Mary Lou took a $7,000 distribution from her educational savings account and used $6,500 to pay for qualified higher education expenses.The remaining balance of $500 was used to purchase clothes.On the date of the distribution,her educational savings account had a $28,000 balance including the $21,000 she had contributed.How much of the $7,000 distribution is tax-free?

Question

Quizplus · Accepted Answer

The distribution is tax-free up to the amount of qualified higher education expenses, which in this case is $6,500. The remaining $500 used for clothes is not a qualified expense and is therefore subject to taxes and penalties. The portion of the distribution that is tax-free is calculated as follows: $6,500/$7,000 = 0.9286. Therefore, $7,000 x 0.9286 = $6,875 is tax-free.

Mary Lou Took a $7,000 Distribution from Her Educational Savings