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Saving For Private Or Prep School? A Tax-Smart Way

Does your family have a history of students attending a prestigious private or prep school? You may want to continue this legacy through your own children and grandchildren, but the tuition and related fees for these institutions can be pricey.

Although the tax law provides several tax-favored ways to defray college costs – most notably, the Section 529 plan – those tax breaks generally don’t extend to other schools, with one exception: the Coverdell Education Savings Account (CESA).

You can set up a CESA for anyone, such as a child or grandchild, and contribute to the account. Annual contributions are limited to $2,000. That’s relatively low, especially when compared to Section 529 plans that allow six-figure contributions, but the other advantages of CESAs are similar to those of 529 plans – no current tax on earnings and tax-free withdrawals to pay qualified expenses.

With a CESA, “qualified expenses” cover costs from kindergarten through 12th grade, as well as college. The money may be used for tuition and fees, room and board, uniforms, transportation, books and supplies, academic tutoring, and computers – even Internet access charges.

There’s one major drawback: CESA contributions are phased out for high-income taxpayers. The phase-out for joint filers begins at $190,000 of modified adjusted gross income and ends at $220,000.