savings plan for education expenses authorized by the Economic Growth and Tax Relief Act of 2001, which greatly expanded both contributions and income eligibility. Annual contribution limits in these accounts (formerly Education IRAs) were raised from $500 to $2,000 per year per child from birth to age eighteen, and the adjusted gross income limitation was increased to $95,000 for singles and $190,000 for married couples. The 2001 legislation renamed the tax-favored savings plan (created by the 1997 tax law) the Coverdell Education Savings Account, in recognition of its primary backer, the late Senator Paul Coverdell of Georgia.
Coverdell Education Savings Account earnings and withdrawals are tax-free, although annual contributions cannot be deducted from personal income taxes. Contributions can be made at any time up to the April 15 filing deadline for the applicable tax year (instead of December 31 under the previous law). Distributions may be used for a much wider range of education expenses, including books; elementary, secondary, and postsecondary school tuition and fees; personal computers; room and board; tutoring; and extended day-care expenses. Taxpayers taking a distribution from an education savings account may also claim a so-called hope credit for postsecondary education expenses or a lifetime learning credit to improve job skills for the same year they took a Coverdell ESA distribution as long as the ESA distribution is not used for the same expenses. Contributions to a Coverdell savings account and a qualified state tuition 529 plan in the same year are allowed without penalty.
