OK, so if they are using the expenses for a credit, the earnings on the distribution are taxable to you. The IRS does allow Taxpayers to claim the distribution as income, even when it went directly to the school. You do not have to pay any penalty tax on the distribution, only the income tax. Ask your parents if you need to claim all the distribution or only a portion. If they used TurboTax, it would tell them how much you need to claim as income.According to the IRS: “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 the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit.
Example. Derek Green had $5,800 of qualified higher education expenses for 2017, his first year in college. He paid his college expenses from the following sources….
…Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return.
Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses.”
