Can you use a qualified tuition program (529 Plan) and claim education tax credits?
States sponsor 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student’s qualified higher education expenses. 529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.
What are Qualified Tuition Expenses?
A student or the student’s parents may claim an education credit for qualified tuition and related expenses paid by or with funds from a QTP, provided the other eligibility requirements are met. However, an individual’s qualifying higher educational expenses must be reduced by tax-free education benefits plus the amount of the qualifying expenses taken into account in computing an education credit. The amount taken out would normally be things such as scholarships and employer-provided education assistance.
Also remember, if there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member.
More Information about Coverdell Education Savings Accounts
For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.