Distributions of earnings from a 529 or Coverdell ESA Plans are tax-exempt only to the extent the total distribution from the program does not exceed the beneficiary’s qualified education expenses, adjusted for any tax-free educational assistance. Thus, for purposes of a distribution from a college savings plan, the total qualified education expenses must be reduced by any tax-free:
- Scholarships or fellowships;
- Veterans’ educational assistance;
- Pell grants;
- Employer-provided educational assistance; and
- Other non-taxable payments, except gifts and inheritances, received as educational assistance.
Neither gifts nor inheritances are deducted from qualified education expenses to arrive at adjusted qualifiededucation expenses.
If your Qualified Education Expenses do not exceed the amount of the distribution, after having considered the GI Bill, the earnings will become Taxable Income. The GI Bill does not create an exception to an Unqualified Distribution from a 529 or Coverdell ESA Plan.
