these darn 1099Qs when theyre not used for education.....

[Just-Lisa-Now-]

Ive got a "kid" with over 170k in a Coverdell ESA, hes NOT going to be using it for educational purposes.

2023 they took 48k out of the account.  The 1099Q shows the 48k in box 1, but doesn't have anything as earnings or basis (not zeroes, just blank boxes).   How does it work when its been contributed to over 10 years?   Isnt that the job of the bank to show whats basis and whats earnings?  If earnings and basis are blank, is this just a return of investment?

Ive been goofing around with it and even when I put a basis and earnings in it, the entire 48k shows up as taxable AND subject to penalty.

Shouldn't only the earnings be taxable? I can understand the penalty on the full amount for not using it for school, but the entire thing shouldn't be taxable, it was funded with after tax dollars.  I have to be missing something somewhere.....

P.S. Every freaking person today was a train wreck, Im ready to lose my cool.

[TaxGuyBill]

I don't really know much about Coverdell accounts, but here are a few thoughts:

Quite annoyingly, it seems like they don't need to report Basis and Earnings (see citation below). I have no idea why.  Hopefully your client knows their Basis.

Yes, I believe that only the earnings are taxable.  Why the program is doing that, I'm not sure.  Is this the child's return and the child is the recipient?  Have you tried temporarily saying that the child is a student (in case it is a glitch in the program and won't calculate things correctly unless it thinks the taxpayer is a student)?

I wish I could help you further, but I've never dealt with a Coverdell before.

For 2023, instead of dividing the gross distribution between your earnings (box 2) and your basis (amount already taxed) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2023. This will be shown in the blank box below boxes 5 and 6.

https://www.irs.gov/publications/p970#en_US_2023_publink1000178472

[Just-Lisa-Now-]

Its the kids return, its in his SSN.  He's not a student and with this income hes got too much to be a dependent.  The kid joined the military and the GI Bill paid for all his schooling, so hes got no need for this to be used for education.

Parent has been dumping money into it for 10 years, she said it started as an educational ROTH or something like that?   Then it changed it to a Coverdell ESA.

Looks like its all been invested in stocks, Mom was under the assumption that it would be capital gains, since they had to sell stock to get the distribution....so Ive got the basis of the stocks that were sold to distribute the money, but Im not sure if that would be the basis for this distribution.

She also made ROTH contributions for him for 2023 and 2024, but hes got NO earned income, so I made her take those out ASAP.

I'll fiddle with it some more and mark him as a student with no expenses and see what happens.

[TaxGuyBill]

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@Just-Lisa-Now- wrote:

He's not a student

GI Bill paid for all his schooling,

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Was the "schooling" in a prior year or in the current year?  Qualified educational expenses that were paid by the GI Bill should reduce the penalty.

[Just-Lisa-Now-]

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@TaxGuyBill wrote:

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@Just-Lisa-Now- wrote:

He's not a student

GI Bill paid for all his schooling,

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Was the "schooling" in a prior year or in the current year?  Qualified educational expenses that were paid by the GI Bill should reduce the penalty.

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@TaxGuyBill wrote:

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@Just-Lisa-Now- wrote:

He's not a student

GI Bill paid for all his schooling,

---

Was the "schooling" in a prior year or in the current year?  Qualified educational expenses that were paid by the GI Bill should reduce the penalty.

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I was under the impression it was prior years, but maybe I misunderstood.   WTF to people wait until April to bring in weird stuff like this!

[Just-Lisa-Now-]

OK, it finally all clicked in my head why it was taxing so much of the distribution!   It looks at the basis of original contributions and the value in the account at the end of the year and does the math for how much of that original basis can be used against this particular distribution.

Sometimes I just need to let stuff marinade in my brain for a few days!