Coverdell Education Savings Accounts: What exactly do they offer?

Coverdell Education Savings Accounts (ESAs), previously known as Education IRAs, are trusts created exclusively for the purpose of paying the qualified education expenses of the designated beneficiary of the trust.

The tax treatment of Coverdell ESAs is similar to that of other education savings plans (529), with a few important differences:

• The maximum contribution amount is $2,000 per beneficiary from all sources per year.
• Coverdell accounts may be owned by the student or the student’s parent.
• Contributions may be made until the beneficiary reaches age 18.
• Contributions must be in the form of cash. Contributions of stocks, bonds, and other savings vehicles are not permitted.
• Contributions are phased out for incomes between $95,000 and $110,000 for single filers and $190,000 and $220,000 for married filing jointly.
• The money must be used by the time the child reaches age 30 or the earnings will be taxed as ordinary income plus a 10% penalty.
• Coverdell accounts may be rolled over to the Coverdell account of a family member of the previous beneficiary.
• Coverdell accounts allow almost any investment inside including stocks, bonds, and mutual funds.
• Contributions are not deductible on federal or state income tax returns, but earnings accumulate tax-free.
• Qualified distributions are exempt from federal income tax.
• Qualified expenses include primary, secondary, and postsecondary education expenses, including tuition, fees, tutoring, books, supplies, related equipment, room and board, uniforms, transportation and computers.
• You can claim the American opportunity credit and/or Lifetime Learning tax credit in the same year as you withdraw funds from a Coverdell Account, so long as the credits are claimed using different qualified education expenses than those paid from the Coverdell distribution.
• You can’t use the same expenses to justify two different programs.

Direct Deposit Limits: IRS announces new procedures

In an effort to combat fraud and identity theft, the IRS announced new procedures effective January 2015 that limits to three the number of refunds electronically deposited into a single financial account or pre-paid debit card. The fourth and subsequent refunds automatically will convert to a paper refund check, which will be mailed to the taxpayer listed on the tax return. The direct deposit limit will prevent criminals from easily obtaining multiple refunds.

These new procedures will affect your family if multiple family members deposit their tax refund into the same bank account. If this affects you, please let us know at your tax season appointment.