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Coverdell ESA Contribution Limit—Illustrated 1. Maximum contribution . . . . . . . . . . . . . . . 1. $ 2,000 2. Enter your MAGI for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 6-1) . . . . . . 2. 96,500 3. Enter $190,000 if married filing jointly; $95,000 for all other filers . . . . . . . . . . . . 3. 95,000 4. Subtract line 3 from line 2. If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8 . . . . . . . . . . . . 4. 1,500 5. Enter $30,000 if married filing jointly; $15,000 for all other filers . . . . . . . . . . . . 5. 15,000 Note. If the amount on line 4 is greater than or equal to the amount on line 5, stop here. You aren't allowed to contribute to a Coverdell ESA for 2022. 6. Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. .100 7. Multiply line 1 by line 6 . . . . . . . . . . . . . . . 7. 200 8. Subtract line 7 from line 1 . . . . . . . . . . . . 8. 1,800 Note. The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Additional Tax on Excess Contributions The beneficiary may owe a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Excess contributions are the total of the following two amounts. 1. Contributions to any designated beneficiary's Cover- dell 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). 2. Excess contributions for the preceding year, reduced by the total of the following two amounts. a. Distributions (other than those rolled over, as dis- cussed later) during the year. b. The contribution limit for the current year minus the amount contributed for the current year. Exceptions. The excise tax doesn't apply if excess con- tributions made during 2022 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2023, for a calendar year tax- payer). However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Box 2 of that form will show the amount of earnings on your excess Worksheet 6-2. contributions. Code “2” or “3” entered in the blank box be- low boxes 5 and 6 indicates the year in which the earnings are taxable. See Instructions for Recipient of your Form 1099-Q, on the back of Copy B. Enter the amount of earn- ings on Schedule 1 (Form 1040), line 8z, for the applica- ble tax year. For more information, see Taxable Distribu- tions, later. The excise tax doesn't apply to any rollover contribu- tion. Note. Contributions made in one year for the preced- ing tax year are considered to have been made on the last day of the preceding year. Example. In 2021, your parents and grandparents contributed a total of $2,300 to your Coverdell ESA—an excess contribution of $300. Because you didn't withdraw the excess before June 1, 2022, you had to pay an addi- tional tax of $18 (6% × $300) when you filed your 2021 tax return. In 2022, excess contributions of $500 were made to your account; however, you withdrew $250 from that ac- count to use for qualified education expenses. Using the steps shown earlier under Additional Tax on Excess Con- tributions, you figure the excess contribution in your ac- count at the end of 2022 as follows. (1) $500 excess contributions made in 2022 + (2) $300 excess contributions in ESA at end of 2021 − (2a) $250 distribution during 2022 $550 excess at end of 2022 × 6% = $33 If you limit 2023 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2022), you won't owe any additional tax in 2023 for excess contribu- tions. Figuring and reporting the additional tax. You figure this excise tax on Form 5329, Part V. Report the additional tax on Schedule 2 (Form 1040), line 8. Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to an- other or the designated beneficiary can be changed. The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Rollovers Any amount distributed from a Coverdell ESA isn't 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. This age limitation doesn't apply if the new benefi- ciary is a special needs beneficiary. Chapter 6 Coverdell Education Savings Account (ESA) Page 43