Even though summer may still be in full swing, schools across the country are starting to get ready to welcome students back to in-person learning. As a parent, you might welcome the return to the classroom after a year of remote learning, but do you know you might be able to enjoy some tax savings through a variety of programs and credits designed to assist with everything from tuition to school supplies?
As with anything tax-related, plenty of nuanced rules and updated regulations abound. Here’s a primer to get you started on a school savings journey.
Tax implications of tuition
In most instances, the IRS won’t allow you to deduct private K-12 school tuition on a federal return, though some states do, enabling you to reduce the amount of state tax you owe. These rules vary by state, so it’s important to check with your tax advisor to see if you qualify.
However, there is an exception to the federal rule when it comes to private schools. If you have a referral from a medical professional that shows your child has special needs that can only be met by attending a private school, you might be eligible to deduct your child’s K-12 tuition, as well as any costs for special tutoring or training. To claim it, you have to itemize rather than choose a standard deduction, and any expenses must qualify as deductible medical expenses.
Saving money without tax penalties
Coverdell Education Savings Accounts offer the ability for parents and guardians to set aside money to invest in educational needs that is exempt from taxes on the earnings. These funds must be used to cover qualified education expenses like tuition, textbooks and associated school supplies. Contributions for each beneficiary are capped at $2,000 per year, though contribution limits are reduced for those who reach certain levels of income.
Another savings option is a 529 Education Savings Plan, which also enables money to be saved for educational needs and protected from federal taxes. For grades K-12, up to $10,000 per student can be withdrawn without a tax penalty and used for tuition, textbooks, computers or other school supplies.
Help for after-school programs
The American Rescue Plan Act overhauled elements of the Child and Dependent Care Tax Credit for 2021, increasing the amount of eligible expenses for the credit and making it fully refundable, meaning you can get the credit even if you don’t owe any taxes.
Now, the amount of qualifying expenses is up to $16,000 for two or more qualifying individuals, while the percentage of qualifying expenses is 50 percent.
Your homework is to call Padgett
Determining what is and isn’t deductible can be tricky, which is why turning to a trusted tax professional is important. At Padgett, we can help you develop a tax savings plan that can help get the most out of your family’s educational expenses. Reach out today!