Coverdell ESAs have played a big role in shaping the facilities available-
The annual contribution was increased from $500 (before 2002) to $2,000 (from 2002).
These contributions won’t be eligible for tax deductions. However, they can grow tax deferred.
The amount withdrawn to pay for the expenses incurred in qualified higher education –is tax free. However, the IRS definition of qualified will vary for each federal tax benefits, and will change from one year to another.
If, you use the funds, withdrawn from Coverdell’s for paying qualified secondary school or elementary school expenses, then the money can be tax free. Before 2002 the withdrawn amount was used for only colleges or graduate schools.
After the tax reforms made in 2002 – the money can be used for computer expenses, internet, and other types of expenses related to education.
People with high income groups can also take advantages of the reforms, as the tax code states that – the income is applicable for the “contributor”- not the parents. Hence, the families can ask someone else to contribute (Who has an income is below the specified limit).Prior to 2002 – the limit for married couples was $150,000 to $160, 000 and $95,000 to $110,000 for single parent. Over 2002, the limit was raised to $190,000 to $220,000 for married couples.
After 2002 the withdrawals made from qualified state tuition programs are made tax free, conditioned – They are used for the purpose of higher education.
One of the major drawbacks of the old 529 plans have been eliminated by the reforms made in 2002. Now, the increase in the value of the contribution is not subjected to taxes (at the beneficiary rate).
The reforms allow you to switch plans in every 12 month or change the beneficiary -However, the rules prior to 2002 penalized you for the same.
The parents are now eligible to get a federal tax credit up to $2,500/year. This is also called as the American Opportunity (Tax) Credit (AOTC).