You may be able to contribute to a Coverdell Education Savings Account (ESA) to finance a beneficiary's qualified education expenses. The contribution is NOT deductible.

A Coverdell ESA is a trust or custodial account set up in the United States solely for the purpose of paying qualified education expenses for the designated beneficiary of the account. Qualified higher education expenses are expenses for tuition, fees, books, supplies, and equipment required for enrollment or attendance. Expenses also include amounts contributed to a qualified tuition program and, if the designated beneficiary is enrolled at least half time at an eligible educational institution, certain room and board expenses. Qualified expenses include public, private and religious elementary and secondary school expenses.

The designated beneficiary must be under the age of 18 when the account is established. Any balance in a Coverdell ESA must be distributed within 30 days after the date the beneficiary reaches age 30. These age limits will not apply to beneficiaries with special needs.

There is no limit to the number of Coverdell ESAs that can be established for one beneficiary. The contributions can only be made in cash and the total contributions made to all Coverdell ESAs for any beneficiary in one tax year cannot be greater than $2000.

Any Individual (including the beneficiary) can contribute to a Coverdell ESA if the individual's modified adjusted gross income is not more than $110,000 (220,000 if the individual is filing a joint return). The $2000 maximum contribution per beneficiary is gradually reduced if the contributor's modified adjusted gross income is between $95,000 and $110,000 ($190,000 and $220,000 if the contributor is filing a joint return).

Modified adjusted gross income for the purpose of determining your maximum contribution limit is the adjusted gross income shown on your tax return increased by the following exclusion from your income:

• Foreign earned income of U.S. citizens or residents living abroad.
• Housing costs of U.S. citizens or residents living abroad.
• Income from sources within:
• Puerto Rico,
• Guam,
• American Samoa, or
• The Northern Mariana Islands

For distribution purposes, in general, the designated beneficiary of a Coverdell ESA can receive tax–free withdrawals to pay qualified education expenses. The withdrawals are tax free to the extent the withdrawal does not exceed the beneficiary's qualified education expenses. If a withdrawal does exceed the beneficiary's qualified education expenses, a portion of the withdrawal is taxable.

The Hope Credit or the Lifetime Learning Credit may be claimed for certain qualified higher education expenses in the same year in which the student receives a tax free withdrawal from a Coverdell ESA as long as the distribution is not used for the same educational expenses for which the credit was taken.

For more information you may refer to Publication 970 (PDF).

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