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Discover tax tips for enrolling your children in private or public schools. Learn about available tax benefits, credits, and savings accounts to help alleviate educational expenses.
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Deciding where to enroll your child in school is a personal decision, and if you opt for private K-12 education, there are federal tax benefits available to alleviate some of the associated costs.
Key Points:
• Federal tax regulations generally do not permit the deduction of private school tuition expenses, unless the child is enrolled in a private school for special needs.
• If a medical professional recommends special needs private education for your child, the associated expenses might qualify as deductible medical costs.
• While direct deduction of private school tuition is not allowed, earnings from a Coverdell Education Savings Account (ESA) can be tax-free if used for eligible K-12 education expenses.
• Withdrawals from a Qualified Tuition Plan, commonly known as a 529 Plan, are also tax-free when utilized for tuition payments (excluding expenses like books or other educational costs).
Generally, sending your children to public school from kindergarten through 12th grade does not typically result in tax breaks. Similarly, there are limited tax advantages for sending your kids to private schools under most circumstances.
Federal tax laws do not permit the deduction of private school tuition to reduce your federal tax liability.
However, if your child is enrolled in a private school for special needs, you might be eligible for a tax break on K-12 private school tuition. To qualify, a physician's referral demonstrating your child's requirement for specialized private education is necessary. Additionally, if your child qualifies, you may be able to deduct expenses for special tutoring or training, along with tuition.
Without meeting these specific conditions, there may be limited opportunities for significant tax savings when sending your children to private school.
Regrettably, covering private school tuition expenses usually does not qualify for a tax deduction on your federal income tax return. However, you do have the option to utilize two types of accounts that can help reduce the overall cost of meeting eligible education expenses.
Two tax-advantaged accounts are available to aid in covering eligible education expenses: the Coverdell Education Savings Account (ESA) and the Qualified Tuition Plan, commonly referred to as a 529 Plan. These accounts provide the opportunity to invest funds for the purpose of covering specific education costs, applicable not only to K-12 education but also extending to college or other qualifying educational expenses.
Although private school tuition generally doesn't directly reduce your tax liability, the government provides potential tax relief through Coverdell Education Savings Accounts (ESAs). These accounts enable tax-free investment of education savings, which can be utilized for qualified K-12 education expenses such as tuition, textbooks, or other necessary supplies. Withdrawals up to $10,000 per student annually from ESAs can be made tax-free to cover these expenses.
However, there are limitations to the tax benefits of contributing to a Coverdell ESA. Contributions for each beneficiary are capped at $2,000 per year. For instance, if grandparents contribute $1,000 to the child's Coverdell account, you can only contribute an additional $1,000 for the year.
Income levels can also affect contribution limits. If your modified adjusted gross income exceeds $95,000 (or $190,000 for joint filers) in 2023, your contribution limits will gradually decrease until reaching $190,000 (or $210,000 for joint filers), where contributions are no longer allowed.
The American Opportunity Tax Credit and the Lifetime Learning Credit, two widely used education credits, are specifically designed for covering higher education expenses and cannot be applied to offset costs associated with K-12 education.
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Similar to Coverdell accounts, 529 plans offer the flexibility to utilize savings for K-12 tuition expenses. Annually, up to $10,000 per student can be withdrawn tax-free from these accounts. However, unlike Coverdell accounts, the tax-free benefit of 529 funds is exclusively reserved for tuition payments and cannot be used for expenses like textbooks, computers, or other fees.
Both of these educational savings avenues offer tax advantages for invested after-tax funds. Yet, unlike using these accounts for college savings, the shorter investment period for K-12 expenses may result in lesser growth in value, thereby potentially reducing your benefits for immediate needs. Nevertheless, seizing any available tax savings can prove beneficial.
Tax credits are available for attending school, specifically through the Child and Dependent Care Credit, which provides a tax break for parents covering child care costs. Although primarily aimed at working parents, individuals who were full-time students or unemployed for part of the year may also be eligible for this credit.
If you've incurred expenses for after-school programs, daycare centers, babysitters, summer camps, or other care providers for a qualifying child under age 13 or a disabled dependent, you could qualify for a tax credit in 2023. The credit can be as much as 35% of up to $3,000 in qualifying expenses (maximum credit of $1,050) for one child or dependent, or up to $6,000 in qualifying expenses (maximum credit of $2,100) for two or more children or dependents.
For instance, in tax year 2023, a taxpayer with one qualifying person, $3,000 in qualifying expenses, and an Adjusted Gross Income (AGI) of $60,000 would be eligible for a nonrefundable credit of approximately $600 (20% x $3,000).
The American Opportunity Tax Credit is designed to assist students in covering the expenses of attending college. This credit stands out for its substantial tax savings compared to other education-related benefits, as it directly reduces the tax owed on a dollar-for-dollar basis, and a portion of it may be refundable. It's important to note that this credit cannot be utilized to offset costs associated with K-12 education.
The Lifetime Learning Credit provides a dollar-for-dollar reduction in your tax bill for a portion of the tuition, fees, and other qualifying expenses incurred by yourself, a spouse, or a dependent attending a post-secondary school. Unlike the American Opportunity Credit, none of the Lifetime Learning Credit is refundable. Similar to its counterpart, this credit cannot be applied to reduce the expenses of private K-12 education.
A dependent care flexible spending account (DCFSA) is a pre-tax account designated for covering eligible dependent care expenses. It can be utilized for dependents such as children under the age of 13, a disabled spouse, or an elderly parent in need of care. Typically, access to a DCFSA is provided through an employer offering this benefit to its employees. While funds from this account cannot be used for K-12 public or private school tuition, they can be employed to cover pre-tax costs associated with before-school and after-school care.
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This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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