With summer fading fast, parents and kids across the country are getting ready to head back to school. Whether your children are starting their freshman year of college or getting prepared for the first day of kindergarten, you may be able to save money at tax time on certain education-related expenses. Here are some of the top tax tips to keep in mind as you and your kids prepare to start the new school year.
If you have younger children who attend day care before or after school, you may qualify for a tax credit for these expenses. The IRS allows you to claim the Child Care Credit if you paid for child care for a qualifying dependent aged 12 or younger. You can only claim the credit if you paid the child care expenses so that you and your spouse could work or look for work. Depending on your income, you can claim the credit for up to 35% of your qualifying expenses. Generally, you can’t use the credit to claim private school tuition unless you can separate child care costs from educational costs.
Most parents are familiar with the glossy catalogs and wrapping paper samples that go along with school fundraisers. What many parents don’t realize, however, is that any donations you make to the school may be tax-deductible. The IRS allows you to claim a deduction for any charitable donations made to your child’s school minus the value of any benefit you enjoy. This means that if you pay $75 for a ticket to a school fundraising dinner that’s actually worth $25, you can deduct the rest as a charitable donation. Keep in mind that you’ll need to itemize your deductions and document cash donations in excess of $250.
Parents of college-age children can take advantage of several tax credits for qualifying education expenses. If you still claim your child as a dependent, you can claim the American Opportunity Credit for the first four years of their post-secondary study. Up to a $2,500 credit is available for each student that you pay qualified education expenses for. The American Opportunity Credit is set to expire at the end of 2012 so you’ll have to act fast to take advantage of the tax break.
The Lifetime Learning Credit is a $2,000 credit that can be claimed if you pay qualified education expenses for an eligible student. Qualified expenses include tuition, fees, books, supplies and equipment. Unlike the American Opportunity Credit, you can use the Lifetime Learning Credit for graduate as well as undergraduate education expenses. As 2012, you must have a modified adjusted gross income of $61,000 or less if filing single or $122,000 or less if filing jointly to claim the credit.
In lieu of a tax credit, parents also have the option of taking a deduction for qualifying education expenses. The tuition and fees deduction can reduce your taxable income by up to $4,000 and you don’t have to itemize in order to claim the deduction. Keep in mind that you can only claim the deduction for those fees or costs that are required as a condition of enrollment. As of 2012, your adjusted gross income must be $80,000 or less if you file single and $160,000 or less if you file jointly to claim the deduction. Married couples who file separately aren’t eligible to deduct tuition and fees.
If you took out student loans to cover the cost of your child’s education, the IRS offers another way to reduce your tax liability. As of 2012, you could deduct up to $2,500 in student loan interest paid for an eligible student. You can claim the deduction as long as the loan money was used to cover tuition, fees, books, supplies and equipment. You can also claim the deduction if the loan was used to cover qualifying room and board expenses. To get the deduction, your modified adjusted gross income must be $75,000 or less if you file single and $150,000 or less for married couples filing jointly.
While the IRS offers some generous deductions for education expenses, there are some things that won’t qualify you for a tax break. For example, you can’t deduct the cost of school uniforms, whether your child attends public or private school. Parents who homeschool can’t claim any deductions or credits for the cost of clothing, study materials, field trips or similar expenses. You also can’t deduct any moving expenses you may have to pay if you have a student going away to college. It’s also worth noting that you can’t use money in a 529 savings plan to cover these expenses.
There’s no doubt that kids are expensive and parents need to be on the lookout for every opportunity to save. With the tax season just around the corner, some careful planning can pay off big when it comes to your child’s education costs.
This post was published on September 4, 2012