Taxable Coverdell ESA Distributions: Education Tax Benefits (2025 IRS Guide)

This guide covers “Taxable Coverdell ESA Distributions” within education tax benefits. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 970 (2025), Tax Benefits for Education, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

The designated beneficiary of a Coverdell ESA can take a distribution at any time. Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (AQEE) (defined later) the beneficiary has in the same tax year.

See Table 6-3 for highlights.

Taxable Coverdell ESA Distributions

A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary’s AQEE for the year.

Excess distribution.

This is the part of the total distribution that is more than the beneficiary’s AQEE for the year.

Earnings and basis.

You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2025. The amount of your gross distribution will be shown in box 1. For 2025, instead of dividing the gross distribution between your earnings (box 2) and your basis (amount already taxed) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2025. This will be shown in box 7.

The amount contributed from survivor benefits (see Military death gratuity, earlier) is treated as part of your basis and won’t be taxed when distributed.

Figuring the Taxable Portion of a Distribution

The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Figure the taxable portion for 2025 as shown in the following steps.

1. Multiply the total amount distributed by a fraction. The numerator (top part) is the basis (contributions not previously distributed) at the end of 2024, plus total contributions for 2025, and the denominator (bottom part) is the value (balance) of the account at the end of 2025 plus the amount distributed during 2025.

2. Subtract the amount figured in (1) from the total amount distributed during 2025. The result is the amount of earnings included in the distribution(s).

3. Multiply the amount of earnings figured in (2) by a fraction. The numerator (top part) is the AQEE paid during 2025, and the denominator (bottom part) is the total amount distributed during 2025.

4. Subtract the amount figured in (3) from the amount figured in (2). The result is the amount the beneficiary must include in income.

The taxable amount must be reported on Schedule 1 (Form 1040), line 8z.

Example.

You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2025. There were no contributions in 2025. This is your first distribution from the account, so your basis in the account on December 31, 2024, was $1,500. The value (balance) of your account on December 31, 2025, was $950. You had $700 of AQEE for the year. Using the steps in Figuring the Taxable Portion of a Distribution, earlier, figure the taxable portion of your distribution as follows.

You must include $25 in income as distributed earnings not used for qualified education expenses. Report this amount on Schedule 1 (Form 1040), line 8z, listing the type and amount of income.

Worksheet 6-3 , at the end of this chapter, can help you figure your AQEE, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s).

Coordination With American Opportunity and Lifetime Learning Credits

The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses aren’t used for both benefits. This means the beneficiary must reduce qualified higher education expenses (QHEE) by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit.

Example.

In 2025, during your first year in college you had $5,800 of QHEE. You paid your college expenses from the following sources.

Of the $5,800 of QHEE, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Your parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return.

Before you can determine the taxable portion of your Coverdell ESA distribution, you must reduce your total QHEE.

Since the AQHEE ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. The balance in your account was $1,800 on December 31, 2025. Prior to 2025, $2,100 had been contributed to this account. Contributions for 2025 totaled $400. Using the four steps outlined earlier, you figure the taxable portion of your distribution as shown below. You must include $75 in income (Schedule 1 (Form 1040), line 8z). This is the amount of distributed earnings not used for AQHEE.

Coordination With Qualified Tuition Program (QTP) Distributions

If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary’s AQEE, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. The following two examples illustrate possible allocations.

Example 1.

In 2025, you graduated from high school and began your first semester of college. That year, you had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of QHEE for college. Your QESEE doesn’t include tuition. To pay these expenses, you withdrew $800 from your Coverdell ESA and $4,200 from your QTP. No one claimed you as a dependent, nor were you eligible for an education credit. You didn’t receive any tax-free educational assistance in 2025. You must allocate your total qualified education expenses between the two distributions.

1. You know that tax-free treatment will be available if you apply your $800 Coverdell ESA distribution toward your $1,000 of qualified education expenses for high school. The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free.

2. Next, you match your $4,200 QTP distribution to your $3,000 of QHEE, and find you have an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). You can’t use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses are not high school tuition expenses and don’t qualify a QTP for tax-free treatment.

3. Finally, you figure the taxable and tax-free portions of your QTP distribution based on your $3,000 of QHEE. (See Figuring the Taxable Portion of a Distribution in chapter 7 for more information.)

Example 2.

Assume the same facts as in Example 1, except that you withdrew $1,800 from your Coverdell ESA and $3,200 from your QTP. In this case, you allocate your qualified education expenses as follows.

1. Using the same reasoning as in Example 1, you match $1,000 of your Coverdell ESA distribution to your $1,000 of QESEE—you have $800 of your distribution remaining.

2. Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, you allocate your $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total).

   	$3,000		x		$800 ESA distribution
   					$4,000 total distribution
   			=		$600 QHEE (ESA)
   	$3,000		x		$3,200 QTP distribution
   					$4,000 total distribution
   			=		$2,400 QHEE (QTP)

3. You then figure the taxable part of the following.

   1. Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). See Figuring the Taxable Portion of a Distribution, earlier, in this chapter.

   2. QTP distribution based on their $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 7).

.The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. However, you don't have to allocate your expenses in the same way. You can use any reasonable method..

Losses on Coverdell ESA Investments

For tax years beginning after 2017 and before 2026, if you have a loss on your investment in a Coverdell ESA, you can’t deduct the loss on your income tax return. You have a loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Your basis is the total amount of contributions to that Coverdell ESA.

Additional Tax on Taxable Distributions

Generally, if you receive a taxable distribution, you must also pay a 10% additional tax on the amount included in income.

Exceptions.

The 10% additional tax doesn’t apply to the following distributions.

1. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary.

2. Made because the designated beneficiary is disabled. A person is considered to be disabled if proof is provided showing there is a physical or mental impairment that substantially limits any gainful activity. A physician must determine that the person’s condition can be expected to result in death or to be of long-continued and indefinite duration.

3. Included in income because the designated beneficiary received:

   1. A tax-free scholarship or fellowship grant (see Tax-Free Scholarships and Fellowship Grants in chapter 1);

   2. Veterans’ educational assistance (see Veterans’ Benefits in chapter 1);

   3. Employer-provided educational assistance (see chapter 10); or

   4. Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance.

   This exception applies only to the extent the distribution isn’t more than the scholarship, allowance, or payment.

4. Made on account of the attendance of the designated beneficiary at a U.S. military academy (such as the USMA at West Point). This exception applies only to the extent that the amount of the distribution doesn’t exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U.S. Code) attributable to such attendance.

5. Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits, earlier).

6. Made before June 1, 2026, of an excess 2025 contribution (and any earnings on it). The distributed earnings must be included in gross income for the year in which the excess contribution was made.

Figuring the additional tax.

Use Part II of Form 5329 to figure any additional tax. Report the amount on Schedule 2 (Form 1040), line 8.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 970 (2025), Tax Benefits for Education: Coverdell Education Savings Account (ESA) — Distributions — Taxable Distributions — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.