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Melissa took a $1,500 distribution from her educational savings account and used $1,200 to pay for qualified education expenses. Before the distribution, Melissa’s account balance was $4,000 of which $3000 is contributions.Calculate the following:

1) The tax free return of capital   

2) Her new adjusted basis for her savings account

3) Distribution of earnings potentially subject to tax

4) The excludable portion of the earnings

5) The taxable portion of earnings

Explanation / Answer

Solution.

1) The tax free return of capital is calculated below :

As Melissa took a $1,500 distribution from her ecucational savings account but used $1,200 to pay for qualified education expenses. Hence only $1,200 is allowed for Qualified Education Expenses then :

Tax free return of capital is only $1,200

2) Calculation of her new adjusted basis for her savings account :

Opening balance in the saving account = 4,000

Less : Kelissa took for ecucational purpose = (1,500)

Adjusted basis for her saving account 3,500

3) Distribution of earnings potentially subject to tax :

Opening balance in Melissa's account = 4,000

Less : Qualified ecucation expenses = (1,200)

Distribution of earnings potentially subject to tax = 2,800

4) Calculation of excludable portion of the earning :

As given in the question that $1,500 Melissa too for distribution from her educational purpose but the same $1,500 is not qualified only $1,200 is qualified education expeses hence the same is excludable portion of the earnings.

5) Calculation of the taxable portion of earnings :

Opening balance in Melissa's account = 4,000

Less : Qualified ecucation expenses = (1,200)

the taxable portion of earnings     2,800

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