Are distributions from Educational Savings Accounts such as a Coverdell ESA and a 529 plan taxable?

Distributions from Educational Savings Accounts, including Coverdell ESAs and 529 plans, are typically tax-free as long as they are used for qualified education expenses. However, the key factor is whether the distributions exceed those qualified expenses. If the amount withdrawn surpasses what is necessary to cover qualified education expenses such as tuition, fees, books, and other related costs, then the excess portion is indeed subject to taxation. This result aligns with the tax rules governing these accounts, which provide favorable tax treatment for distributions that directly relate to education costs. Thus, the correct answer highlights that only the excess distribution is taxable, making it essential for account holders to track their expenses relative to their withdrawals for tax compliance.