These special savings accounts are designed to encourage savings toward future education. For that reason, if the distributions from a Coverdell Education Savings Account (ESA) do not exceed the beneficiary’s adjusted qualified education expenses for the year, funds withdrawn are tax-free.
Qualified Tuition Plan
A Qualified Tuition Program (QTP), also known as a “section 529 plan,” is a tax-free method by which one prepays a student’s college tuition or contribute to a higher education savings account. However, these funds cannot exceed more than the amount necessary to provide for the qualified higher education expenses of the beneficiary. Qualified institutions include colleges, universities, vocational schools, or other postsecondary institutions, as long as it’s eligible to participate in a student aid program administered by the Department of Education.
Education: Received Scholarship/Fellowship
A scholarship or fellowship received is tax-free as long as you are a degree candidate at an eligible educational institution, and you must use the scholarship to pay all qualified educational expenses.
Education: Credit or Deduction
Understanding the complex tax codes regarding education can be confusing. Is your college aged-child still considered a dependent? Which scholarships are taxable and which are not? Which tax credits or deductions are you eligible for? Consider these questions and more when evaluating your individual circumstances before filing your tax return.