Coverdell ESA - Grad Student

[Amy111]

My daughter is attending grad school.  She is provided a full scholarship and also receives funds for living expenses (she works in a lab) which she reports as income. 

I have some funds left over from a Coverdell ESA.  Can we use that for "room and board" while she is in grad school and have it be a qualified expense (non-taxable)?  It seems that the definition of qualified education expenses are different for grad students than for undergrad but I may be confused.

[AmyC]

The ESA could be used for room and board while the money for living expenses is already being taxed. The full scholarship is a little unclear, if that includes room and board plus tuition. then your daughter would need to pay tax on the room and board portion to make your ESA tax free. One of you has to pay tax and I imagine her tax rate is lower than yours. 

Double check your income and expenses with the IRS pub 970.

For information on contributions and how to determine the part of any distribution that is taxable earnings, refer to Chapter 7 of Publication 970, Tax Benefits for Education. 

Page 52 states: Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses the beneficiary has in the same tax year. See page 5

[Hal_Al]

Simple answer: yes.  The fact that she is also getting "funds  for living expenses" doesn't matter because  she reports it as income.  So, there is no double dipping of tax benefits.  Taxable scholarship is hers to spent anyway she wants. 

The definition of qualified education expenses is somewhat  different for grad students and undergrads as applies to the tuition credits.  But for 529 plan distributions, the rules are the same.