A contributor may contribute up to $500 to Coverdell education savings
accounts on behalf of each beneficiary in any taxable year ($2,000 in
taxable years beginning after December 31, 2001). Code Section 530(b)(3).
Since the aggregate limit on contributions from all sources on behalf of
any one beneficiary is also $500 per taxable year ($2,000 in taxable
years beginning after December 31, 2001), the contributor's limit will in
effect be reduced if other contributors make contributions on that same
beneficiary's behalf for the taxable year. See Section 31.4(a) for a
discussion of the aggregate limit on contributions on one beneficiary's
behalf in any taxable year.

Even if an individual is the only contributor to the Coverdell education
savings accounts for a particular beneficiary, the maximum amount an
individual contributor may contribute may be reduced below the $500 or
$2,000 limit, eventually to the point where a contribution is prohibited
altogether, if the individual's modified adjusted gross income (AGI)
reaches certain levels. Code Section 530(c)(1). Modified adjusted gross
income is gross income plus any amounts excluded from gross income as
foreign earned income or income from sources within Guam, American Samoa,
the Northern Mariana Islands, or Puerto Rico. Code Section 530(c)(2).  

Generally, the amount that can be contributed is reduced for individuals
with modified AGI over $95,000, and contributions are prohibited for
individuals with modified AGI of $110,000 or higher. In the case of a
joint return, the corresponding dollar amounts are $150,000 and $160,000.
Code Section 530(c)(1). For taxable years beginning after December 31,
2001, the modified AGI dollar amounts for joint returns are increased to
$190,000 and $220,000, so that on a joint return the maximum contribution
amount will be reduced if modified AGI is over $190,000, and
contributions will be prohibited if modified AGI is $220,000 or higher.
Code Section 530(c)(1), amended by Pub. L. 107-16, Economic Growth and
Tax Relief Reconciliation Act of 2001, Section 401(b). <25> 

Individuals whose modified AGI is between the two phase-out levels must
figure their contribution limit by multiplying the $500 or $2,000 limit
(whichever applies) by a fraction, and then subtracting the result from
the applicable limit. The fraction's numerator is the amount by which the
individual's modified AGI exceeds the lower phase-out level; and the
denominator is the amount by which the upper phase-out level exceeds the
lower phase-out level.

     EXAMPLE 1: John, a calendar-year taxpayer, is single and has modified
     adjusted gross income of $96,500 for 2001. John can contribute up to
     $450 for 2001 for each of his designated beneficiaries. John
     determines this limit by first calculating the appropriate fraction:


                 $96,500 - $95,000            $1,500            1
                 ------------------     =     -------     =     --
                 $110,000 - $95,000           $15,000           10


     Then John multiplies the $500 limit applicable for 2001 by 1/10,
     which equals $50. Finally, John subtracts the $50 from the $500
     limit, which gives him a reduced limit of $450.

     EXAMPLE 2: Same facts as in Example 1, except now it is 2002. John
     can contribute up to $450 for 2002 for each of his designated
     beneficiaries. John determines this limit by first calculating the
     appropriate fraction:


                 $96,500 - $95,000            $1,500            1
                 ------------------     =     -------     =     --
                 $110,000 - $95,000           $15,000           10


     Then John multiplies the $2,000 limit applicable for taxable years
     beginning after December 31, 2001, by 1/10, which equals $200.
     Finally, John subtracts the $200 from the $2,000 limit, which gives
     him a reduced limit of $1,800.

     EXAMPLE 3: Jill, a calendar-year taxpayer, is married and has
     modified adjusted gross income of $193,000 for 2002. Jill can
     contribute up to $1,800 for 2002 for each of her designated
     beneficiaries. Jill determines this limit by first calculating the
     appropriate fraction:


                 $193,000 - $190,000            $3,000            1
                 -------------------     =      -------     =     --
                 $220,000 - $190,000            $30,000           10


     Then Jill multiplies the $2,000 limit applicable for taxable years
     beginning after December 31, 2001, by 1/10, which equals $200.
     Finally, Jill subtracts the $200 from the $2,000 limit, which gives
     her a reduced limit of $1,800.

     COMPLIANCE TIP: The Instructions for Form 8606, Nondeductible IRAs,
     contain a worksheet that can be used to compute the amount an
     individual can contribute.

     OBSERVATION: For taxable years beginning after December 31, 2001,
     corporations and other entities, including tax-exempt organizations,
     are allowed to make contributions to Coverdell education savings
     accounts. However, only contributions made by individuals are subject
     to reduction based on modified AGI. Code Section 530(c)(1),  amended
by Pub. L. 107-16, Economic Growth and Tax Relief
     Reconciliation Act of 2001, Section 401(e).