26 U.S.C. § 530 — Coverdell education savings accounts

(a) General rule. A Coverdell education savings account is exempt from tax under this subtitle. However, it is subject to the taxes imposed by section 511 on unrelated business income of charitable organizations.

(b) Definitions and special rules.

(1) Coverdell education savings account. “Coverdell education savings account” means a trust created or organized in the United States only to pay the qualified education expenses of its designated beneficiary, and identified as a Coverdell education savings account when created or organized. Its written governing instrument must provide all of the following:

(A) The trust may accept a contribution only if it is cash, is made no later than the beneficiary’s 18th birthday, and—except for a rollover contribution—would not make total contributions for the taxable year^* exceed $2,000.

(B) The trustee must be a bank (as section 408(n) defines that term) or another person who satisfies the Secretary^* that the trust will be administered consistently with this section, or who has shown that ability for an individual retirement plan^*.

(C) No trust asset may be invested in a life-insurance contract.

(D) Trust assets may not be mixed with other property, except in a common trust fund^* or common investment fund.

(E) Unless subsection (d)(7) provides otherwise, any balance credited to the beneficiary must be distributed within 30 days after the beneficiary turns 30. If the beneficiary dies before turning 30, it must be distributed within 30 days after death. The age limits in (A)(ii) and (E), and in subsection (d)(5) and (6), do not apply to a designated beneficiary with special needs, as determined under the Secretary’s regulations.

(2) Qualified education expenses.

(A) In general. “Qualified education expenses” means (i) qualified higher-education expenses, as defined in section 529(e)(3), and (ii) qualified elementary and secondary education expenses, as defined in paragraph (3).

(B) Qualified tuition programs. The term also includes a contribution for the beneficiary to a qualified tuition program, as defined in section 529(b), for a beneficiary as defined in section 529(e)(1). But, for section 72, the investment in the contract does not increase by the part of the contribution excluded from gross income under subsection (d)(2).

(3) Qualified elementary and secondary education expenses.

(A) In general. “Qualified elementary and secondary education expenses” means:

(i) tuition, fees, academic tutoring, special-needs services for a special-needs beneficiary, books, supplies, and other equipment connected with the beneficiary’s enrollment or attendance as an elementary or secondary student at a public, private, or religious school;

(ii) room and board, uniforms, transportation, and supplementary items and services, including extended-day programs, that the school requires or provides in connection with that enrollment or attendance; and

(iii) computer technology or equipment, Internet access, and related services, if the beneficiary and the beneficiary’s family will use them during a year in which the beneficiary is in school. This does not include software designed for sports, games, or hobbies unless it is mainly educational.

(B) School. “School” means a school providing elementary or secondary education, kindergarten through grade 12, as determined under State law.

(C) Computer technology or equipment. “Computer technology or equipment” means computer software as defined in section 197(e)(3)(B), computer or peripheral equipment as defined in section 168(i)(2)(B), and fiber-optic cable related to computer use.

(4) Time when contributions deemed made. An individual is treated as making a contribution to an education individual retirement account on the last day of the preceding taxable year if the contribution is for that preceding year and is made by the legal filing deadline for that year, without extensions.

(c) Reduction in permitted contributions based on adjusted gross income.

(1) In general. For an individual contributor, the maximum contribution otherwise allowed is reduced by the fraction whose numerator is the contributor’s modified adjusted gross income for the taxable year minus $95,000 ($190,000 for a joint return^*), and whose denominator is $15,000 ($30,000 for a joint return), multiplied by that maximum amount.

(2) Modified adjusted gross income. “Modified adjusted gross income” means the taxpayer’s adjusted gross income for the taxable year, plus amounts excluded under section 911, 931, or 933. This section does not define those quoted terms.

(d) Tax treatment of distributions.

(1) In general. A distribution is included in the recipient’s gross income in the manner section 72 provides.

(2) Distributions for qualified education expenses.

(A) If the beneficiary’s qualified education expenses for the taxable year are at least the total distributions for that year, no amount is included in gross income under paragraph (1).

(B) If total distributions exceed those expenses, the amount otherwise included is reduced in the same ratio that the qualified education expenses bear to total distributions.

(C) Coordination with American Opportunity and Lifetime Learning credits and qualified tuition programs. For subparagraph (A): (i) total qualified education expenses for an individual are reduced as section 25A(g)(2) provides and by expenses used to determine a credit allowed under section 25A to the taxpayer^* or another person; and (ii) if distributions covered by this subparagraph and section 529(c)(3)(B) exceed the individual’s qualified education expenses after that reduction, the taxpayer must allocate the expenses among those distributions to determine the exclusion under this subparagraph and section 529(c)(3)(B).

(D) No deduction, credit, or exclusion under another section of this chapter is allowed for qualified education expenses to the extent they were used to determine the exclusion under this paragraph.

(3) Estate and gift taxes. Rules similar to section 529(c)(2), (4), and (5) apply to this section.

(4) Additional tax for distributions not used for educational expenses.

(A) The tax for a taxable year of a taxpayer who receives a payment or distribution from a Coverdell account that is included in gross income is increased by 10 percent of the included amount.

(B) This additional tax does not apply when the payment or distribution is: (i) made to the beneficiary or the beneficiary’s estate after the beneficiary’s death; (ii) attributable to the beneficiary’s disability, as section 72(m)(7) defines it; (iii) made because of a scholarship, allowance, or payment described in section 25A(g)(2), to the extent it does not exceed that amount; (iv) made because the beneficiary attended one of the five listed United States service academies, to the extent it does not exceed the costs of advanced education as defined in section 2005(e)(3) of title 10 as in effect when this section was enacted; or (v) included only because of paragraph (2)(C)(i)(II).

(C) The additional tax does not apply to a contribution returned before the first day of the sixth month after the taxable year in which it was made, if the return includes the net income attributable to the excess contribution. That net income is included in gross income for the year in which the excess contribution was made.

(5) Rollover contributions. Paragraph (1) does not apply to an amount paid from a Coverdell account and paid within 60 days into another Coverdell account for the same beneficiary or a family member, as section 529(e)(2) defines that term, who is under 30 on that date. This rule does not apply if it applied to a prior payment during the 12-month period ending on the payment date.

(6) Change in beneficiary. Changing the beneficiary is not a distribution under paragraph (1) if the new beneficiary is a family member of the old beneficiary and is under 30 when the change occurs.

(7) Special rules for death and divorce. Rules similar to section 220(f)(7) and (8) apply. For paragraph (8), the beneficiary’s family members are treated like the spouse.

(8) Deemed distribution on required distribution date. When subsection (b)(1)(E) requires a distribution, any balance remaining at the end of its 30-day distribution period is treated as distributed then.

(9) Military death gratuity. (A) “Rollover contribution” includes a contribution made within one year after the contributor receives an amount under section 1477 of title 10 or section 1967 of title 38 for a person, to the extent it does not exceed the amounts received during that year, minus amounts contributed to a Roth IRA^* under section 408A(e)(2) or another Coverdell account. (B) The 12-month rollover limit in paragraph (5) does not apply to amounts treated as rollovers under (A). (C) For section 72, an amount treated as a rollover under (A) is treated as investment in the contract.

(e) Tax treatment of accounts. Rules similar to section 408(e)(2) and (4) apply to a Coverdell account.

(f) Community property laws. This section applies without regard to community-property laws.

(g) Custodial accounts. A custodial account is treated as a trust if a bank, or another person satisfying the Secretary that it will administer the account consistently with this section, holds its assets, and the account would otherwise qualify under subsection (b)(1) except for not being a trust. For this title, the custodian is treated as the trustee.

(h) Reports. The trustee must report to the Secretary and the beneficiary about contributions, distributions, and other matters the Secretary requires. Reports must be filed and provided at the times and in the manner the Secretary requires.