Education Distributions

What are qualified educational expenses?

ESAs tax-free withdrawals may be made to pay for qualifying educational expenses for a child’s kindergarten through 12th grade qualified expenses at a public, private, or parochial school, and for a child’s higher education. Qualified (K–12) education expenses include the following.

  • Tuition, fees, books, supplies, equipment, services for special needs children, and academic tutoring that are incurred in connection with enrollment or attendance
  • Room and board, uniforms, transportation, and supplementary items and services, such as extended day programs, that are required or provided by the school
  • Computer technology, computer equipment, or Internet access or related services used by the beneficiary while in school (Computer technology and equipment is defined as computer software and computer or peripheral equipment. This specifically excludes software designed for sports, games, or hobbies, unless the software is predominantly educational in nature.)
  • Contributions to a qualified tuition program

Qualified expenses  for higher education include the following.

  • Books, supplies, equipment, tuition, and fees required for enrollment or attendance
  • Room and board expenses for students enrolled in a post-secondary education institution at least half time
  • Services for special needs students
  • Contributions to a qualified tuition program
Can a child qualify for other tax credits if using an ESA?

A child may claim the American Opportunity Credit or Lifetime Learning Credit in the same tax year as she takes qualified distributions from an ESA. But the credit and the ESA distribution have to be used for different education expenses.

You also may make a contribution to both an ESA and a qualified tuition program for the same beneficiary in the same tax year.

What happens if a child does not use the money in his ESA?

If a child does not use the money in his ESA before he turns age 30, he can roll over the unused portion tax-free and penalty-free to another eligible family member who is under age 30 or who is a special needs beneficiary for whom no age limit currently applies. The IRS broadly defines family members to include among others, first cousins, a child’s siblings and step-siblings, and a child’s spouse and children. If not rolled over to another family member, any money remaining in the ESA when the child turns age 30 must be distributed, unless the child is a special needs beneficiary. And if the money isn’t used for educational purposes, the earnings will be included in your child’s gross income and will be subject to income taxes, as well as a 10 percent penalty tax. Taxes and penalties will apply only to the earnings because contributions were made with after-tax dollars.

Is there a penalty for using ESA money for nonqualified education expenses?

If a child withdraws money from her ESA at any time and for any purpose other than qualified education expenses, the child must pay income taxes on the earnings and a 10 percent additional penalty tax, unless an exception applies. Exceptions to the 10 percent penalty tax include distributions due to the disability or death of the child, and distributions made because the child received a qualified scholarship or certain other types of educational assistance.

Posted by Kelley Parks in Uncategorized.