Coverdell ESA distribution

[RitaB]

Kid's qualifying education expenses (adjusted for scholarships, grants) are 1,000.  (There is no room and board; tuition and books only.) 

1099-Q issued to kid:  Gross Distribution = 1,000.  Earnings = 200.  Basis = 800.

Do I have this right?  Can I do either of these two things (assuming all the stars are aligned for parents to qualify for education credits)?

1)  Report the 200 on kid's return as income.  Not subject to 10% penalty because he DID use the entire distribution for education expenses.  Take the 1,000 expenses on parent's return.

2)  Report nothing on kid's return, and take 800 expenses on parents' return.

 

[RitaB]

After reading further, I think #2 is not an option.  If the grand total of kid's expenses are 1,000 and he does not pay tax on the earnings, the parents cannot use any education expenses for education credit purposes.

[Catherine]

1 hour ago, RitaB said:

After reading further, I think #2 is not an option.  If the grand total of kid's expenses are 1,000 and he does not pay tax on the earnings, the parents cannot use any education expenses for education credit purposes.

But if the parents count the $200 as taxable income, they might get  a smidgen of tax credit.  For $200 it's probably not worth the bother, though, once you go through it all.  How desperate are they to save ~$20 in taxes?

[RitaB]

Option #1 saves the family $980.  Parents get $1,000 AOC and kid pays $20 by reporting the interest.  Obviously that's what I did.  But I'd like to know if I have it correct in my mind now - that Option #2 is not even possible.  If they save the tax on the earnings, they in essence waste the AOC completely. 

I think that's why ESA are pushed on the "wealthy" - here's your only chance at saving any money on college expenses cause your income is too high to get credits. 

[Catherine]

9 minutes ago, RitaB said:

Option #1 saves the family $980.  Parents get $1,000 AOC and kid pays $20 by reporting the interest.  Obviously that's what I did.  But I'd like to know if I have it correct in my mind now - that Option #2 is not even possible.  If they save the tax on the earnings, they in essence waste the AOC completely. 

I think that's why ESA are pushed on the "wealthy" - here's your only chance at saving any money on college expenses cause your income is too high to get credits. 

Got it in one.  Take the income so you can get the credit.  And your use of "wealthy" really does belong in quotes.  I have seen far too many clients get *nothing* for grants or scholarships because of income that is "too high" and also have AGI "too high" for credits, who have a 80-year-old 3-bedroom house that needs a new roof they cannot afford to replace.  Too high my hindquarters.

[jasdlm]

I agree with Catherine.  I often take the income so I can get the credit for clients.  They often end up several hundred dollars ahead.

[RitaB]

30 minutes ago, Catherine said:

And your use of "wealthy" really does belong in quotes.  I have seen far too many clients get *nothing* for grants or scholarships because of income that is "too high" and also have AGI "too high" for credits, who have a 80-year-old 3-bedroom house that needs a new roof they cannot afford to replace.  Too high my hindquarters.

Yes, I have two in college and I'm too rich as a single mom to take credits.  Really?  I mean, really?

[Lion EA]

Congress' definition of wealthy is someone with a job who's not on EIC.

[Catherine]

1 hour ago, Lion EA said:

Congress' definition of wealthy is someone with a job who's not on EIC.

And most people's definition of wealthy is "someone who makes $30K more than we do" or similar.  Works whether they make $30K or $330K.  

[RitaB]

1 hour ago, Catherine said:

And most people's definition of wealthy is "someone who makes $30K more than we do" or similar.  Works whether they make $30K or $330K.  

Yes, and "old" is always 20 years older than I am.

[GeneInAlabama]

So old is when a person becomes a hundred years old.

 

[GeneInAlabama]

I wasn't referring to Rita.  I was referring to me.

 

[Catherine]

Hey; eighty is the new sixty!