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Back to School Tax Tips

Back to School Tax TipsThe month of August is in full-swing and you know what that means, back to-school season is right around the corner.  While some of you may be seasoned veterans, there are a lot of first-time parents out there sending there little ones off to school for the first time.  Either way, we at Ayar Law Group and have some great back-to-school tax tips for all you parents out there.

Donations

Donations made to your kid’s public school may be written-off as a deduction from your taxable income but it all depends on who benefits from your donation.

To break it down, a monetary donation or a donation of equipment that would serve the entire student body or a specific group (such as a sports team or an after-school or academic club) then it falls under the umbrella of a charitable donation, and is therefore tax-deductible.  An example of this would be if you made a donation to help your child’s basketball team pay for new uniforms – however much you contributed could be considered tax-deductible.

If, on the other hand, you only contributed towards your own child’s needs,then that would not be considered a donation and is therefore not tax-deductible.  An example of this would be if you were required to buy your child’s basketball uniform but you only paid for that one – that would not be considered a donation and is thusly not tax-deductible.

Fundraisers v. Raffles

Even though donating to school fundraisers and raffles are both considered charitable by definition, according to the IRS they are not and therefore the question of whether or not they are tax-deductible gets a bit murkier. If you contribute to a raffle (where you can win something), it is never tax-deductible, but fundraisers on the other hand can be.

If the fundraiser you are contributing to is one where you don’t receive anything in return for your donation, then it can be used as a charitable donation, and therefore, written-off.

On the other hand, if you do happen to receive something in return for your contribution then the property’s reasonable value must be subtracted prior to the deduction.  A perfect example of this would be as follows:  Let us say you attend a $150/plate black tie banquet for your son or daughter’s basketball team, and in return you receive an upscale $50 steak dinner and a program that sells for $5.  In this particular example, you would subtract the $55 for the price of the goods received and the remaining $95 may then be received as a charitable tax deduction.

The Child-Care Credit

Can I use my child’s after-school activities toward the child-care credit? This is one of those areas in tax law with shades of nuance, so it is certainly wise (and as you’ll see certainly worthwhile) to consult a tax professional on the matter.  This tax credit is worth anywhere between 20% and 35% of the first $3,000 in qualifying expenses for one child; and $6,000 for more than one child, depending on your income.  There are certain stipulations we can spell out for you here that may answer a few questions for you.

  • The child must be attending the program so that you may retain employment, look for employment, or attend school.
  • The after-school program your child attends must also be considered a “child-care” program.  So bear in mind that tutoring sessions do not qualify.
  • The child-care credit is only available if your child is under 13 years of age.
  •  Additionally, tuition at the kindergarten level or above never qualifies for the credit.

Plan for your child’s educational future and your future tax savings: 2 birds, 1 stone.

Setting up a college savings plan for your child is not only a great way to plan ahead for his or her educational future but it is also a smart way for you to set yourself up for future tax savings. There are two great options available to you to accomplish this task: a 529 Savings Plan and a Coverdell ESA (Education Savings Account). We have outlined the bullet points of each plan below.

529 Savings Plans

  • run by the states
  • Function much like 401(K)s as far as investment options go
  • Depending on the plan you choose, the best plan to suit your needs – much like with a 401(k) – with a 529 Savings Plan you can select from a wide array of mutual funds, including stock- and bond-based options along with target-date funds when gradually, lower investment risk the closer your child gets to college age.
  • With this type of plan, you are not limited with low contribution limits as many 529 Plans allow for balances upward of $400,000
  • Finally, while you may not be able to deduct the contributions made on these plans on your federal tax returns, depending on the state you reside in you may be able to deduct your contributions on your state returns.

Coverdell ESAs

  • Coverdell ESAs are quite different from the 529 Plans described above

For starters, the contributions are capped at a mere $2,000 per year; so you may want to start early!

On the other hand, the investment options available to you are of a much wider variety.

  1. With Coverdell ESAs, you are free to invest in any stocks, bonds or mutual funds you’d like.
  2. Furthermore, Coverdell funds are not only limited to college expenses; you are free to use the account for any level of education you’d like.

When it comes to tax advantages both of these savings plans function similar to a Roth IRA.  That is, the contributions made are not federally tax-deductible. Although, any withdrawals made and used for qualified education expenses are 100% tax-free.

When it comes to saving for your child(ren)’s higher education there’s no such thing as starting too soon and the earlier you begin the more time you give your investment to grow.

Conclusion

Children are a blessing but they can cost a fortune (trust us…we know!)  And there is absolutely nothing wrong with reaping the benefits of the credits and deductions the IRS allots for our little dependents of joy – it is why they exist!  So if, and only if (we do not encourage any sort of creative accounting by any means) you meet the criteria, we think it is foolhardy for you NOT to claim what is rightfully yours.  So speak to your trusted tax professional and see what you can claim – you may be missing out on certain deductions and credits you did not even know existed.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.