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Free tax programs 7. Free tax programs   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Free tax programs For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Free tax programs There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Free tax programs However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Free tax programs See Contributions , later. Free tax programs This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Free tax programs What is the tax benefit of the Coverdell ESA. Free tax programs   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Free tax programs   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Free tax programs See Tax-Free Distributions , later. Free tax programs    Table 7-1 summarizes the main features of the Coverdell ESA. Free tax programs Table 7-1. Free tax programs Coverdell ESA at a Glance Do not rely on this table alone. Free tax programs It provides only general highlights. Free tax programs See the text for definitions of terms in bold type and for more complete explanations. Free tax programs Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Free tax programs Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Free tax programs Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Free tax programs Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Free tax programs Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Free tax programs What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Free tax programs When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Free tax programs To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Free tax programs The document creating and governing the account must be in writing and must satisfy the following requirements. Free tax programs The trustee or custodian must be a bank or an entity approved by the IRS. Free tax programs The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Free tax programs The contribution is in cash. Free tax programs The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free tax programs The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Free tax programs Money in the account cannot be invested in life insurance contracts. Free tax programs Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Free tax programs The balance in the account generally must be distributed within 30 days after the earlier of the following events. Free tax programs The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Free tax programs The beneficiary's death. Free tax programs Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Free tax programs For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Free tax programs Designated beneficiary. Free tax programs   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Free tax programs Contributions to a qualified tuition program (QTP). Free tax programs   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Free tax programs In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Free tax programs See chapter 8, Qualified Tuition Program . Free tax programs Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Free tax programs Eligible postsecondary school. Free tax programs   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free tax programs S. Free tax programs Department of Education. Free tax programs It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free tax programs The educational institution should be able to tell you if it is an eligible educational institution. Free tax programs   Certain educational institutions located outside the United States also participate in the U. Free tax programs S. Free tax programs Department of Education's Federal Student Aid (FSA) programs. Free tax programs Eligible elementary or secondary school. Free tax programs   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Free tax programs Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Free tax programs As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Free tax programs The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Free tax programs Tuition and fees. Free tax programs Books, supplies, and equipment. Free tax programs Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Free tax programs Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Free tax programs The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Free tax programs The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Free tax programs The actual amount charged if the student is residing in housing owned or operated by the school. Free tax programs Half-time student. Free tax programs   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Free tax programs Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Free tax programs As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Free tax programs There are special rules for computer-related expenses. Free tax programs The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Free tax programs Tuition and fees. Free tax programs Books, supplies, and equipment. Free tax programs Academic tutoring. Free tax programs Special needs services for a special needs beneficiary. Free tax programs The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Free tax programs Room and board. Free tax programs Uniforms. Free tax programs Transportation. Free tax programs Supplementary items and services (including extended day programs). Free tax programs The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Free tax programs (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Free tax programs ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Free tax programs For individuals filing joint returns, that amount is $220,000. Free tax programs Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Free tax programs There is no requirement that an organization's income be below a certain level. Free tax programs Contributions must meet all of the following requirements. Free tax programs They must be in cash. Free tax programs They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free tax programs They must be made by the due date of the contributor's tax return (not including extensions). Free tax programs Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Free tax programs Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Free tax programs Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Free tax programs When contributions considered made. Free tax programs   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Free tax programs They must be made by the due date (not including extensions) for filing your return for the preceding year. Free tax programs   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Free tax programs Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Free tax programs Limit for each designated beneficiary. Free tax programs   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Free tax programs This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Free tax programs Rollovers are discussed under Rollovers and Other Transfers , later. Free tax programs Example. Free tax programs When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Free tax programs In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Free tax programs For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Free tax programs Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Free tax programs These contributions could be put into any of Maria's Coverdell ESA accounts. Free tax programs Limit for each contributor. Free tax programs   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Free tax programs This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Free tax programs Example. Free tax programs The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Free tax programs If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Free tax programs Reduced limit. Free tax programs   Your contribution limit may be reduced. Free tax programs If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Free tax programs If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Free tax programs Table 7-2. Free tax programs Coverdell ESA Contributions at a Glance Do not rely on this table alone. Free tax programs It provides only general highlights. Free tax programs See the text for more complete explanations. Free tax programs Question Answer Are contributions deductible? No. Free tax programs What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Free tax programs What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Free tax programs What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Free tax programs Can contributions other than cash be made to a Coverdell ESA? No. Free tax programs When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Free tax programs Modified adjusted gross income (MAGI). Free tax programs   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free tax programs MAGI when using Form 1040A. Free tax programs   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free tax programs MAGI when using Form 1040. Free tax programs   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free tax programs MAGI when using Form 1040NR. Free tax programs   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Free tax programs MAGI when using Form 1040NR-EZ. Free tax programs   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Free tax programs   If you have any of these adjustments, you can use Worksheet 7-1. Free tax programs MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Free tax programs Worksheet 7-1. Free tax programs MAGI for a Coverdell ESA 1. Free tax programs Enter your adjusted gross income  (Form 1040, line 38)   1. Free tax programs   2. Free tax programs Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free tax programs       3. Free tax programs Enter your foreign housing deduction (Form 2555, line 50)   3. Free tax programs         4. Free tax programs Enter the amount of income from Puerto Rico you are excluding   4. Free tax programs       5. Free tax programs Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free tax programs       6. Free tax programs Add lines 2, 3, 4, and 5   6. Free tax programs   7. Free tax programs Add lines 1 and 6. Free tax programs This is your  modified adjusted gross income   7. Free tax programs   Figuring the limit. Free tax programs    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Free tax programs The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Free tax programs The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Free tax programs Subtract the result from $2,000. Free tax programs This is the amount you can contribute for each beneficiary. Free tax programs You can use Worksheet 7-2. Free tax programs Coverdell ESA Contribution Limit to figure the limit on contributions. Free tax programs    Worksheet 7-2. Free tax programs Coverdell ESA Contribution Limit 1. Free tax programs Maximum contribution   1. Free tax programs $2,000 2. Free tax programs Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Free tax programs   3. Free tax programs Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free tax programs   4. Free tax programs Subtract line 3 from line 2. Free tax programs If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free tax programs   5. Free tax programs Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free tax programs     Note. Free tax programs If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Free tax programs You are not allowed to contribute to a Coverdell ESA for 2013. Free tax programs       6. Free tax programs Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free tax programs . Free tax programs 7. Free tax programs Multiply line 1 by line 6   7. Free tax programs   8. Free tax programs Subtract line 7 from line 1   8. Free tax programs   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free tax programs Example. Free tax programs Paul, who is single, had a MAGI of $96,500 for 2013. Free tax programs Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Free tax programs Worksheet 7-2. Free tax programs Coverdell ESA Contribution Limit—Illustrated 1. Free tax programs Maximum contribution   1. Free tax programs $2,000 2. Free tax programs Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Free tax programs 96,500 3. Free tax programs Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free tax programs 95,000 4. Free tax programs Subtract line 3 from line 2. Free tax programs If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free tax programs 1,500 5. Free tax programs Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free tax programs 15,000   Note. Free tax programs If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Free tax programs You are not allowed to  contribute to a Coverdell ESA for 2013. Free tax programs       6. Free tax programs Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free tax programs . Free tax programs 100 7. Free tax programs Multiply line 1 by line 6   7. Free tax programs 200 8. Free tax programs Subtract line 7 from line 1   8. Free tax programs 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free tax programs Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Free tax programs Excess contributions are the total of the following two amounts. Free tax programs Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Free tax programs Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Free tax programs Exceptions. Free tax programs   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Free tax programs   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Free tax programs You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Free tax programs Box 2 of that form will show the amount of earnings on your excess contributions. Free tax programs Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Free tax programs See Instructions for Recipient on the back of copy B of your Form 1099-Q. Free tax programs Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Free tax programs For more information, see Taxable Distributions , later. Free tax programs   The excise tax does not apply to any rollover contribution. Free tax programs Note. Free tax programs Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Free tax programs Example. Free tax programs In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Free tax programs Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Free tax programs In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Free tax programs Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Free tax programs (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Free tax programs Figuring and reporting the additional tax. Free tax programs   You figure this excise tax in Part V of Form 5329. Free tax programs Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Free tax programs Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Free tax programs The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Free tax programs Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Free tax programs This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free tax programs An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Free tax programs Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Free tax programs These are not taxable distributions. Free tax programs Members of the beneficiary's family. Free tax programs   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Free tax programs Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Free tax programs Brother, sister, stepbrother, or stepsister. Free tax programs Father or mother or ancestor of either. Free tax programs Stepfather or stepmother. Free tax programs Son or daughter of a brother or sister. Free tax programs Brother or sister of father or mother. Free tax programs Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Free tax programs The spouse of any individual listed above. Free tax programs First cousin. Free tax programs Example. Free tax programs When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Free tax programs He wanted to give this money to his younger sister, who was still in high school. Free tax programs In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Free tax programs Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Free tax programs This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Free tax programs Military death gratuity. Free tax programs   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Free tax programs Such payments are made to an eligible survivor upon the death of a member of the armed forces. Free tax programs The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Free tax programs   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Free tax programs The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Free tax programs   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Free tax programs See Distributions , later. Free tax programs The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Free tax programs Changing the Designated Beneficiary The designated beneficiary can be changed. Free tax programs See Members of the beneficiary's family , earlier. Free tax programs There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Free tax programs Example. Free tax programs Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Free tax programs Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Free tax programs Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Free tax programs After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Free tax programs Example. Free tax programs In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Free tax programs In this process, the account was transferred into her name. Free tax programs Peg now treats the funds in this Coverdell ESA as if she were the original owner. Free tax programs Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Free tax programs Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Free tax programs See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Free tax programs Table 7-3. Free tax programs Coverdell ESA Distributions at a Glance Do not rely on this table alone. Free tax programs It provides only general highlights. Free tax programs See the text for definitions of terms in bold type and for more complete explanations. Free tax programs Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Free tax programs After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Free tax programs Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Free tax programs Also, certain transfers to members of the beneficiary's family are permitted. Free tax programs Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Free tax programs Adjusted qualified education expenses. Free tax programs   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Free tax programs Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free tax programs The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Free tax programs Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Free tax programs Do not report tax-free distributions (including qualifying rollovers) on your tax return. Free tax programs Taxable Distributions 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. Free tax programs Excess distribution. Free tax programs   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Free tax programs Earnings and basis. Free tax programs   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Free tax programs The amount of your gross distribution will be shown in box 1. Free tax programs For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Free tax programs This will be shown in the blank box below boxes 5 and 6. Free tax programs   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Free tax programs Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Free tax programs Figure the taxable portion for 2013 as shown in the following steps. Free tax programs Multiply the total amount distributed by a fraction. Free tax programs The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Free tax programs Subtract the amount figured in (1) from the total amount distributed during 2013. Free tax programs The result is the amount of earnings included in the distribution(s). Free tax programs Multiply the amount of earnings figured in (2) by a fraction. Free tax programs The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Free tax programs Subtract the amount figured in (3) from the amount figured in (2). Free tax programs The result is the amount the beneficiary must include in income. Free tax programs The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Free tax programs Example. Free tax programs You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Free tax programs There were no contributions in 2013. Free tax programs This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Free tax programs The value (balance) of your account on December 31, 2013, was $950. Free tax programs You had $700 of adjusted qualified education expenses (AQEE) for the year. Free tax programs Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Free tax programs   1. Free tax programs $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Free tax programs $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Free tax programs $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Free tax programs $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Free tax programs Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Free tax programs Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Free tax programs Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Free tax programs This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Free tax programs Example. Free tax programs Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Free tax programs He paid his college expenses from the following sources. Free tax programs     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Free tax programs Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Free tax programs Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Free tax programs     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Free tax programs The balance in Derek's account was $1,800 on December 31, 2013. Free tax programs Prior to 2013, $2,100 had been contributed to this account. Free tax programs Contributions for 2013 totaled $400. Free tax programs Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Free tax programs   1. Free tax programs $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Free tax programs $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Free tax programs $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Free tax programs $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Free tax programs This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Free tax programs Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Free tax programs The following two examples illustrate possible allocations. Free tax programs Example 1. Free tax programs In 2013, Beatrice graduated from high school and began her first semester of college. Free tax programs That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Free tax programs To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Free tax programs No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Free tax programs She did not receive any tax-free educational assistance in 2013. Free tax programs Beatrice must allocate her total qualified education expenses between the two distributions. Free tax programs Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Free tax programs The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Free tax programs Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Free tax programs She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Free tax programs Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Free tax programs (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Free tax programs ) Example 2. Free tax programs Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Free tax programs In this case, she allocates her qualified education expenses as follows. Free tax programs Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Free tax programs Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Free tax programs   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Free tax programs See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Free tax programs   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Free tax programs The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Free tax programs However, you do not have to allocate your expenses in the same way. Free tax programs You can use any reasonable method. Free tax programs Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Free tax programs You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Free tax programs Your basis is the total amount of contributions to that Coverdell ESA. Free tax programs You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Free tax programs If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Free tax programs ) from all such accounts in order to determine your taxable earnings for the year. Free tax programs By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Free tax programs For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Free tax programs Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Free tax programs Exceptions. Free tax programs   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Free tax programs Made because the designated beneficiary is disabled. Free tax programs A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Free tax programs A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Free tax programs Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free tax programs Made on account of the attendance of the designated beneficiary at a U. Free tax programs S. Free tax programs military academy (such as the USMA at West Point). Free tax programs This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Free tax programs S. Free tax programs Code) attributable to such attendance. Free tax programs Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Free tax programs Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Free tax programs The distributed earnings must be included in gross income for the year in which the excess contribution was made. Free tax programs Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Free tax programs Figuring the additional tax. Free tax programs    Use Part II of Form 5329, to figure any additional tax. Free tax programs Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Free tax programs When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Free tax programs The designated beneficiary reaches age 30. Free tax programs In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Free tax programs However, this rule does not apply if the beneficiary is a special needs beneficiary. Free tax programs The designated beneficiary dies before reaching age 30. Free tax programs In this case, the remaining assets must generally be distributed within 30 days after the date of death. Free tax programs Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Free tax programs (“Family member” was defined earlier under Rollovers . Free tax programs ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Free tax programs This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free tax programs There are no tax consequences as a result of the transfer. Free tax programs How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Free tax programs You determine these earnings as shown in the following two steps. Free tax programs Multiply the amount distributed by a fraction. Free tax programs The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Free tax programs Subtract the amount figured in (1) from the total amount distributed during 2013. Free tax programs The result is the amount of earnings included in the distribution. Free tax programs For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Free tax programs The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Free tax programs Worksheet 7-3 Instructions. Free tax programs Coverdell ESA—Taxable Distributions and Basis Line G. Free tax programs Enter the total distributions received from all Coverdell ESAs during 2013. Free tax programs Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Free tax programs Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Free tax programs Line 2. Free tax programs Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Free tax programs   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Free tax programs For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Free tax programs For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Free tax programs You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Free tax programs Line 4. Free tax programs Enter the total distributions received from this Coverdell ESA in 2013. Free tax programs Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Free tax programs   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Free tax programs Line 7. Free tax programs Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Free tax programs A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Free tax programs   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Free tax programs An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Free tax programs Worksheet 7-3. Free tax programs Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Free tax programs • • • Complete Part I, lines A through H, on only one worksheet. Free tax programs  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Free tax programs  Complete Part III, the Summary (line 16), on only one worksheet. Free tax programs Part I. Free tax programs Qualified Education Expenses (Complete for total expenses)       A. Free tax programs Enter your total qualified education expenses for 2013   A. Free tax programs   B. Free tax programs Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Free tax programs         C. Free tax programs Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Free tax programs Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Free tax programs         D. Free tax programs Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Free tax programs         E. Free tax programs Add lines B, C, and D   D. Free tax programs   F. Free tax programs Subtract line E from line A. Free tax programs This is your adjusted qualified education expense for 2013   E. Free tax programs   G. Free tax programs Enter your total distributions from all Coverdell ESAs during 2013. Free tax programs Do not include rollovers  or the return of excess contributions (see instructions)   F. Free tax programs   H. Free tax programs Divide line F by line G. Free tax programs Enter the result as a decimal (rounded to at least 3 places). Free tax programs If the  result is 1. Free tax programs 000 or more, enter 1. Free tax programs 000   G. Free tax programs . Free tax programs Part II. Free tax programs Taxable Distributions and Basis (Complete separately for each account) 1. Free tax programs Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Free tax programs Do not include rollovers or the return of excess contributions   1. Free tax programs   2. Free tax programs Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Free tax programs   3. Free tax programs Add lines 1 and 2   3. Free tax programs   4. Free tax programs Enter the total distributions from this Coverdell ESA during 2013. Free tax programs Do not include rollovers  or the return of excess contributions (see instructions)   4. Free tax programs   5. Free tax programs Multiply line 4 by line H. Free tax programs This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Free tax programs         6. Free tax programs Subtract line 5 from line 4   6. Free tax programs         7. Free tax programs Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Free tax programs         8. Free tax programs Add lines 4 and 7   8. Free tax programs         9. Free tax programs Divide line 3 by line 8. Free tax programs Enter the result as a decimal (rounded to  at least 3 places). Free tax programs If the result is 1. Free tax programs 000 or more, enter 1. Free tax programs 000   9. Free tax programs . Free tax programs       10. Free tax programs Multiply line 4 by line 9. Free tax programs This is the amount of basis allocated to your  distributions, and is tax free   10. Free tax programs     Note. Free tax programs If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Free tax programs       11. Free tax programs Subtract line 10 from line 4   11. Free tax programs   12. Free tax programs Divide line 5 by line 4. Free tax programs Enter the result as a decimal (rounded to  at least 3 places). Free tax programs If the result is 1. Free tax programs 000 or more, enter 1. Free tax programs 000   12. Free tax programs . Free tax programs       13. Free tax programs Multiply line 11 by line 12. Free tax programs This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Free tax programs   14. Free tax programs Subtract line 13 from line 11. Free tax programs This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Free tax programs   15. Free tax programs Subtract line 10 from line 3. Free tax programs This is your basis in this Coverdell ESA as of December 31, 2013   15. Free tax programs   Part III. Free tax programs Summary (Complete only once)       16. Free tax programs Taxable amount. Free tax programs Add together all amounts on line 14 for all your Coverdell ESAs. Free tax programs Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Free tax programs   Prev  Up  Next   Home   More Online Publications
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The Free Tax Programs

Free tax programs 20. Free tax programs   Standard Deduction Table of Contents What's New Introduction Standard Deduction Amount Standard Deduction for Dependents Who Should ItemizeWhen to itemize. Free tax programs Married persons who filed separate returns. Free tax programs What's New Standard deduction increased. Free tax programs  The standard deduction for some taxpayers who do not itemize their deductions on Schedule A (Form 1040) is higher for 2013 than it was for 2012. Free tax programs The amount depends on your filing status. Free tax programs You can use the 2013 Standard Deduction Tables in this chapter to figure your standard deduction. Free tax programs Introduction This chapter discusses the following topics. Free tax programs How to figure the amount of your standard deduction. Free tax programs The standard deduction for dependents. Free tax programs Who should itemize deductions. Free tax programs Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions. Free tax programs If you have a choice, you can use the method that gives you the lower tax. Free tax programs The standard deduction is a dollar amount that reduces your taxable income. Free tax programs It is a benefit that eliminates the need for many taxpayers to itemize actual deductions, such as medical expenses, charitable contributions, and taxes, on Schedule A (Form 1040). Free tax programs The standard deduction is higher for taxpayers who: Are 65 or older, or Are blind. Free tax programs You benefit from the standard deduction if your standard deduction is more than the total of your allowable itemized deductions. Free tax programs Persons not eligible for the standard deduction. Free tax programs   Your standard deduction is zero and you should itemize any deductions you have if: Your filing status is married filing separately, and your spouse itemizes deductions on his or her return, You are filing a tax return for a short tax year because of a change in your annual accounting period, or You are a nonresident or dual-status alien during the year. Free tax programs You are considered a dual-status alien if you were both a nonresident and resident alien during the year. Free tax programs Note. Free tax programs If you are a nonresident alien who is married to a U. Free tax programs S. Free tax programs citizen or resident alien at the end of the year, you can choose to be treated as a U. Free tax programs S. Free tax programs resident. Free tax programs (See Publication 519, U. Free tax programs S. Free tax programs Tax Guide for Aliens. Free tax programs ) If you make this choice, you can take the standard deduction. Free tax programs If an exemption for you can be claimed on another person's return (such as your parents' return), your standard deduction may be limited. Free tax programs See Standard Deduction for Dependents, later. Free tax programs Standard Deduction Amount The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. Free tax programs Generally, the standard deduction amounts are adjusted each year for inflation. Free tax programs The standard deduction amounts for most people are shown in Table 20-1. Free tax programs Decedent's final return. Free tax programs   The standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. Free tax programs However, if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed. Free tax programs Higher Standard Deduction for Age (65 or Older) If you are age 65 or older on the last day of the year and do not itemize deductions, you are entitled to a higher standard deduction. Free tax programs You are considered 65 on the day before your 65th birthday. Free tax programs Therefore, you can take a higher standard deduction for 2013 if you were born before January 2, 1949. Free tax programs Use Table 20-2 to figure the standard deduction amount. Free tax programs Higher Standard Deduction for Blindness If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. Free tax programs Not totally blind. Free tax programs   If you are not totally blind, you must get a certified statement from an eye doctor (ophthalmologist or optometrist) that: You cannot see better than 20/200 in the better eye with glasses or contact lenses, or Your field of vision is 20 degrees or less. Free tax programs   If your eye condition is not likely to improve beyond these limits, the statement should include this fact. Free tax programs You must keep the statement in your records. Free tax programs   If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers, you can take the higher standard deduction for blindness if you otherwise qualify. Free tax programs Spouse 65 or Older or Blind You can take the higher standard deduction if your spouse is age 65 or older or blind and: You file a joint return, or You file a separate return and can claim an exemption for your spouse because your spouse had no gross income and cannot be claimed as a dependent by another taxpayer. Free tax programs You cannot claim the higher standard deduction for an individual other than yourself and your spouse. Free tax programs Examples The following examples illustrate how to determine your standard deduction using Tables 20-1 and 20-2. Free tax programs Example 1. Free tax programs Larry, 46, and Donna, 33, are filing a joint return for 2013. Free tax programs Neither is blind, and neither can be claimed as a dependent. Free tax programs They decide not to itemize their deductions. Free tax programs They use Table 20-1. Free tax programs Their standard deduction is $12,200. Free tax programs Example 2. Free tax programs The facts are the same as in Example 1 except that Larry is blind at the end of 2013. Free tax programs Larry and Donna use Table 20-2. Free tax programs Their standard deduction is $13,400. Free tax programs Example 3. Free tax programs Bill and Lisa are filing a joint return for 2013. Free tax programs Both are over age 65. Free tax programs Neither is blind, and neither can be claimed as a dependent. Free tax programs If they do not itemize deductions, they use Table 20-2. Free tax programs Their standard deduction is $14,600. Free tax programs Standard Deduction for Dependents The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the greater of: $1,000, or The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $6,100). Free tax programs However, if the individual is 65 or older or blind, the standard deduction may be higher. Free tax programs If you (or your spouse, if filing jointly) can be claimed as a dependent on someone else's return, use Table 20-3 to determine your standard deduction. Free tax programs Earned income defined. Free tax programs   Earned income is salaries, wages, tips, professional fees, and other amounts received as pay for work you actually perform. Free tax programs    For purposes of the standard deduction, earned income also includes any part of a scholarship or fellowship grant that you must include in your gross income. Free tax programs See Scholarships and fellowships in chapter 12 for more information on what qualifies as a scholarship or fellowship grant. Free tax programs Example 1. Free tax programs Michael is single. Free tax programs His parents can claim an exemption for him on their 2013 tax return. Free tax programs He has interest income of $780 and wages of $150. Free tax programs He has no itemized deductions. Free tax programs Michael uses Table 20-3 to find his standard deduction. Free tax programs He enters $150 (his earned income) on line 1, $500 ($150 + $350) on line 3, $1,000 (the larger of $500 and $1,000) on line 5, and $6,100 on line 6. Free tax programs His standard deduction, on line 7a, is $1,000 (the smaller of $1,000 and $6,100). Free tax programs Example 2. Free tax programs Joe, a 22-year-old full-time college student, can be claimed as a dependent on his parents' 2013 tax return. Free tax programs Joe is married and files a separate return. Free tax programs His wife does not itemize deductions on her separate return. Free tax programs Joe has $1,500 in interest income and wages of $3,800. Free tax programs He has no itemized deductions. Free tax programs Joe finds his standard deduction by using Table 20-3. Free tax programs He enters his earned income, $3,800 on line 1. Free tax programs He adds lines 1 and 2 and enters $4,150 on line 3. Free tax programs On line 5, he enters $4,150, the larger of lines 3 and 4. Free tax programs Because Joe is married filing a separate return, he enters $6,100 on line 6. Free tax programs On line 7a he enters $4,150 as his standard deduction because it is smaller than $6,100, the amount on line 6. Free tax programs Example 3. Free tax programs Amy, who is single, can be claimed as a dependent on her parents' 2013 tax return. Free tax programs She is 18 years old and blind. Free tax programs She has interest income of $1,300 and wages of $2,900. Free tax programs She has no itemized deductions. Free tax programs Amy uses Table 20-3 to find her standard deduction. Free tax programs She enters her wages of $2,900 on line 1. Free tax programs She adds lines 1 and 2 and enters $3,250 on line 3. Free tax programs On line 5, she enters $3,250, the larger of lines 3 and 4. Free tax programs Because she is single, Amy enters $6,100 on line 6. Free tax programs She enters $3,250 on line 7a. Free tax programs This is the smaller of the amounts on lines 5 and 6. Free tax programs Because she checked one box in the top part of the worksheet, she enters $1,500 on line 7b. Free tax programs She then adds the amounts on lines 7a and 7b and enters her standard deduction of $4,750 on line 7c. Free tax programs Example 4. Free tax programs Ed is single. Free tax programs His parents can claim an exemption for him on their 2013 tax return. Free tax programs He has wages of $7,000, interest income of $500, and a business loss of $3,000. Free tax programs He has no itemized deductions. Free tax programs Ed uses Table 20-3 to figure his standard deduction. Free tax programs He enters $4,000 ($7,000 - $3,000) on line 1. Free tax programs He adds lines 1 and 2 and enters $4,350 on line 3. Free tax programs On line 5 he enters $4,350, the larger of lines 3 and 4. Free tax programs Because he is single, Ed enters $6,100 on line 6. Free tax programs On line 7a he enters $4,350 as his standard deduction because it is smaller than $6,100, the amount on line 6. Free tax programs Who Should Itemize You should itemize deductions if your total deductions are more than the standard deduction amount. Free tax programs Also, you should itemize if you do not qualify for the standard deduction, as discussed earlier under Persons not eligible for the standard deduction . Free tax programs You should first figure your itemized deductions and compare that amount to your standard deduction to make sure you are using the method that gives you the greater benefit. Free tax programs You may be subject to a limit on some of your itemized deductions if your adjusted gross income is more than: $250,000 if single ($275,000 if head of household, $300,000 if married filing jointly or qualifying widow(er); or $150,000 if married filing separately). Free tax programs See chapter 29 or the instructions for Schedule A (Form 1040) for more information on figuring the correct amount of your itemized deductions. Free tax programs When to itemize. Free tax programs   You may benefit from itemizing your deductions on Schedule A (Form 1040) if you: Do not qualify for the standard deduction, or the amount you can claim is limited, Had large uninsured medical and dental expenses during the year, Paid interest and taxes on your home, Had large unreimbursed employee business expenses or other miscellaneous deductions, Had large uninsured casualty or theft losses, Made large contributions to qualified charities, or Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled. Free tax programs These deductions are explained in chapters 21–28. Free tax programs    If you decide to itemize your deductions, complete Schedule A and attach it to your Form 1040. Free tax programs Enter the amount from Schedule A, line 29, on Form 1040, line 40. Free tax programs Electing to itemize for state tax or other purposes. Free tax programs   Even if your itemized deductions are less than your standard deduction, you can elect to itemize deductions on your federal return rather than take the standard deduction. Free tax programs You may want to do this if, for example, the tax benefit of itemizing your deductions on your state tax return is greater than the tax benefit you lose on your federal return by not taking the standard deduction. Free tax programs To make this election, you must check the box on line 30 of Schedule A. Free tax programs Changing your mind. Free tax programs   If you do not itemize your deductions and later find that you should have itemized — or if you itemize your deductions and later find you should not have — you can change your return by filing Form 1040X, Amended U. Free tax programs S. Free tax programs Individual Income Tax Return. Free tax programs See Amended Returns and Claims for Refund in chapter 1 for more information on amended returns. Free tax programs Married persons who filed separate returns. Free tax programs   You can change methods of taking deductions only if you and your spouse both make the same changes. Free tax programs Both of you must file a consent to assessment for any additional tax either one may owe as a result of the change. Free tax programs    You and your spouse can use the method that gives you the lower total tax, even though one of you may pay more tax than you would have paid by using the other method. Free tax programs You both must use the same method of claiming deductions. Free tax programs If one itemizes deductions, the other should itemize because he or she will not qualify for the standard deduction. Free tax programs See Persons not eligible for the standard deduction , earlier. Free tax programs 2013 Standard Deduction Tables If you are married filing a separate return and your spouse itemizes deductions, or if you are a dual-status alien, you cannot take the standard deduction even if you were born before January 2, 1949, or are blind. Free tax programs Table 20-1. Free tax programs Standard Deduction Chart for Most People* If your filing status is. Free tax programs . Free tax programs . Free tax programs Your standard deduction is: Single or Married filing separately $6,100 Married filing jointly or Qualifying widow(er) with dependent child 12,200 Head of household 8,950 *Do not use this chart if you were born before January 2, 1949, are blind, or if someone else can claim you (or your spouse if filing jointly) as a dependent. Free tax programs Use Table 20-2 or 20-3 instead. Free tax programs Table 20-2. Free tax programs Standard Deduction Chart for People Born Before January 2, 1949, or Who are Blind Check the correct number of boxes below. Free tax programs Then go to the chart. Free tax programs You: Born before January 2, 1949 □ Blind □ Your spouse, if claiming spouse's exemption: Born before January 2, 1949 □ Blind □ Total number of boxes checked   IF  your filing status is. Free tax programs . Free tax programs . Free tax programs AND the number in the box above is. Free tax programs . Free tax programs . Free tax programs THEN your standard deduction is. Free tax programs . Free tax programs . Free tax programs Single 1 $7,600   2 9,100 Married filing jointly 1 $13,400 or Qualifying 2 14,600 widow(er) with 3 15,800 dependent child 4 17,000 Married filing 1 $7,300 separately 2 8,500   3 9,700   4 10,900 Head of household 1 $10,450   2 11,950 *If someone else can claim you (or your spouse if filing jointly) as a dependent, use Table 20-3 instead. Free tax programs Table 20-3. Free tax programs Standard Deduction Worksheet for Dependents Use this worksheet only if someone else can claim you (or your spouse if filing jointly) as a dependent. Free tax programs Check the correct number of boxes below. Free tax programs Then go to the worksheet. Free tax programs You:   Born before January 2, 1949 □ Blind □ Your spouse, if claiming spouse's exemption: Born before January 2, 1949 □ Blind □ Total number of boxes checked 1. Free tax programs Enter your earned income (defined below). Free tax programs If none, enter -0-. Free tax programs 1. Free tax programs   2. Free tax programs Additional amount. Free tax programs 2. Free tax programs $350 3. Free tax programs Add lines 1 and 2. Free tax programs 3. Free tax programs   4. Free tax programs Minimum standard deduction. Free tax programs 4. Free tax programs $1,000 5. Free tax programs Enter the larger of line 3 or line 4. Free tax programs 5. Free tax programs   6. Free tax programs Enter the amount shown below for your filing status. Free tax programs Single or Married filing separately—$6,100 Married filing jointly—$12,200 Head of household—$8,950 6. Free tax programs   7. Free tax programs Standard deduction. Free tax programs         a. Free tax programs Enter the smaller of line 5 or line 6. Free tax programs If born after January 1, 1949, and not blind, stop here. Free tax programs This is your standard deduction. Free tax programs Otherwise, go on to line 7b. Free tax programs 7a. Free tax programs     b. Free tax programs If born before January 2, 1949, or blind, multiply $1,500 ($1,200 if married) by the number in the box above. Free tax programs 7b. Free tax programs     c. Free tax programs Add lines 7a and 7b. Free tax programs This is your standard deduction for 2013. Free tax programs 7c. Free tax programs   Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Free tax programs It also includes any amount received as a scholarship that you must include in your income. Free tax programs Prev  Up  Next   Home   More Online Publications