D received coverdell gift from grandparents for graduation. Now that the money has been dispersed to her, are we required to use the full amount in this tax year for tuition/room/board or how does it work?
Yes (for a tax free distribution) and as a side note, you can likely pay spring 2016 tuition, room/board by December 2015.
How much is the gift?
$6200. I’ve read Pub 970, but for me it was a little confusing and I don’t have a tax accountant I could ask. Figured this forum would have enough parents that have had similar experiences/questions. I did find this interesting article today. Seemed to really simplify things for me.
Timing the Expenses
You don’t have to use the money from the Coverdell account to pay the expenses. You simply need to have the expenses in the same year you take the withdrawal.
Example: In February you take $5,000 from a Coverdell account and use the money to buy an auto for the beneficiary — not a qualified education expense. In September you take out a loan to pay $5,000 in tuition for the beneficiary of the Coverdell account. The February withdrawal is tax-free because the expenses fell in the same year.
Yes, the example is correct, so yes, you have to have enough Coverdell qualified expenses in the same tax year for the distribution to be tax-free. You can’t use the same expenses used to claim the AOTC or to make scholarships/grants tax-free. Usually that is ok because room and board expenses are qualified expenses for Coverdell/529 distributions but not for the AOTC or for tax-free scholarships/grants.
Wonderful!! Thank you so much!!!