<p>We have small Coverdell accounts for our 3 kids, the first two of which will be entering college fall 2013. We are thinking about cashing them out now, and are trying to determine which expenses we've had this year, if any, might be qualified expenses. Would fees for standardized testing be qualified for a secondary school student?</p>
<p>Also, do the distributions from the Coverdell accounts need to be reported on the FAFSA or CSS forms above what might be reflected on our tax return? (We may have to report $100 in income - plus a 10% penalty - per account on the tax return).</p>
<h2>That’s my understanding also, that Coverdell cannot be used for testing costs.</h2>
<p>On a different matter, you might look into rolling over your Coverdell into a 529. When I did, I got a nice deduction on my state income tax, and I didn’t have to pay any federal income tax for the change. I believe there was a federal form to fill out with the annual tax return to show where the money went. Rules vary from state to state - some only allow a person to deduct contributions to a 529 held by your own state, and not accounts under programs of other states. </p>
<p>I believe 529s have a little more flexibility on how the money can be used vs. Coverdells.</p>
<p>If you pick a 529, just be careful because some have high fees. Usually the Vanguard accounts have some of the lowest fees - they serve 529s for many of the states.</p>
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<p>If you are of moderate income, you may be eligible for a fee waiver for the SAT or ACT. The forms are typically available from school guidance counselors.</p>
<p>If you pay your kids’ educational expenses with their Coverdell accounts, you don’t have anything to report on the 1040.</p>
<p>If you withdraw money for other purposes, you have to report the gains on the 1040. Then, the increased AGI (with the gains) will be reported on the FAFSA & CSS.</p>
<p>Patsmom, thank you for the link. It indicates the pre-college expenses, including test costs, DO qualify, but charlieschm is saying that they would NOT. I will try to research more.</p>
<p>These accounts have netted so little over the years (each account has a basis of $2000 and is only worth $2150 - aggghhh!), that we just want to clear them out and make financial aid reporting a little cleaner. I just want to make sure I’m reporting everything properly, and trying to take advantage of any qualified expenses we DO have. For this year, since the kids are all still in high school, the only expenses are costs for 3 college courses and books, an online course, computer costs, and… quite a few AP, SAT and ACT tests (I have twins)… that’s why I was hopeful for those.</p>
<p>Chapter 7 in the link below explains Coverdells and what is qualified both for college and secondary expenses. I don’t believe testing would count for either.</p>
<p>I agree about the income/penalties being included in AGI for fafsa/profile. The pub says they are taxable to the beneficiary. Any balance in a Coverdell would be counted as a parent asset for fafsa.</p>
<p>The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school.
Room and board.
Uniforms.
Transportation.
Supplementary items and services (including extended day programs).</p>
<p>So we would probably be looking at $50-100 of taxable income to each of the three beneficiaries, plus the 10% penalty. They have no other income. Would they have to file tax returns just to reflect this? That’d be even MORE hassle, haha! Better to wait until they have more qualified expenses next year!</p>
<p>I had a financial counselor say that the Coverdell would be counted as a student asset on the financial aid forms, instead of a parent asset. This continues to confuse me.</p>
<p>Financial Aid Impact: Treated as an asset of the account owner. If the account owner is the student, this has a high impact on financial aid eligibility. (But note that the Higher Education Reconciliation Act of 2005 added special treatment for Coverdell, Prepaid Tuition and 529 College Savings Plan accounts owned by a dependent student. The impact on need-based aid for dependent students will therefore be minimal.) If the account owner is the parent, this has a low impact on financial aid eligibility. Qualified distributions from a Coverdell account are not counted as income on the FAFSA and thus do not reduce financial aid eligibility. </p>
<p>You’re talking about expenses that you would have, whether you use the Coverdell or not. You will pay them one way or another - either from the Coverdell or from other savings.</p>
<p>If you pay with Coverdell money, the value of that account at an asset is reduced - but you are not reducing whatever other account you would otherwise use to pay them. Thus your total assets will remain the same no matter where the money comes from.</p>
<p>If you are concerned that your Coverdell accounts are not performing well, then take out whatever you can to cover legitimate expenses, but don’t take unqualified distributions - those will cost the 10% penalty plus tax. If you wait a year, you will probably have enough eligible expenses to avoid both. If you feel you really need to spend the money, consider a computer - it is an eligible expense for secondary school, but not for college unless it is required.</p>