Education IRA Modifications

Well to begin with, Education IRA's have been renamed to "Coverdell Education Savings Accounts." These were never actually IRA's.

Beginning in tax year 2002, the annual maximum contributions to Coverdell Education Savings Accounts will be increased from $500 to $2,000. Also, the definition of qualified education expenses that may be paid tax-free from a Coverdell Education Savings Account is expanded to include elementary and secondary school expenses. In addition, the phase-out range is increased for married taxpayers filing a joint return, so that it is DOUBLE the range for single taxpayers. Thus, the phase-out range for married taxpayers filing a joint return is $190,000 to $220,000 of modified adjusted gross income. Furthermore, the various age limitations will NOT apply to special needs beneficiaries.

The new tax act will also allow a taxpayer to claim a HOPE Credit or Lifetime Learning Credit for a taxable year AND to exclude from gross income amounts distributed (both the contributions and the earnings portions) from a Coverdell Education Savings Account on behalf of the same student as long as the distribution is NOT used for the same educational expenses for which a Hope of Lifetime Learning Credit is claimed.

The new law also repeals the excise tax on contributions made by any person to a Coverdell Education Savings Account on behalf of a beneficiary during any taxable year in which any contributions are made by anyone to a qualified State tuition program on behalf of the same beneficiary.

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