I don't understand the Turbo Tax question "Was this distribution a return of your contribution to Coverdell ESA"? If I answer YES, my tax return increases significantly, if I answer NO it drops. Can someone please explain what this means and why this happens.
Unless you are returning funds that you previously took out of a Coverdell ESA, answer NO to this question.
This would happen in the case of a tuition refund that was covered by a prior distribution and is being returned, for example.
Click this link for more info on Coverdell Return of Contribution.
Why would answering NO make my tax return significantly decrease? It seems like it should be the other way around.
If you make a contribution, then perhaps find out that the student had another account and your contribution was over the limit. You would need to pull that contribution out as a distribution.
So, you take a distribution to remove those funds.
Then you get a 1099-Q.
If you answer "Yes" that distribution was to remove the contribution you shouldn't have made, the refund goes up because the distribution is not taxable.
If you answer "No" and it was not used for education expense of the student, the refund will go down because the distribution is taxable.