Juanita receives a $2,000 distribution from her Coverdell Education Savings Account (CESA).The distribution consists of $1,500 of contributions and $500 of earnings.Juanita pays $1,700 in qualified higher education expenses for the year.Calculate the amount to be included in Juanita's gross income.

Question

Quizplus · Accepted Answer

Since Juanita paid $1,700 in qualified higher education expenses and only received a $1,500 distribution of contributions, only $1,500 of the distribution can be considered tax-free. The remaining $200 is the amount that needs to be included in Juanita's gross income. However, since $75 of that $200 is attributable to earnings, that portion is subject to income tax and a 10% penalty, resulting in a total tax liability of $15 ($75 x 0.10 x 1). Therefore, the amount to be included in Juanita's gross income is $200 - $75 + $15 = $140.

Juanita Receives a $2,000 Distribution from Her Coverdell Education Savings