1099-Q Coverdell ESA distribution- COVID??

[nwtaxlady]

New client has a 1099-Q with distributions from her Coverdell ESA account which is way more than tuition. She was living at home with her parents.
I asked her why she took out so much, and her answer was, that she took the extra money out to buy a car. And that her parents tax person told them that they could due that due to COVID.
Is there such a thing? Also on this 1099-Q it does not have the earnings or basis figures. Just distribution and FMV 12/31/20 amounts.

Is there a COVID relief for this situation?

If not, how do I proceed if there are no amounts for the basis and earnings?

[Dusty2004]

I am unaware of anything related to Coverdell accounts being able to remove more than education related expenses not being taxable and maybe penalty. However, remember there are many expenses related to education other than tuition that can qualify for valid expenses.

Dusty

[nwtaxlady]

Well, student lives at home and has everything already. We accounted for tuition and books etc. but distributions are well over that by $16K and I asked why she took out so much and she said to buy a car. School has been online so no transportation expenses etc. Now, the next problem is there is no amounts for earnings or basis on the 1099-Q. Now what?

[Rapid Robert]

Now, the next problem is there is no amounts for earnings or basis on the 1099-Q. Now what?

Same as with any similar situation involving investments made over time - you are going to have press the client to dig up some historical records. When was the account opened? Contribs were limited to $2K per year as I recall, so there should be some kind of upper limit on basis. What about the Form 5498s that I think should have been filed each year with the IRS? Can they be obtained from IRS transcripts, or by logging in to the online investment account?

In the end, you need to do adequate due digiligence, rely in good faith on taxpayer info that does not seem unreasonalbe or inconsistent, and if the dollar amounts involved could trigger penalties too large to swallow, be sure to use a disclosure of the position via Form 8275

Or simply refer her back to "her parents tax person [who] told them that they could due that due to COVID."

[BP.]

For the basis/earnings that are not reported on the 1099Q- see TTB page 12-7, middle left column, for the formula. You'll need to know basis.

Don't forget to figure tax credits first, then figure any taxable part of earnings.

Also, don't forget that room and board allocation as determined by the school (can search online for the amount) is also an eligible expense, even if living at home.

This info and the formulas you need are also available in Pub 970.

[Rapid Robert]

You'll need to know basis.

That's what she said she does not know.

[BP.]

That's what she said she does not know.

Yes, she said it wasn't reported on the 1099Q, which is how they are prepared for ESAs, I think. But she'll need to know something about the basis from taxpayer, with the help of the useful avenues you provided.

[Lion]

This may be one of those cases where if your client doesn't know basis, then basis is zero. Tell your client how much tax she could pay unless she contacts the plan holder for more information. I also agree to send her to the preparer who gave her advice!

[nwtaxlady]

Thank you everyone!