Coverdell Educational Savings Accounts (ESAs) and Qualified Tuition Programs (QTPs), also called "section 529 plans," are accounts that help individuals save for the cost of elementary, high school or higher education. Generally, an individual can establish a Coverdell ESA for a child who is under age 18.
A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year.
The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. The taxable amount must be reported on Form 1040, line 21.
Be sure to note that the definition of qualified education expenses is different for the various education benefits. Qualified education expenses for ESAs and QTPs are summarized in Appendix B in the back of Publication 970. The details are outlined in the text of that publication.
Ask taxpayers questions to determine if they are using the funds for qualified education expenses.