Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
cancel
Showing results for 
Search instead for 
Did you mean: 
dgaudin12
New Member

If I use a Coverdell ESA to pay for school, am I able to receive the American Opportunity Credit.

 
1 Best answer

Accepted Solutions
Fern
New Member

If I use a Coverdell ESA to pay for school, am I able to receive the American Opportunity Credit.

The American Opportunity or Lifetime Learning Credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren't used for both benefits.

This means that qualified higher education expenses are reduced by
1) tax-free educational assistance (scholarships and grants), and
2)any expenses paid by a Coverdell ESA distribution

Any remaining expenses can then be used to calculate the American Opportunity or Lifetime Learning credit.

View solution in original post

6 Replies
Fern
New Member

If I use a Coverdell ESA to pay for school, am I able to receive the American Opportunity Credit.

The American Opportunity or Lifetime Learning Credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren't used for both benefits.

This means that qualified higher education expenses are reduced by
1) tax-free educational assistance (scholarships and grants), and
2)any expenses paid by a Coverdell ESA distribution

Any remaining expenses can then be used to calculate the American Opportunity or Lifetime Learning credit.
taxmom99
Returning Member

If I use a Coverdell ESA to pay for school, am I able to receive the American Opportunity Credit.

Why, then, is Turbotax calculating that we qualify for the American Opportunity Credit, when the amount on the 1098-T were paid for with Coverdell funds? Is that an error?

VictorW9
Expert Alumni

If I use a Coverdell ESA to pay for school, am I able to receive the American Opportunity Credit.

Taxpayers may claim the AOTC in the same year a tax free distribution is made from a Coverdell as long as there is no double-dipping. Different expenses must be used to justify the AOTC and a tax free distribution. from a Coverdell. If the distribution was used for room and board that is not covered by the AOTC, then the credit can be taken.

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
MJJS02
Level 3

If I use a Coverdell ESA to pay for school, am I able to receive the American Opportunity Credit.

This question seems closest to my situation/question.  We've got it figured out that I shouldn't owe taxes on the ESA distribution, but Turbo Tax asks about the amount used to calculate education credit or deduction (like the AOTC) on my parent's taxes.  It preloads with the number that  their run through Turbo Tax wants to use, which is higher than  the $4000 that actually matters.  If I leave that higher preloaded amount in place, then I owe a couple hundred in taxes (& maybe penalties is included in that too).  If I reduce that to the $4000 like the message seems to indicate I should, then I don't owe taxes.  However, we cannot figure out how to make my parent's run through Turbo Tax to only reflect $4000.  How do we address this?  From what I read in this response they need to reduce qualified expenses on their return by the amount of ESA $ mentioned on my return to make sure we are double counting expenses and tax benefits to paying those expenses, but we cannot figure out how.

 

The school included room and board in qualified expenses on the 1098-T. From what I've read that is rare, but could be because they require me to live on campus and require me to buy a certain level of food plan.  So there is no noting room and board as a non-qualified expense that is appropriately covered without taxation on my return.

 

Am I making sense.  Any one have suggestions?

 
 
MJJS02
Level 3

If I use a Coverdell ESA to pay for school, am I able to receive the American Opportunity Credit.

Follow up to that.  If we reduce qualified expenses on my parent's return by the ESA distribution then they would be under the $4000 in expenses to get the maximum amount AOTC.  So it looks like as a family we're money ahead for me to pay $200-$250 in taxes/penalties and them get about $400 more in AOTC.  So is this how Turbo Tax is intending to run things and we just didn't understand?  IE, run the parent's first, get the maximum AOTC; then run the dependent student and let them (ME) take the tax/penalty hit for ESA distributions?

Hal_Al
Level 15

If I use a Coverdell ESA to pay for school, am I able to receive the American Opportunity Credit.

@MJJS02 

Yes,  this is how Turbo Tax  (TT) is intending to run things; run the parent's first, get the maximum AOTC; then run the dependent student and let you take the tax/penalty hit for ESA distributions*. 

 

But make sure TT is only using $4000, on your return,  as the amount they claimed. Go through the entire education interview until you reach a screen titled "Your Education Expenses Summary".  Click edit next to the student's name. That should take you to a screen “Here’s your Education Summary”. Click edit next to “Education Information”. When you get to the screen titled “Amount Used to Calculate Education Deduction or Credit”, verify the amount ($4000) you want to use or change it.

 

*An alternate would be to declare some of any  scholarships to be taxable. See full discussion below. 

__________________________________________________________________________________

Qualified Tuition Plans  (QTP 529 Plans) Distributions

General Discussion.

For 529 plans, there is an “owner” (usually the parent), and a “beneficiary” (usually the student dependent). The "recipient" of the distribution can be either the owner or the beneficiary depending on who the money was sent to. When the money goes directly from the Qualified Tuition Plan (QTP) to the school, the student is the "recipient". The distribution will be reported on IRS form 1099-Q. 
The 1099-Q gets reported on the recipient's return.** The recipient's name & SS# will be on the 1099-Q.
Even though the 1099-Q is going on the student's return, the 1098-T should go on the parent's return, so you can claim the education credit. You can do this because he is your dependent.

You can and should claim the tuition credit before claiming the 529 plan earnings exclusion. The educational expenses he claims for the 1099-Q should be reduced by the amount of educational expenses you claim for the credit.
But be aware, you can not double dip. You cannot count the same tuition money, for the tuition credit,  that gets him an exclusion from the taxability of the earnings (interest) on the 529 plan. Since the credit is more generous; use as much of the tuition as is needed for the credit and the rest for the interest exclusion. Another special rule allows you to claim the tuition credit even though it was "his" money that paid the tuition.
In addition, there is another rule that says the 10% penalty is waived if he was unable to cover the 529 plan withdrawal with educational expenses either because he got scholarships or the expenses were used (by him or the parents) to claim the credits. He'll have to pay tax on the earnings, at his lower tax rate (subject to the “kiddie tax”), but not the penalty.

 

Total qualified expenses (including room & board) less amounts paid by scholarship less amounts used to claim the Tuition credit equals the amount you can use to claim the earnings exclusion on the 1099-Q. 
Example:
  $10,000 in educational expenses(including room & board)

   -$3000 paid by tax free scholarship***

   -$4000 used to claim the American Opportunity credit

 =$3000 Can be used against the 1099-Q (usually on the student’s return)

 

Box 1 of the 1099-Q is $5000

Box 2 is $600

3000/5000=60% of the earnings are tax free

60%x600= $360

You have $240 of taxable income (600-360)

 

**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 still have to do the math to see if there were enough expenses left over for you to claim the tuition credit. Again, 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." 

***Another alternative is have the student report some of his scholarship as taxable income, to free up some expenses for the 1099-Q and/or tuition credit.

 

Dynamic AdsDynamic Ads
Privacy Settings
v