In large bowl, combine sugar, butter and eggs; beat until light and fluffy. Stir in eggnog and vanilla. Lightly spoon flour into measuring cup; level off. In medium bowl, combine flour, nutmeg and baking powder. Add flour mixture to butter mixture; blend well. Cover with plastic wrap; refrigerate 30 minutes for easier handling.
Meanwhile, in small bowl, combine egg yolks and water; blend well. Divide mixture into several small cups; tint with food color. If paint thickens, add a few drops water.
Heat oven to 350°F. Divide dough in half. On lightly floured surface, roll half of dough to 1/8-inch thickness. Cut with assorted cutters. Place 2 inches apart on ungreased cookie sheets. Using small paint brush, paint designs on cookies with egg yolk paint.
Bake at 350°F. for 7 to 10 minutes or until cookies are light golden brown. Remove from cookie sheets.