1099q

[JG EA]

In TTB it compares a Coverdell ESA with a Roth.

If there are no earnings on a distribution from a CESA and therefore nothing taxable, do the funds withdrawn need to be subtracted from tuition and other costs in order to figure out the education credit the taxpayer may take?

[mactoolsix]

I think you just reduce the total expenses by the expenses claimed for AOC. If this leaves more than the Coverdell distribution, part of the distribution will be taxable.

From Pub 970: Coverdell Section
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. 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.

The show an example of using the Coverdell w/partial scholarship, which reduced the eligible expenses to less than the Coverdell distribution, making it partly taxable.

Hope this helps,
Mike

[JG EA]

Thanks for answering. I am just wondering why? If they money is after tax, why is it thought of at all. Unless there are earnings of course. I mean if someone gifts the money to the student then that student (or whoever is claiming that student) can claim the money as spent by them.

[BP.]

do the funds withdrawn need to be subtracted from tuition and other costs in order to figure out the education credit the taxpayer may take?

No, the funds withdrawn from the ESA aren't subtracted from the education expenses.

The dollars applied to an education credit (e.g.- $4,000 for AOC) are subtracted from the total education expenses to determine if there are any taxable earnings from the 1099-Q. You have no earnings, so nothing to calculate. Check pub 970, p. 50: (How to coordinate AOC & ESA)

http://www.irs.gov/pub/irs-pdf/p970.pdf