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Tax deductions and education: What you should know
What educational expenses can you deduct on your taxes? We asked the experts.
As inflation drives prices up, parents are doing everything they can to save money — including asking themselves how they can lower their annual tax burden. Some kinds of educational expenses, such as 529 Plan contributions, offer families the opportunity to make tax-deferred contributions for their children’s future. Other types of educational expenses or dependent care expenses, including pre-K childcare programs, could qualify for the Child and Dependent Care Tax Credit.
That’s why we asked a Certified Financial Planner® professional what parents need to know about the upcoming tax year. Are tutors tax-deductible? What about tuition? What about other expenses related to education, such as textbooks?
The school year is only half over — but tax prep season is just beginning. Here’s what parents need to know, whether they’re planning for preschool or paying for college.
In this article:
Contributing to a 529
Many families use 529 Plans to save money and invest in their children’s education. These educational savings plans allow parents, grandparents and other family members to make tax-deferred contributions that can be used towards future educational expenses. The account beneficiary — that is, the child — does not have to report 529 earnings as income, and any distributions used for qualified educational expenses are not taxed.
Whether you’re planning ahead for elementary or secondary school tuition or hoping to help your child pay for college, contributing to a 529 Plan is one way to get the most out of your money — and potentially reduce your tax burden.
“529 Plans became more appealing after the passing of the Secure Act 2.0 at the end of December last year,” says Betty Wang, CFP and founder of BW Financial Planning. “Folks used to be afraid that their kids would decide not to go to college. Then they would be stuck with unappealing choices of taking the money out with taxes and penalties or changing the beneficiary to someone who is not their child.”
Fortunately, you now have another option. “With the new Secure Act, you are now able to make a tax-free transfer from your child’s 529 account to you or your spouse’s Roth IRA.” This provision takes effect in 2024, so keep that in mind as you plan your 2023 financial goals.
You may also want to consult a CPA, CFP or tax professional to ensure you’re following the new guidelines. “There are conditions,” Wang explains, “like the account must be opened for more than 15 years. The government wants to make sure you are using 529 accounts for their primary purpose of saving for college, not as a conduit to stash money in a more tax-efficient way.”
The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are both designed to help students and families save money on the cost of tuition. The AOTC offers a credit of up to $2,400 per eligible college student. The LLC offers a credit of up to $2,000 for students enrolled in undergraduate, graduate and professional degree programs, as well as students taking courses to acquire or improve job skills.
If your child still can be claimed as a dependent on your tax return, you may be able to use the AOTC or LLC to save on the cost of their education. Depending on where you are in your educational journey, you may even be able to use these tax credits to save on your own tuition costs.
As mentioned above, parents can also use 529 Plans to cover the costs of college tuition for higher education, high school tuition or elementary school tuition. If you use 529 account money to cover these qualified educational expenses, you won’t need to pay tax on the distributions you take from your 529 Plan.
Preschool tuition and other forms of pre-K educational expenses do not qualify as tax-advantaged educational expenses under the current 529 Plan rules. However, you may be able to claim the Child and Dependent Care Credit, which is a tax credit that helps cover the expenses of caring for children while you work, look for work or attend school. This credit covers a percentage of your childcare expenses, including preschool and pre-K educational expenses.
While the expanded credits offered under the American Rescue Plan Act of 2021 have since expired, parents can still claim the credit to save up to $3,000 on one qualifying dependent or $6,000 on two qualifying dependents.
Hiring a tutor
In most cases, money you pay for tutoring services is not tax deductible. Parents of special needs children may be able to qualify for a tax deduction, if the tutoring is recommended by a doctor and classified as a special education expense.
Parents may still want to keep track of the money they spend on tutoring, however — especially if they hire a tutor directly instead of working through an educational service like Pearson or Princeton Review. If your tutor qualifies as a freelancer or independent contractor, you may need to file 1099-MISC forms with the IRS so that your tutor can pay taxes on the money you pay them.
That said, it’s still worth hiring a tutor for your child. “Parents spend thousands of dollars a year on youth sports,” Wang explains. “Some say it’s because they are aiming for athletic scholarships, but only 1.3% of high school kids get partial or full athletic scholarships to college. If parents are aiming to cut down the cost of college, their money would be better spent on AP classes or a tutor to get better grades.”
Other educational expenses
The costs of college go far beyond tuition, as many families quickly learn. Luckily, so do many educational tax breaks. Your child’s textbooks and other educational expenses may qualify for the American Opportunity Tax Credit, for example. They may also help you or your child qualify for a student loan interest deduction.
“College costs have skyrocketed,” Wang explains. “For four years of college, families can be looking at a total cost of $109,000 to $316,000.
“For many families, paying for their child’s college education is the biggest investment of their lives,” she adds. “But there are ways to mitigate the costs. Tax breaks can lessen the financial burden of college expenses, but as with most things tax related, there are rules about who qualifies and how to use these tax credits. Consult with a tax professional to see if your family qualifies.”
Tax deductions and education can be complicated — so think of it as a learning process. Take your time, check your work and don’t be afraid to ask for help.
That’s the same advice you’d give your kids, after all.
About Nicole Dieker
Nicole Dieker has been a full-time freelance writer since 2012, with a focus on personal finance and habit formation. In addition to Haven Life, her work regularly appears at Lifehacker, Bankrate, CreditCards.com, and Vox. Dieker spent five years as a writer and editor for The Billfold, a personal finance blog where people had honest conversations about money, and is the author of Frugal and the Beast: And Other Financial Fairy Tales.Read more by Nicole Dieker
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Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
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