Coverdell ESA Questions

[taug24]

Hello there,

I am in the process of amending my tax return for 2022. I am doing this because I was misinformed about a qualifying education expense -- (car -- loosely justified to get to school by parent).  I am having trouble figuring out the basis.

What should be done to calculate the basis if the company managing the ESA has no records of total contributions? Box 2 and 3 are left as $0 and am told I need to calculate it myself using a table from the IRS. — My ESA fund has been managed by more than one company over the years, and I did not find any records from them about total contributions dating years back.

 What should be done if the contributor has no records of contributions?  

How should this be reported if some of the distribution was used for a qualifying expense and some was not? I had later found out this year that one of my expenses did not qualify.

[Anonymous_]

@Hal_Al 

[taug24]

Apologies,

This question was answered in another thread. Not sure how to close this. Thank you!

Best,

taug

[Opus 17]

I'm not an expert on calculating the taxable portion of an ESA distribution, but the general rule for all income tax purposes is the IRS doesn't have to award any adjustment that you can't prove.  

“Deductions are a matter of legislative grace;
taxpayers bear the burden of substantiating their
claimed deductions by keeping and producing
records sufficient to enable the Commissioner to
determine the correct tax liability.” INDOPCO,
Inc. v. Comm’r, 503 U.S. 79, 84 (1992)

If you can't prove any basis, and you are audited, the IRS is allowed to assume the worst--your basis is zero and the entire excess amount is taxable.    

One position you could take is to guess at the amount of prior contributions and hope you aren't audited.  Another position would be to assume you have zero basis (since you can't prove a basis), and pay tax on the entire excess distribution.  I can't give you specific advice on what you should do.  You may want to consult a tax professional.  

[Opus 17]

I assume the current plan manager has records of contributions you made since you switched to that manager.  That would be a start, at least.  If the current plan manager doesn't have records of prior contributions, the prior plans might still have those records.  I don't know how long they are required to keep them.  Have you tried contacting the prior plans? 

[Hal_Al]

Answered at https://ttlc.intuit.com/community/taxes/discussion/how-to-answer-coverdell-esa-questions/00/2977745

[taug24]

I’m not sure. I’ll have to figure out what plan managers the ESA has gone through. I’ll take a look and reach out.

Thank you for your help!

taug