Coverdell ESA excess contribution help

[Crystal168]

Hi tax experts,

I have read several threads about tax issues related to excess contribution to Coverdell ESA.  I find myself in a similar condition and need some help.  We over contributed to our two kids' ESA accounts in 2020 and 2021.  I realized the issue last year and removed all the excess contributions in 2023.  As a result, I have two 1099Q forms, one for each kid.

My questions are:

1) I am using TurboTax premier CD version to file my tax. While I was able to input the numbers in the Coverdell ESA section, it appears that TurboTax did not provide me with the correct results. The worksheets show that the distributions were treated as if the excess contributions had occurred in 2022. Nowhere did the software prompt me to input information for the prior years 2020 and 2021. Did I miss something?

2) I saw experts mention that qualified education expenses, such as tuition, can correct the excess contributions to avoid the 6% tax each year. I have read Publication 970, Chapter 6, but was unable to find the relevant discussion. Could someone please suggest where I can find this information?

3)  For the qualified education expenses,  can I use tuitions in prior years 2021 and 2022?  Or the qualified education expenses must occur in the same year as the distribution, in my case 2023?

Thanks for your help!

[AmyC]

1. No, nothing missed.  Each year, you will enter the total excess still in the account on Dec 31. You will need to amend for prior year overages. The penalty is 6% per year.  Form 5329 will be generated when you remove the excess plus earnings.

2. Publication 970, Tax Benefits for Education page 47 contains information for excess. Distributions used for qualified expenses are tax free. Another thought that strikes me is a rollover to another Coverdell or a 529 account, that will have benefit in some states. See Coverdell ESA vs. 529 Plans: Which Is Right for You? as both might be the answer for you.

3. Since you are amending, you could claim education credits since the money was not distributed in 2021 and 2022. Distributions must be for the current year or first 3 months of the following year. See Qualified Education Expenses - Internal Revenue Service  & IRS Q & A about education credits

Amending help: 

• how to file an amended return. 
• I need to amend my state return.
• Can I e-file my amended state return?
• Can I e-file my 1040X to amend my return?

• Pay additional tax. Taxpayers who will owe more tax should file Form 1040-X and pay the tax as soon as possible to avoid penalties and interest. They should consider using IRS Direct Pay to pay any tax directly from a checking or savings account for free.
• Use separate forms if amending more than one tax year.
  • Each year on its own form
  • Each year in its own envelope
• Track amended return status online. Taxpayers can track the status of their amended tax return in English and Spanish using Where’s My Amended Return?  Amended returns take up to 16 weeks to process and up to three weeks from the date of mailing to show up in the system.
• Mail forms with tracking to ensure your privacy is protected and the documents safely reach their destination.

Additional help:

Why can't I amend my return?

instructions on How to Undo an Amendment.

Second Amendment instructions.

Mail federal  see Where to File Addresses for Taxpayers and be sure to use tracking to ensure safe arrival.

[Crystal168 · Accepted solution]

Hi Amy, 

Thanks for all the helpful information.   Can you please help me to check whether my understandings are correct:

1)  Even if I do have enough qualified education expenses in 2023, I still need to pay the 6% penalty for the prior years 2020, 2021 and 2022 because I didn't take the excess contributions out in a timely manner.  Correct?

2) I do not need to pay additional 10% tax for the earnings caused by the excess contributions, because I have the qualified education expenses in 2023.  Correct?

3) To pay the 6% penalty for 2020, 2021 and 2022,  I need file a separate Form 5329 for each year; i.e., a 5329 for 2020, a 5329 for 2021 and a 5329 for 2022.  Correct?

4) I still haven't figured out how to use TurboTax 2023 premier version to generate 5329 forms for 2020, 2021 and 2022.  The software only asks me for information about 2022 and 2023.  I never get any chance to input the years "2020", "2021".   Any guidelines on how to do that?  Do I need to use previous versions of TurboTax to generate 5329 forms for 2020 and 2021?

Thank you so much for your help!

[AmyC]

1. Yes

2. Yes

3. Yes

4. Yes Tax forms must be generated within the program for the matching year in order for the tax laws to be correct. You can find prior year forms at the IRS or use the software from your original return. You can save a copy of your return and mark that you want to  either add a state or amend to get back into the program and calculate the forms. 

All four answers are correct so you have a perfect score and and are ready to move forward! Best wishes!

If you go the IRS blank forms route, you need to enter the form and year in the search bar.

[Crystal168]

Thank you so much Amy.  All the best!