Its that time of year again! I always enjoyed going back to school when I was younger for the mere fact I got to get new supplies, clothes, and shoes for school. Once I got into college though, I was eager to start a new semester not only because that meant I was closer to graduation, but also because it meant possibly a bigger deduction on my taxes! I know, what every college student thinks of during their college years, right?
Are back-to-school supplies tax deductible? Its a common question come tax time especially with many investing so much money into school supplies, uniforms, tuition, school lunches. Not a lot know all the benefits you can get for tax breaks available for qualifying expenses. Whether you are going to school, or you have a child/dependent going to school, or even a teacher. There's several misconceptions people have on what is deductible and what is considered a qualifying expense for other tax breaks, too. I have listed several below with an explanation of what is and what is not deductible.
1. Private School Tuition and School Uniforms: The cost of private school tuition and required school uniforms are not directly deductible on your tax return. However, they do qualify as qualified education expenses for those who set up an ESA (Education Savings Accounts) (mentioned later).
2. Before/After school Child Care Component & Costs: If a child is under the age of 13, the cost of before or after school care may qualify as a tax credit if it is a qualifying expense. Qualifying expenses include payments to a dependent care center, household services to care for the child, expenses for a child in nursery school, pre-school, or similar program for children below the level of kindergarten and expenses for before or after school care of a child in kindergarten or higher grade. Also, not a lot realize that the cost of sending a child to a day camp is a qualified expense even if it specializes in a particular activity, like soccer. But the cost of summer school and tutoring programs do not qualify. The credit percentage ranges from 20% to 35% with a maximum credit of 20% of qualified expenses for taxpayers with income over $43,000 (2015 law). Although this is a small amount, the credit like some, does not have an Income limitation. So even high-income taxpayers can claim this credit.
3. School Fundraisers: Don't you love how much fundraiser activity the school does? Your child probably brings home a form for a fundraising activity every month! Most of the time they are selling a product, and the school will get a percentage of the sales. So the question always remains, can I deduct all this money I spend on school fundraisers? The answer is quite simple. It depends. As long as you reduce your donation by the market value of any goods or services received in return for your donation. So if you are buying some candy through the school fundraiser, more than likely, your donation is not deductible because you received some goods in return. However, if you are donating strictly money for the fundraising activity and receive nothing in return, it will more than likely be a charitable donation.
4. Moving Expenses to College: As many as some would like for it to be true, you cannot deduct moving expenses when moving away to college. Going away to college is not moving for a job. Even if you consider yourself a "professional college student"! However, the expenses moving from college to that first job may be eligible for the moving expense deduction if they pass the distance test and time test.
5. §529 Plans: In other words, a Qualified Tuition Program (QTP) which allows a taxpayer to make contributions to an account or program to be used to pay qualified higher education costs. The benefit is the contributor is not subject to income limitations. Although contributions are not tax deductible, the money grows tax-free and the distributions and earnings from these QTPs are excluded from income if used for higher education expenses. So it's like a savings account that earns money, and when you take it out for education expenses, you are not taxed on the earnings.
6. Educational Savings Account: These are similar to §529 plans, but the earnings and distributions can be used for post-secondary expenses AND for qualified K-12 expenses. Also, with a ESA, the money must be used in the account by age 30. Click here to compare differences between §529 and ESA: http://www.savingforcollege.com/compare_savings_options/?assigned_to%5B%5D=0&assigned_to%5B%5D=1&hiddenField=vehicles&mode=Submit
7. Student Loan Interest: Some, like myself, had to take out substantial loans for college. If you take out a loan for yourself or dependent for college or vocational school expenses, you can deduct the interest amount up to $2,500 (2015). The benefit, you don't have to itemize in order to claim the deduction. The downside, it will be limited to your income. Higher income taxpayers may not benefit.
8. American Opportunity Tax Credit: This is a education tax incentive geared toward the taxpayer, spouse, dependents first four years of undergraduate. Does not have to be consecutive years. The credit is up to $2,500 (2015) per student, but will be limited to income. The student must also be enrolled at least part-time. This credit is refundable, so this means its money in your pocket even if they have no tax liability. New for 2016 filings, you must have a 1098-T from the qualified educational institution to take the credit and must be based on the amount paid, not billed from the institution.
9. Lifetime Learning Credit: This is similar to the AOTC above, however, the credit is up to $2,000 per return and the student can be undergraduate OR graduate. This credit is non-refundable. Currently there is no limit on the number of years to claim the credit. (The AOTC is only 4). Income limits do apply to this credit as well.
10. Tuition and Fees Deduction: This is a deduction is applied directly to reduce your income. (Above the line). The maximum deduction is $4,000 and can be fore undergraduate, graduate, or post graduate courses. Income limits do apply, but there is no limit to the number of years the credit can be claimed.
11. Roth IRA: "This is a retirement account" you say! Well yes, but it has its benefits for students. Some students earn income from summer and/or after school employment. These kids can start contributing to a Roth IRA which will grow tax-free. Because of the kids' age who invest in the ROTH, they can take full advantage of time and the power of compounding. Opening an IRA for your child provides him not only a jump start on retirement savings, but also valuable financial lessons. Another benefit is that your child may be able to tap into the account for qualified higher education expenses. With a Roth IRA, you can withdraw any contributions, but not the investment earnings, for any reason without tax or penalty.
12. Savings Bonds Interest Exclusion: All or part of the interest earned on Series EE bonds issues after 12/31/1989 or on Series I bonds, is excluded from income for certain taxpayers if the bonds are used for qualified educational expenses. Bond owners must be at least 24 years old before bond's issue date. Interest is tax-free if the amount of bonds redeemed is less than qualified educational expenses in year of redemption. However, there are income limitations and income phase-out levels.
13. States and Sales tax holiday's & States education expense credits: There are many states that have back-to school tax free holiday's in which you can buy school supplies tax free. There are also states that have specific education tax credit laws in which you can take an education tax credit when filing the state income tax return at the end of the year.
A list of states that have a tax free week/weekend for purchase of school supplies are:
a. Maryland
b. Connecticut
c. Alabama
d. Arkansas
e. Florida
f. Iowa
g. Louisiana
h. Missouri
i. New Mexico
j. Ohio
k. Oklahoma
l. South Carolina
m. Texas
n. Virginia
o. Georgia
p. Mississippi
q. Tennessee
Please check with the states' laws or your tax accountant to determine what items are specifically included in the tax free purchase as they all differ.
Some States that have specific tax education credits for income tax returns are:
a. Iowa
b. Arizona
c. Minnesota
d. Illinois
e. Louisiana
Since I am from Illinois, expanding on the tax credit for Illinois Residents, the law allows parents to receive a tax credit equal to 25% of any amount they expend in excess of $250 for tuition, book fees, and lab fees, but not to exceed $500 annually. This credit is available to any public or private school student.
14. TEACHERS!!!!!
There is also a small break for teachers who use their own money (non-reimbursed) to pay for school supplies for their classroom. For several years, there has been a deduction from your annual income for eligible elementary and secondary school teachers that could claim a deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary material used in the classroom. UPDATE!!! As of 1/1/2016, the law modifies the deduction indexing the $250 amount for inflation AND it now treats professional development expenses as expenses eligible for the deduction. I've heard it from many of my teacher friends, "Why is it only $250?!! That is way too low". They finally adjusted it for inflation. The increase each year might not be much, but at least there's a possibility of an increase!
