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high school. The qualified expenses are greater than the distribution, making the $800 Coverdell ESA dis- tribution tax free. 2. Next, you match your $4,200 QTP distribution to your $3,000 of QHEE, and find you have an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). You can't use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses are not high school tuition expenses and don't qualify a QTP for tax-free treatment. 3. Finally, you figure the taxable and tax-free portions of your QTP distribution based on your $3,000 of QHEE. (See Figuring the Taxable Portion of a Distribution in chapter 7 for more information.) Example 2. Assume the same facts as in Example 1, except that you withdrew $1,800 from your Coverdell ESA and $3,200 from your QTP. In this case, you allocate your qualified education expenses as follows. 1. Using the same reasoning as in Example 1, you match $1,000 of your Coverdell ESA distribution to your $1,000 of QESEE—you have $800 of your distri- bution remaining. 2. Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, you allocate your $3,000 of QHEE between the re- maining $800 Coverdell ESA and the $3,200 QTP dis- tributions ($4,000 total). $3,000 QHEE × $800 ESA distribution $4,000 total distribution = $600 QHEE (ESA) $3,000 QHEE × $3,200 QTP distribution $4,000 total distribution = $2,400 QHEE (QTP) 3. You then figure the taxable part of the following. a. Coverdell ESA distribution based on qualified edu- cation expenses of $1,600 ($1,000 QESEE + $600 QHEE). See Figuring the Taxable Portion of a Distribution, earlier, in this chapter. b. QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 7). The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. However, you don't have to allocate your expenses in the same way. You can use any reasonable method. Losses on Coverdell ESA Investments For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a Coverdell ESA, you can’t deduct the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your TIP unrecovered basis. Your basis is the total amount of con- tributions to that Coverdell ESA. Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you must also pay a 10% additional tax on the amount included in income. Exceptions. The 10% additional tax doesn't apply to the following distributions. 1. Paid to a beneficiary (or to the estate of the designa- ted beneficiary) on or after the death of the designa- ted beneficiary. 2. Made because the designated beneficiary is disabled. A person is considered to be disabled if proof is provi- ded showing there is a physical or mental impairment that substantially limits any gainful activity. A physi- cian must determine that the person's condition can be expected to result in death or to be of long-contin- ued and indefinite duration. 3. Included in income because the designated benefi- ciary received: a. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1); b. Veterans' educational assistance (see Veterans' Benefits in chapter 1); c. Employer-provided educational assistance (see chapter 10); or d. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. This exception applies only to the extent the distri- bution isn't more than the scholarship, allowance, or payment. 4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn't exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) at- tributable to such attendance. 5. Included in income only because the qualified educa- tion expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier). 6. Made before June 1, 2023, of an excess 2022 contri- bution (and any earnings on it). The distributed earn- ings must be included in gross income for the year in which the excess contribution was made. Figuring the additional tax. Use Part II of Form 5329 to figure any additional tax. Report the amount on Schedule 2 (Form 1040), line 8. Chapter 6 Coverdell Education Savings Account (ESA) Page 47