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

The taxable portion of the distribution is the earnings part that is not used for qualified expenses. The ratio of qualified expenses to the total distribution is $1,700/$2,000 = 0.85. Thus, 85% of the earnings are tax-free, and 15% are taxable. Therefore, $500 * 0.15 = $75 is included in Juanita's gross income.

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