taxes on Coverdell ESA distribution?

I cashed in my kid’s Coverdell ESA account this year in order to pay for private high school tuition.

I have contributed 12,000 over the last 15 years, and it was worth about 27,000 when I closed the account, so I had about $15,000 in gains.

I’m claiming $20,000 in tuition expenses, so that leaves $7000.

On the 1099-Q worksheet generated by my tax program (Turbotax), it seems to want to charge me tax based on the expense:gross-distribution ratio.

I.e., 20000/27000 = .741, meaning 15000 * .741 ($11,111) is non-taxable, and remainder of 15,000- 11,111 ($3889) is taxable.

This doesn’t seem right, since isn’t the $12,000 of the distribution just a return of the original contributions (similar to ROTH)?

There is a section on the worksheet to state “Return of Contribution”, but it seems to only apply for current and previous tax year.

Should I just ignore the dates and list the $12k here?

Any help appreciated!



No, this is nothing like a Roth distribution, which follows ordering rules. Turbotax is correct. You took a total distribution meaning your received 15,000 of earnings. 11,111 can be applied to the tuition which is the portion calculated by determining the % of the total distribution allocated to the tuition (.741) and therefore non taxable. 3889 is the amount of earnings not allocated to qualified expenses and therefore taxable. You also owe a 10% penalty on the 3889 taxable amount regardless of age. See Pub 970, p 53. Return of contributions is only for excess contributions returned by a certain date, similar to an IRA excess contribution.

thanks very much, this is what I suspected.I have one other option I think, which is to pay off tuition for this school year before 12/31/17, which bumps the expenses up past the distribution amount.thanks!

Add new comment

Log in or register to post comments