Information Bulletin #3 - Coverdell Education Savings Accounts changes HB 2732 - SB1562            10/28/2003


Did you know that:  Parents are not able to take advantage of the Education Savings Account unless they comply with the federal rules that established the account. A change in Federal legislation regarding the Coverdell Education savings Accounts is simply one more way that homeschoolers will be included in a category of parents who must endure federal regulation. Until now, the Internal Revenue Service had no ability to review anything about homeschooling. With implementation of this bill, yet another agency of the federal government will be authorized to intrude on and regulate the activities of a homeschooling family. With implementation of this bill, the IRS will have a new definition of homeschooling.


Let's look at the changes propose in the federal legislation HR2732/SB1562 which is being considered by Congress and analyze it.

SEC. 6. CLARIFICATION OF THE COVERDELL EDUCATION SAVINGS ACCOUNT AS TO ITS APPLICABILITY FOR EXPENSES ASSOCIATED WITH STUDENTS PRIVATELY EDUCATED AT HOME UNDER STATE LAW. (a) IN GENERAL- Paragraph (4) of section 530(b) of the Internal Revenue Code of 1986 (relating to qualified elementary and secondary education expenses) is amended by adding at the end the following new subparagraph: `(C) SPECIAL RULE FOR HOME SCHOOLS- For purposes of clauses (i) and (iii) of subparagraph (A), the terms `public, private, or religious school' and `school' shall include any home school which provides elementary or secondary education if such school is treated as a home school or private school under State law.'. (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act.


While it sounds laudable to include homeschool families under this section of the IRS code, the statement ‘if such school is treated as a home school or private school under State law' is problematic for homeschoolers in states which do not currently ‘treat’ them under state law. In order to qualify for a small tax benefit, states would need to enact laws which would ‘treat’ homeschoolers as a home or private school, thereby removing any independence homeschoolers in those states now enjoy.


Briefly, the Education Savings Accounts may be used to pay for elementary or secondary educational expenses related to enrollment or attendance at an eligible school for a designated beneficiary (child) such as tuition, books, tutoring, special needs services, room and board, uniforms and transportation. Computer equipment is included if it is used for educational purposes. The educational institution should be able to tell you if it is an eligible educational institution. Up to $2000 may be added to each child’s account each year by qualifying parents and relatives and the money then belongs to the child. It is counted as the child’s asset and income when applying for education loans. If it is not used by the time the child is 30 years old, it becomes theirs. It should also be noted that trustee fees to manage the account may exceed the tax-free interest earned and in order to access this type of tax benefit, parents are required to file a tax return.


If families want to use their own money to pay for the education of their own children, they can do so right now with no government rules attached. Another alternative to a government program would be to open a tax-free no-load mutual fund to save for your child’s education. To learn more about this type of investment program visit:,3285,lnp=10094&cg=910&htmlid=39,00.html Because these are private mutual fund investments, none of your fellow homeschoolers would have their freedom threatened by federal regulation so you could qualify. No state would have to institute homeschool laws to treat homeschools "as a home school or private school under State law" in states which currently do not regulate them as such. Additionally, you and your family members would be able to save for your child without any limits on the amount you set aside and your educational choice will not have to be approved by the government. Homeschoolers need to assess whether this small tax benefit is worth trading for legislation regulating homeschools in those states which do not currently do so. To learn more about Coverdell ESA’s (Educational Savings Accounts) either request IRS publication 970 - Tax Benefits for Education – or visit their web site at


Federal legislation that is being considered (HR2732/SB1562) to revise to the change the IRS code regarding Education Savings Accounts is totally unnecessary and will only invite further reporting requirements and regulation for homeschoolers!



Attorney Deborah Stevenson - Executive Director of National Home Education Legal or email :

Judy Aron - Director of Research, NHELD –