Trump accounts reduce your taxable income in the year you contribute

A Trump account (formally a Coverdell Education Savings Account, or ESA) lets you set aside money for a child's education expenses and deduct those contributions from your federal taxable income. The money you put in reduces your adjusted gross income for that tax year, which can lower the taxes you owe.

The contribution limit is $2,000 per child per calendar year. You can contribute that full amount and deduct it on your tax return if you meet income requirements. The income limits change yearly and depend on your filing status — they are higher for married couples filing jointly than for single filers.

You do not have to contribute the full $2,000 to get a tax benefit. If you contribute $500, you deduct $500. The deduction is straightforward: you claim it on your federal tax return in the year you make the contribution, and it lowers your taxable income dollar-for-dollar.

Key Takeaways

  • Contributions to a Trump account reduce your taxable income in the year you make them, potentially lowering your federal tax bill.
  • The annual contribution limit is $2,000 per child, and you can only deduct contributions if your income is below the IRS threshold for your filing status.
  • Money in the account grows tax-free, and withdrawals used for may have access to education expenses are not taxed.
  • If you withdraw money for non-education purposes, you owe income tax on the earnings plus a 10 percent penalty.
  • You report the contribution on Form 8606 when you file your tax return, and the account custodian sends you a Form 5498-ESA for record-keeping.

Income limits determine whether you can deduct your contribution

The IRS sets income thresholds that determine whether your contribution is tax-deductible. If your modified adjusted gross income (MAGI) falls below the limit for your filing status, you can deduct the full $2,000. If your income exceeds the limit, the deduction phases out — you lose $200 of deduction for every $1,000 of income over the threshold.

The income limits vary by year and filing status. For the 2024 tax year, the phase-out range for single filers begins around $150,000 and ends around $165,000, while married couples filing jointly have a higher range. Check the IRS website or your tax software for the current year's limits before you contribute, because exceeding the income threshold means you cannot deduct that contribution.

If you are over the income limit, you can still contribute to the account — the money still grows tax-free and withdrawals for education are still tax-free. You simply do not get the upfront tax deduction. Some families choose to contribute anyway for the tax-free growth benefit alone.

Tax-free growth and withdrawals for education expenses

Once money is in the Trump account, it grows tax-free. Any interest, dividends, or investment gains are not taxed while the money sits in the account. This is different from a regular savings account, where you would owe tax on the interest each year.

When you withdraw money to pay for may have access to education expenses, neither the contribution nor the earnings are taxed. may have access to expenses include tuition, fees, books, supplies, equipment, and room and board if the student is at least a half-time student. Some K-12 tuition also qualifies, as does up to $35,000 in student loan repayment per the SECURE 2.0 Act.

The key is that the expense must be for the child named on the account and must occur in the same tax year as the withdrawal. If you withdraw $3,000 and use $2,500 for tuition and $500 for something else, only the $2,500 portion is tax-free.

Penalties and taxes on non-may have access to withdrawals

If you withdraw money for something other than a may have access to education expense, you owe income tax on the earnings portion of that withdrawal, plus a 10 percent penalty tax. The contribution itself comes out tax-free (because you already paid tax on that money when you earned it), but the growth is taxed and penalized.

Example: You contributed $2,000 and the account grew to $2,400. If you withdraw $2,400 for a non-may have access to expense, you owe income tax on the $400 in earnings plus a $40 penalty (10 percent of $400). The tax rate on the earnings depends on your tax bracket.

There is one exception: if the child receives a scholarship, you can withdraw an amount equal to the scholarship without penalty (though you still owe tax on the earnings portion). This prevents you from being penalized for having both a Trump account and a scholarship.

How to report the contribution and account activity on your tax return

You report your Trump account contribution on Form 8606 (Nonqualified Distributions from Education Savings Accounts) when you file your federal tax return. This form shows the IRS how much you contributed, your income, and whether you are claiming the deduction.

The account custodian (the bank or investment firm holding the account) sends you a Form 5498-ESA by January 31 each year. This form shows contributions made during the year and the account balance. You use this form to fill out Form 8606 accurately.

If you make a withdrawal, the custodian also reports it to the IRS. If the withdrawal is for a non-may have access to expense, you will need to report the taxable earnings on your return and calculate the 10 percent penalty. Your tax software or tax preparer can walk you through this calculation.

Coordination with other education tax benefits

You cannot claim a tax benefit twice for the same expense. If you use a Trump account withdrawal to pay for tuition, you cannot also claim the American Opportunity Tax Credit or Lifetime Learning Credit for that same tuition in the same year.

However, you can use different education benefits for different expenses in the same year. For example, you could use a Trump account withdrawal for books and supplies, and claim the American Opportunity Credit for tuition and fees. The key is that no single expense gets claimed under two different benefits.

If you have both a Trump account and a 529 plan, the same rule applies — coordinate which benefit you use for which expense to maximize your tax savings. Some families use the Trump account for K-12 expenses and the 529 for college, or vice versa, to spread the benefits across both accounts.

What happens to unused money after the child turns 30

Trump accounts have an age limit. The account must be closed and the money distributed by the time the child turns 30. Any earnings remaining in the account at that time are subject to income tax and the 10 percent penalty, even if the money was never withdrawn before.

If the child does not use all the money for education, you have options before age 30. You can roll the remaining balance into a 529 plan for the same child (subject to 529 rules), or you can withdraw it and pay tax and penalty on the earnings. Some families plan to use the account only through high school or early college, then move to a 529 for graduate school or other education goals.

Frequently Asked Questions

Can I deduct a Trump account contribution if I am over the income limit?

No. If your modified adjusted gross income exceeds the IRS threshold for your filing status, you cannot deduct any part of your contribution. You can still contribute and benefit from tax-free growth, but you do not get the upfront tax deduction. Check the current year's income limits before you contribute.

What counts as a may have access to education expense?

Tuition, fees, books, supplies, equipment, room and board (for at least half-time students), K-12 tuition, and up to $35,000 in student loan repayment all count. The expense must be for the child named on the account and occur in the same tax year as the withdrawal. Ask the account custodian if you are unsure whether a specific expense qualifies.

Do I have to withdraw all the money when the child turns 30?

Yes. The account must be closed by age 30. Any remaining earnings are taxed and penalized at that time. You can roll unused money into a 529 plan before the deadline, or withdraw it and pay tax on the earnings portion plus a 10 percent penalty.

Can I use a Trump account and a 529 plan for the same child?

Yes, but you cannot claim two tax benefits for the same expense. You can use the Trump account for one expense (like books) and the 529 for another (like tuition) in the same year. Coordinate which account you withdraw from for which expense to avoid double-claiming.

What if the child gets a scholarship?

You can withdraw an amount equal to the scholarship without the 10 percent penalty. You still owe income tax on the earnings portion of that withdrawal, but the penalty does not apply. This prevents the account from being penalized when the child receives outside funding for education.