Education expenses have risen geometrically since the turn of the century. To manage these expenses and preserve more of their income and savings, families are turning to their CPAs for tax advice on managing hefty tuitions or school loans. Here are some key tax tips to help you keep more of your money and stay on the right side of the Internal Revenue Service.
Know Your Deductibles
The list of education-related tax deductibles is long and varied enough to puzzle anyone who is less than familiar with tax law. For example, transportation costs may be deductible, but school uniforms are not – even when your child’s school requires them. Private school tuition is also not deductible, a fact that many people who prepare their own taxes may not know. Families with children under the age of 13 or at the college level have special restrictions and additional deductibles, so your tax status could change as children progress through their academic careers.
Divide to Conquer
Even for cases in which tuition itself is not deductible, other expenses may be. Your tax preparer or family financial advisor can help you pinpoint these additional expenses. Books and other educational materials are often deductible, as are some expenses related to extracurricular activities. Like other uniforms, sports uniforms are not deductible, but some costs related to additional training might apply. Only by segmenting and itemizing your expenses precisely can you find some of the more arcane deductibles, so speak with your advisor and divide direct educational costs such as tuition from other outlays that you may be able to claim.
To defray the cost of before-school and after-school care, the IRS allows families to claim these expenses as a deductible. However, these costs must be carefully documented and tracked; occasional babysitting fees or unpaid care from family members does not typically qualify. These deductions are only available for children under the age of 13, beyond which after-school programs and care are only deductible in exceptional cases such as for children with special needs.
Charitable Donations and Bake Sales
It’s always wise to get the full value of your charitable donations as a tax deductible, and some school events qualify as charitable donations. If you incurred expenses for the class bake sale, you may be able to claim those cupcake tins and bags of flour on your annual tax return. However, you must subtract the value of any services or goods you received in exchange for your donation. In other words, if the school reimbursed you for your travel expenses or paid you for your secret pineapple muffin recipe, you can no longer claim those expenses.
Tax-Deferred Education Accounts
Educational savings accounts are not taxed and can be used for any direct educational expenses, including books, computers, laboratory gear and tuition. Also called 529 plans after the sections of the IRS code that deal with them, these plans fall into one of two categories: savings plans and tuition credits. Tuition credits let you lock in current tuition costs at specific institutions as a hedge against rising future prices while an educational savings account (ESA) gives greater flexibility for school choice but may limit value if tuition rises precipitously.
Tuition Deductions and Credits
Tuition and school fees count as their own deductions, but the restrictions and qualifications on these deductions can be complex. They are income-dependent, but tuition deductions are graduated, and many families can claim a portion of these deductions even when their income is too great to permit application of the entire deduction. Students can also claim this deduction for an unlimited number of years, unlike other academic tax breaks such as the American Opportunity Credit (AOC).
The AOC can be as high as $2,500 per year for four years of post-secondary education. This credit can apply to any direct educational expense, including books, lab fees, required supplies and course-related sports equipment, but it cannot be counted toward student housing, health care insurance or other indirect expenses. As with tuition deductions, income restrictions apply.
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