It's no secret that raising children is expensive, and when it comes to saving money, every penny counts. Fortunately, there are several excellent tax breaks you might qualify for as a parent, such as the child care credit, deductions for charitable contributions, and the various tax breaks for tuition and other educational expenses. However, the details of each of these are not well known, so here's what you need to know about what expenses qualify for these tax breaks, as well as what doesn't.
What exactly counts as "child care"?
The Child and Dependent Care Tax Credit is designed to reduce the burden of child care expenses while parents work, and is worth 20% to 35% (depending on your income) of the first $3,000 in qualifying expenses for one child under age 13, or the first $6,000 in expenses for more than one child.
However, there is some confusion about exactly what expenses qualify for the credit, so here are a few guidelines:
- The expenses you claim must have been incurred while you were working, looking for work, or attending school full-time.
- The child must be under 13 for the entire year. If the child turns 13 during the year, you may be able to claim a partial deduction.
- The child care must meet the IRS' definition. Basically, the main purpose must be child care, not some other service. For example, an after-school tutoring program or sports program doesn't count.
- Tuition at the kindergarten level and above never qualifies as a child care expense. Preschool tuition, however, can be considered child care, provided that you're working while your child is attending.
Admittedly, there is some gray area here. For example, if you send your child to an after-school child care program where there happen to be tutors available if your child needs help with homework, it could potentially qualify. Always check with a tax professional before claiming any "borderline" child care expenses.
I gave money to my child's school. Is this a charitable contribution?
It is well-known that contributions to non-profit organizations can qualify for a charitable deduction on your taxes. And, your child's school is most likely a non-profit organization. However, the IRS has some pretty specific rules about this.
Basically, the money in question must be intended for the benefit of all of the children in the school or program, not just your child. A donation made directly to the school or to a sports program almost always qualifies for a tax deduction. On the other hand, if you buy say, school uniforms specifically for your child, it's not considered a donation.
Similarly, if you buy sports equipment for your child, it's not deductible, but if you buy something for the benefit of the entire school-related sports team, it can be deducted. For instance, if you buy new uniforms for your child's entire soccer team, or donate a dozen new soccer balls to the program, it could qualify.
Also, many school and school-related programs host fundraisers and raffles in order to raise money. The cost of attending a fundraiser is generally tax-deductible, less the value of anything you receive in return. For example, if you pay $20 to attend a fundraising lunch, and the lunch would have reasonably cost $10 at a restaurant, you can deduct the $10 difference.
Raffle tickets, on the other hand, are never tax-deductible. Even though it is a form of a donation, it is technically considered to be a form of gambling -- that is, you could receive something that's worth even more than the raffle ticket.
Education tax benefits: Which do you qualify for?
The bad news is that there really aren't any federal tax breaks for secondary school tuition or expenses. However, if you are planning on helping your child pay for college, there are a few education tax breaks you should know about.
There are three main tax breaks related to paying tuition and other qualifying expenses. Note that the first two are credits, which means that they actually lower your tax liability dollar-for-dollar as opposed to a deduction that simply reduces your tax liability. Here's a brief summary of the three options available:
- The American opportunity credit: This is the most valuable education tax break, but is also the most specific. It can be worth up to $2,500 per student per year, calculated as 100% of the first $2,000 in qualified expenses and 25% of the next $2,000. However, it only applies to the first four years of higher education and students must be pursuing a degree or certificate at half-time attendance or greater. This credit begins to phase out for AGI above $80,000 (single) or $160,000 (married).
- The lifetime learning credit: This credit is worth up to $2,000 per year, or 20% of the first $10,000 in qualifying expenses. However, unlike the American Opportunity Credit, this applies beyond four years, and has no degree program or attendance requirement. Even a single class taken for personal enrichment can qualify. Income limits are a bit less generous for this credit at $65,000 (single) and $130,000 (married).
- The tuition and fees deduction: This is generally used by individuals who can't qualify for either of the credits for income reasons or any of the other requirements, and can reduce your taxable income by up to $4,000.
In addition, both parents and students can qualify for a deduction for student loan interest, even if they don't itemize deductions. For the 2015 tax year, up to $2,500 of student loan interest is deductible for taxpayers with AGI under $75,000 (single filers) or $150,000 (married).
Finally, while contributions aren't deductible, if you save money in a 529 plan or Coverdell ESA for your child's education, the money earned by your investments in these accounts aren't subject to tax. For example, if you invest $10,000 in a 529 plan, and it's worth $30,000 by the time your child goes to college, the $20,000 in earnings is tax-free, provided that it gets used for qualified higher education expenses. The only drawback is that expenses paid from these plans aren't eligible for either of the aforementioned tax credits.
Be sure to save your documentation
As a final note, make sure you can document any of these tax breaks, especially when it comes to deductions with some gray area. For example, you should be able to prove the child care expenses you paid were for a qualifying purpose, or that the money you gave to your child's school was really for everyone's benefit.