Jenifer Atkins,
123 Mockingjay Lane,
Maple Heights.
Dear Ms. Atkins:
I am writing in response to your inquiry on whether you can withdraw some of the money saved under your daughter’s Michigan Education Savings Program (MESP) and Coverdell Education Saving Account (CESA) to cover the expenses for Hawaii vacation, and the tax ramifications for such a withdraw. Unfortunately, withdrawing from any of the above accounts will attract tax liability under the respective state and federal regulations.
According to the Internal Revenue Service (IRS; 2013) guidelines for CESA, only distributions (withdrawals) used for “qualified education expenses” are tax-free. Qualifying expenses as per Code §529 include tuition, fees, books, boarding and equipment that facilitate the beneficiary’s (your daughter’s) education. Expenses on enrollment of the beneficiary to eligible education institutions also qualify (IRS, 2013). In this respect, as per provisions of code 529.(b) (1)(B), the Sylvan Learning Center program cannot be identified as a qualified tuition program. As such, payment of the holiday expenses and expenses under the Sylvan Learning Center program will not be tax-free. They will attract income tax and likely attract an additional 10% tax (IRS, 2013).
Concerning MESP, withdrawal of monies for the purposes you have identified will also attract taxation since the uses do not qualify for treatment as education expenses. As provided by the Mich. Comp. Laws Ann. §206.30(1)(u), you will thus have to add back a specified amount of the withdrawal to the federal adjusted gross income (AGI) for tax purposes. The amount added will be lower or equal to the deductions from AGI under Mich. Comp. Laws Ann. §206.30(1)(t) for the current and preceding tax years. Under the sub-article (t), you are allowed to deduct the contributions made under MESP during the year of taxation up to a limit of $5,000.00 for a single return or $10,000.00 for a joint return from AGI. By withdrawing the monies to cover the non-qualifying expenses, you will thus be required to add back the specified amounts to your taxable income thus lose the benefit of tax exemption.
In summary, withdrawing monies from either of the two accounts for the vacation is not advisable. The amounts withdrawn will attract tax liability since the vacation expenses do not qualify for treatment as education expenses. Further, use of such amounts for payment of expenses under the Sylvan Learning Center program is also not advisable since the program is ineligible. It would be more advisable to use the savings in the accounts for qualifying expenses to allow you to benefit from tax exemptions. Please do not hesitate to contact me for further clarification.
Sincerely,
[Name & Signature]
References
Internal Revenue Service. (2013, May 10). Coverdell education savings accounts. Retrieved from http://www.irs.gov/uac/Coverdell-Education-Savings-Accounts
Michigan Education Savings Program Act (Excerpt). Act 161 of 2000. § 206.30. Retrieved from http://www.legislature.mi.gov/(S(ga3kayfcbwsqwjbuupm5buja))/mileg.aspx?page=GetObject&objectname=mcl-206-30
Use the order calculator below and get started! Contact our live support team for any assistance or inquiry.
[order_calculator]