each year an excess contribution remains in the ESA and this tax is paid and reported by the beneficiary on Form 5329 Part V, not the donor. But the extended due date for correcting a prior year excess is 6/1, not 10/15. If there have been any distributions taken (or eligible contributions not made) over this period, they reduce the excess amount. Otherwise, the excess amount must be withdrawn to stop the annual accumulation of the excise taxes. Form 5498 is used by the IRS to track contribution amounts, but in many cases there is no IRS follow up, perhaps due to the low limits and age of most beneficiaries.