Coverdell ESA Basis

[MHolahan]

I had a distribution from my Coverdell ESA in August 2019. TurboTax asks three questions under the "This Coverdell ESA" section. I'm unable to answer the 2nd question:

"Basis in this Coverdell ESA Account as of December 31, 2018"

I'm unsure what this means. Thoughts/guidance appreciated.

[Hal_Al]

If you took a distribution from your Coverdell ESA, you should have received a form 1099-Q with the earnings portion of the distribution in box 2 and the basis in box 3. 

Some ESA custodians may leave boxes 2 & 3 blank and you have to enter from your own records.  TurboTax can do that. But, you have to know the starting info ("Basis in this Coverdell ESA Account as of December 31, 2018").  You get that from your own records.  Your year end 2019 statement, from the fund, may have it.

[Hal_Al]

Alternatively; you can just not report the 1099-Q, at all, if your student-beneficiary has sufficient educational expenses, including room & board (even if he lives at home) to cover the distribution. You would have to do the math to see if there were enough expenses left over for you to claim the tuition credit. You cannot double dip.  When the box 1 amount on form 1099-Q is fully covered by expenses, TurboTax will enter nothing about the 1099-Q on the actual tax forms. But, it will prepare a 1099-Q worksheet for your records, in case of an IRS inquiry.

On form 1099-Q, instructions to the recipient reads: "Nontaxable distributions from CESAs and QTPs are not required to be reported on your income tax return. You must determine the taxability of any distribution." 

[tdcjmd]

How do I determine basis for a Coverdell ESA for which we have not received disbursement before 2020?

[Hal_Al]

You get that info from the administrator (custodian) of the account or from your own records.

[DonHHH]

I just had to do this myself.  Some trustees don't have the basis. They only provide you with the end-of-year value and let you calculate it, leaving boxes 2 and 3 empty on your 1099-Q.  You have to know the ending account balance on Dec 31 of each year that you took a distribution, and the amount of the distributions each year.  IRS Publication 970 almost has it.  Note that if you took no distributions, then your basis only increases with the amount of your contribution(s).  If you made no contributions, then it stays the same.  Here are the 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 the previous year, plus total contributions for that year, and the denominator (bottom part) is the value (balance) of the account at the end of the year plus the amount distributed during the year.  This is the amount of basis included in the distribution(s). (The amount that should have been in 1099-Q box 3.)

2. Subtract the amount figured in (1) from the total amount distributed for that year. The result is the amount of earnings included in the distribution(s). (The amount that should have been in 1099-Q box 2.)

3. Your new basis for NEXT YEAR is the the basis for the prior year, adding your contribution(s), then subtracting the basis of your distribution(s) which is the amount you figured in (1).

EXAMPLE:

You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2020. There was a $100 contribution in 2020. This is your first distribution from the account, so your basis in the account on December 31, 2019, was $1,500. The value (balance) of your account on December 31, 2020, was $1050. 

Your Distribution was: $850.

The amount of  basis in the distribution was: 850 x (1500+100) / (1050+850) = 715.79

The amount of earnings in the distribution was: 850-715,79 = 134.21 

Your new basis for 2021 is: 1500+100-715.79=884.21