Tax breaks to look for as kids head back to school

With children returning to school, cash-strapped parents may be looking for tax savings in their back-to-school expenditures.

Listed below are a few tax-saving tips, as well as a few items that do not offer a tax break, although you may wish they did.

Tuition – Most tuition is not deductible. But there are some exceptions. For example, private school tuition is generally not deductible, even when the school is run by a church or other organization that is eligible to receive tax-deductible contributions. But if your child has special needs, tuition paid to a school with a program to remediate or alleviate a disability may qualify as a deductible medical expense.

For children under 13, a portion of the cost of child care may qualify for the Child and Dependent Care Tax Credit, if the program allows the parent to work or attend school. The maximum credit is $1,050 for one child or $2,100 for more than one child. The credit drops to as low as $600 and $1,200, respectively, for higher income parents. You must be able to separate the cost of the child care from the cost of the education, a task that is usually easier with after-school programs. There is no age limit if your dependent is disabled.

For older students, tuition paid for the first four years of college may qualify for the American Opportunity Tax Credit. Depending on your income, the credit could be up to $2,500 per student. Older students, including yourself, may qualify for the Lifetime Learning Credit of up to $2,000. And tuition paid to maintain or improve job skills may be deductible as a business expense.

Books, fees and other costs – The cost of books and fees is generally treated in the same manner as tuition. But not all education-related costs produce tax benefits. The cost of a computer, a band instrument or a school uniform is generally not deductible. Nor is the cost of transporting your child to her college or other educational institution. The only exception is if your child attends the school primarily to receive medical care. Then travel costs may be considered a medical expense.

The cost of room and board is considered a personal expense. There is no tax deduction, and scholarships that pay for room and board must generally be reported as taxable income.

Charitable contributions – Contributions to your child's tax-exempt school may entitle you to a charitable contribution deduction if you itemize. But when you buy candy bars, attend car washes or purchase raffle tickets, your charitable deduction is limited to the amount you pay in excess of the value of the item you receive.

Education savings accounts – These accounts allow parents, grandparents and others to save for a child's future education costs. The two most common accounts are Section 529 plans and Coverdell Education IRAs.

Both accounts have certain common characteristics: Contributions into the account are not tax-deductible, investment earnings in the accounts are not taxed, and distributions used to pay qualified education costs are not taxable.

But the accounts differ in the amount that can be contributed annually and the types of education costs that are "qualified" for tax-free distributions. For example, a Section 529 plan can be used to pay the cost of college room and board, while an education IRA can pay for primary and secondary private school tuition and the cost of school uniforms.

Read more in IRS Publication 970, Tax Benefits for Education.

 
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