Pub. 4 2014-2015 Issue 4

8 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE An additional 10 percent penalty tax also may apply to the earnings, unless the designated beneficiary qualifies for a penalty tax exception. ALISON BRINK RETIREMENT SERVICES DIVISION OF ASCENSUS Unraveling Qualified Expenses for Coverdell ESAs W ith students back in school and those glaring tuition bills coming due, many of your Coverdell educa- tion savings account (ESA) mem- bers may be seeking distributions to help pay (or be reimbursed for) their education expenses. And because a designated beneficiary (the child for whom the ESA is established) does not pay taxes on ESA distributions if the as- sets are used for qualified education expenses incurred at an eligible education institution, members may have questions about whether their expenses are qualified. While the ESA’s designated beneficiary or responsible individual (often a parent or guardian) ultimately is responsible for deter- mining if education expenses are qualified, they often turn to the ESA administrator with questions. Eligible Education ESA assets generally can be used for ele- mentary and secondary education, as well as postsecondary education. Some taxpayers save for postsecondary education through qualified tuition programs, commonly referred to as “529 plans.” But 529 plan assets cannot be used for elementary or secondary education. Eligible Education Institutions Part of what makes qualified education expenses qualified is the fact that the expenses have to be incurred at an eligible education in- stitution. An eligible elementary or secondary school for ESA purposes is any public, private, or religious school that provides elementa- ry and secondary education (kindergarten through grade 12) as determined under state law. An eligible postsecondary school is any college, university, vocational school, or other postsecondary educational institution that is eligible to participate in student aid programs administered by the Department of Educa- tion. An eligible educational institution would include nearly all accredited public, nonprofit, and private postsecondary institutions. Qualified Education Expenses Not all education expenses qualify for tax-free ESA distributions. For example, cer- tain computer technology and equipment are qualified elementary and secondary expenses, but not qualified expenses for postsecondary education.