In 2015,Kathy receives a $4,000 distribution from her Coverdell Education Savings Account (CESA),which has a fair market value of $10,000.Total contributions to her CESA have been $7,000.Kathy's AGI is $25,000.If Kathy uses $3,000 of the $4,000 distribution for qualified education expenses,what amount should she include in her gross income?

Question

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Because $3,000 of the $4,000 is used by Kathy to pay for qualified higher education expenses,75% ($3,000/$4,000)of the earnings received in the $4,000 distribution are excludible from Kathy's gross income.The $4,000 distribution is allocated between contributions and earnings as follows: Contributions: $7,000/$10,000 × $4,000 = $2,800 Earnings: $3,000/$10,000 × $4,000 = $1,200.The $2,800 is excluded from Kathy's gross income because it represents a return of her contributions.Of the $1,200 representing earnings,$900 ($1,200 × 75%)is excluded from Kathy's gross income and $300 ($1,200 × 25%)is included in Kathy's gross income.

In 2015,Kathy Receives a $4,000 Distribution from Her Coverdell Education