Income – Other Income
15-3
Refer to the Volunteer Resource Guide, Tab D, Income, Entering Medicaid Waiver Payments.
Are distributions from ABLE accounts taxable?
A qualied ABLE program is a program established and maintained by a state agency under which a
person may make cash contributions to an ABLE account to pay for the qualied disability expenses of an
eligible individual (the designated beneciary). Qualied beneciaries can have only one ABLE account.
Contributions are made in after-tax dollars and can be made by any person. Contributions must be made in
cash and are not deductible for federal income tax purposes.
Distributions from an ABLE account that do not exceed the qualied disability expenses of the beneciary
during the taxable year are excluded from gross income. A distribution from an ABLE account that exceeds
the qualied disability expenses of the beneciary is included in the beneciary’s gross income and is
subject to an additional tax of 10% imposed on the amount not used for qualied disability expenses.
Taxable distributions from ABLE accounts are out of scope for the VITA/TCE programs.
Qualied disability expenses include: education, housing, transportation, employment training and support,
assistive technology and personal support services, health, prevention and wellness, nancial management
and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses.
Form 1099-QA, Distributions from ABLE Accounts, is used to report distributions from an ABLE Account.
Are distributions from an Educational Savings Account (ESA), such as a Coverdell ESA
and a 529 plan, taxable?
Distributions from Coverdell ESAs and Qualied Tuition Plans (QTPs) are reported on Form 1099-Q,
Payments From Qualied Education Programs (Under Sections 529 and 530). Coverdell ESA distributions
can be used to pay for qualied elementary, secondary, and postsecondary expenses. QTP distributions
may also be used for qualied educational expenses for elementary and secondary public, private,
and religious schools of up to $10,000 per year for each qualied beneciary, certain expenses of an
apprenticeship program, and the principal or interest on a qualied education loan up to a lifetime limit of
$10,000 per beneciary.
A portion of the distributions is generally taxable to the beneciary if the total distributions are more than
the beneciary’s adjusted qualied education expenses for the year. Qualied education expenses are
discussed in more detail in the Education Credits lesson.
The taxable portion is the amount of the excess distribution that represents earnings that have accumulated
tax free in the account. The taxable amount must be reported as other income on the tax return. Taxable
distributions from ESAs and QTPs are out of scope.
For additional information about educational savings accounts, distributions, and qualied education
expenses, refer taxpayers to Publication 970, Tax Benets for Education.
An American opportunity credit or lifetime learning credit can be claimed in the same year the beneciary
takes a tax-free distribution from a QTP or Coverdell ESA, as long as the same expenses are not used for both
benets. See Publication 970, Tax Benets for Education, for more details.
Is a recovery taxable?
Reimbursement in a later year for medical or other expenses deducted in an earlier year must be reported
as income up to the amount previously deducted as medical or under another provision. However, do not
report as income the amount of reimbursement received up to the amount of the prior year deductions that
did not reduce the tax for the earlier year.