ESA - Education Savings Account

Taxpayers are able to make an annual investment toward an Education Savings Account (ESA) for the benefit of a child ranging from birth to the age of eighteen. In the case of a special needs beneficiary, the age limitation does not apply. Currently, the annual contribution amount toward an ESA is equal to $2,000 per child. Additionally, ESA's are able to accept contributions from corporations, tax-exempt organizations and other entities; however, the total amount contributed for any one child may not exceed $2,000 per year.

Funds from an ESA do not need to be used only for higher education expenses. Distributions from an ESA may be used to pay for elementary and secondary school expenses (K-12), regardless of whether the school is public or private. Expenses that are covered included tutoring, acquisition of computer equipment, room and board, uniforms and extended day programs.

Contributions to ESA are not tax deductible, but any appreciation is, at a minimum, tax-deferred. As long as the distributions are used to pay covered expenses, the disbursements are tax-free. The ability to use an ESA begins phasing out for single taxpayers with AGI greater than $95,000 and completely phases out at $110,000; for married taxpayers filing jointly with AGI greater than $190,000, the phase out begins at an AGI of $220,000.

- Gregory A. Papiernik, JD, CPA
Excerpted from Accounting for Divorce by Jeffrey W. Brend, JD, CPA/ABV, ASA, CFE