If you've been using a Coverdell savings account to pay for tuition or other expenses for a student in kindergarten through 12th grade, step up your spending. Beginning next year, any earnings you withdraw will be taxable as ordinary income and subject to a 10% penalty unless used for college expenses. The maximum allowable yearly contribution to Coverdell account will also be lowered from $2,000 to $500.
Congress could step in to renew the expiring provisions, but that's unlikely.If your child will go to college, you could roll the Coverdell money into a 529 savings plan at any time, penalty-free, as long as the accounts have the same beneficiary. But if that's not an attractive option, this is the time to spend Coverdell funds creatively.
Beyond tuition and fees, you can use Coverdell money to pay for tutoring, books and supplies, uniforms, and transportation. You can buy a computer for the whole family to use and pay for Internet access, too.
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One provision that might be addressed by Congress: Starting next year, anyone who claims a higher-education tax credit cannot take a tax-free distribution from a Coverdell account in the same year, even for college expenses. Lawmakers may tweak that rule so that you can use both in the same year, but not to pay for the same expenses.
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