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Coverdell ESA Distributions at a Glance Don't rely on this table alone. It provides only general highlights. See the text for definitions of terms and for more complete explanations. Table 6-3. 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 isn't more than the designated beneficiary's AQEE. After the designated beneficiary completes the educational requirements at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Amounts must be distributed when the designated beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Also, certain transfers to members of the beneficiary's family are permitted. Does the designated beneficiary need to be enrolled for a minimum number of courses to claim tax-free distribution? No. Adjusted qualified education expenses (AQEE). 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-free educational assistance includes: • The tax-free part of scholarships and fellowship grants (see Tax-Free Scholarships and Fellowship Grants in chapter 1); • Veterans' educational assistance (see Veterans' Ben- efits in chapter 1); • The tax-free part of Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chap- ter 1); • Employer-provided educational assistance (see chap- ter 10); and • Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assis- tance. The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your AQEE. Tax-Free Distributions Generally, distributions are tax free if they aren't more than the beneficiary's AQEE for the year. Don't report tax-free distributions (including qualifying rollovers) on your tax return. Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the ben- eficiary's AQEE for the year. Excess distribution. This is the part of the total distribu- tion that is more than the beneficiary's AQEE for the year. Earnings and basis. You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was dis- tributed in 2022. The amount of your gross distribution will be shown in box 1. For 2022, instead of dividing the gross distribution between your earnings (box 2) and your basis (amount already taxed) (box 3), the payer or trustee may report the fair market value (account balance) of the Cov- erdell ESA as of December 31, 2022. This will be shown in the blank box below boxes 5 and 6. The amount contributed from survivor benefits (see Military death gratuity, earlier) is treated as part of your basis and won't be taxed when distributed. Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribu- tion that represents earnings that have accumulated tax free in the account. Figure the taxable portion for 2022 as shown in the following steps. 1. Multiply the total amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2021, plus total contributions for 2022, and the denominator (bottom part) is the value (balance) of the account at the end of 2022 plus the amount distributed during 2022. 2. Subtract the amount figured in (1) from the total amount distributed during 2022. The result is the amount of earnings included in the distribution(s). 3. Multiply the amount of earnings figured in (2) by a fraction. The numerator (top part) is the AQEE paid during 2022, and the denominator (bottom part) is the total amount distributed during 2022. 4. Subtract the amount figured in (3) from the amount figured in (2). The result is the amount the beneficiary must include in income. The taxable amount must be reported on Schedule 1 (Form 1040), line 8z. Example. You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed be- fore 2022. There were no contributions in 2022. This is your first distribution from the account, so your basis in the account on December 31, 2021, was $1,500. The value (balance) of your account on December 31, 2022, was $950. You had $700 of AQEE for the year. Using the steps in Figuring the Taxable Portion of a Distribution, earlier, figure the taxable portion of your distribution as follows. Chapter 6 Coverdell Education Savings Account (ESA) Page 45