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February 16, 2016

Coverdell Education Savings Accounts—background

William A. Estrada, Esq.
Director of Federal Relations

Director of Federal Relations

Many of our members have expressed interest in HSLDA’s ongoing work to end federal discrimination against parents who want to use Coverdell Education Savings Accounts (ESAs) to protect the money they spend for home education purposes from federal taxation. One such bill, S. 306, was introduced in the Senate last year to fix this discrimination. You can read our full analysis of that bill here.

Answers to commonly asked questions regarding Coverdell ESAs:

How long has HSLDA been working on this issue?

HSLDA first lobbied for legislation to fix ESA discrimination in 2002, and again in 2003. Senators David Vitter (LA) and Jim DeMint (SC) introduced similar legislation in 2008. This legislation was again introduced in 2013, and then most recently in 2015. While the wording has sometimes changed slightly based on conversations with members of Congress, their staff, and legislative counsel, HSLDA has been committed to ending this discrimination against homeschool families in the federal tax code for close to two decades.

What exactly is the problem?

Coverdell ESAs are a unique tool that can help a homeschool family pay for kindergarten–12th grade education expenses. They are similar to a “529” savings account, but unlike a 529, which can only be used for college expenses, a Coverdell ESA can be used for both college expenses and K–12 expenses.

A Coverdell ESA is not a government grant, a voucher, a tax credit, or a tax deduction. It operates in a very similar way to a Roth IRA. Families put their after-tax earnings into a special account. They then do not have to pay any further taxes on the interest income, so long as they use the money for educational expenses.

The U.S. Department of Education is not involved in Coverdell ESAs. The IRS has set up basic guidelines for Coverdell ESAs, but they are minimal. Since all of the money in a Coverdell ESA is your own money, the federal government cannot restrict what educational expenses you use them for. Parents are free to use Coverdell ESA funds to pay for educational materials with religious or political educational content, for instance.

Current federal laws allows Coverdell ESAs to be used for kindergarten–12th grade “public, private, and religious school expenses.” This means that if a homeschooling family lives in a state where homeschools are classified as a type of private school (Alaska, California, Illinois, Indiana, Kansas, Kentucky, Nebraska, and Texas), then the family may use a Coverdell ESA for their home education expenses. Several other states also have an option for homeschooling families to operate as a private school; these families are also eligible to use Coverdells.

The vast majority of homeschoolers, however, live in states where homeschools are classified differently from private schools. Under the current regulations, these families are not able to use a Coverdell ESA for their homeschool expenses. This is the discrimination we are trying to fix.

Is a Coverdell related to Title I federal education funding?

No. Some have expressed concerns about this because one of the bills that would fix the Coverdell discrimination issue, S. 306, also includes several unrelated provisions, including one giving Title I portability to “state accredited private schools.” This provision is unrelated to the Coverdell fix, and there are no homeschools in any state that would be considered to be a “state accredited private school.”

Title I federal funds are government money, with numerous federal regulations that accompany it. While many conservative organizations (including the Heritage Foundation and the American Enterprise Institute) support Title I portability, HSLDA does not take a position on Title I portability to public and private schools, and we vigorously oppose any attempt to expand Title I portability to home educators. Since HSLDA’s founding in 1983, we have warned homeschoolers about the dangers in receiving federal funds, whether through vouchers, virtual public education, or any other means. There are always strings attached.

Does legislation to end Coverdell ESA discrimination pose a threat to homeschool freedom?

No. HSLDA’s primary mission at the local level, in all 50 states, and at the federal level, is to protect, preserve, and advance homeschool freedom. When we meet with members of Congress and their staff, we tell them that homeschoolers “want to be left alone.” However, a secondary aspect of our mission is to make sure that homeschoolers are treated fairly. We have won victories ensuring that homeschool graduates are eligible for federal student aid for higher education, eligible to enlist in the Armed Services, eligible for Social Security Administration benefits—in a nutshell, that they are not treated as second-class citizens because they were educated at home.

Through all of our previous work at the federal level we have made sure that there was no federal definition or control of homeschooling. We won these battles. Our work to end Coverdell ESA discrimination is no different.

Some have expressed concern that future legislation may seek to restrict how money in a Coverdell ESA is used. While this is always possible (legislation has been introduced to retroactively tax 401(k) retirement accounts, for example), there has never been a bill introduced in Congress to do any such thing. And even if some silly legislator tried to restrict how families who use Coverdell ESAs could use their money, HSLDA has a 100% winning track record in defeating dangerous legislation at the federal and state level. Any attempt to pass legislation reducing homeschool freedom, even if it was only to limit how money in a Coverdell ESA was used, would be treated very seriously by HSLDA, and would be opposed not only by homeschoolers, but also by public, private, and religious schoolers who would also be impacted by such an infringement on the use of their own money.

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