Back to School Tax Tips

Donations to your kid’s school

If you make annual donations to your kid’s public school, then you may be able to deduct the donation amount from your taxable income. If your donation of money or equipment is for the benefit of all students or a group of students, then it potentially qualifies as a charitable donation. For example, if you contribute to a fund to buy sports uniforms for the entire soccer team, then it can be considered tax-deductible.

On the other hand, anything bought directly for your child is not deductible. For instance, the purchase of school uniforms or new athletic shoes for your child cannot be used as a write-off.

After-school activities and the child care credit

Many children attend back-to-school programs, and your child’s program may qualify for the child care credit if it meets certain criteria.

  1. child must be attending the program so that you can work, look for work, or go to school.
  2. The program must also be considered “child care,” so hour-long tutoring sessions don’t qualify.
  3. the credit is only available if your child is under 13 years old.

The child care credit is worth between 20% and 35% of the first $3,000 in qualifying expenses for one child, or $6,000 for more than one child, depending on your income.

It’s also worth mentioning that tuition at the kindergarten level or above never qualifies for a child care credit for federal tax purposes.

It’s never too early to start thinking ahead

Two great options for college saving are a 529 savings plan and a Coverdell ESA (education savings account).

529 savings plans are run by the states and are similar to 401(k)s as far as investment options go. Depending on your plan, you can choose from a selection of mutual funds, including stock- and bond-based options, as well as target-date funds, which gradually reduce investment risk as your child gets closer to college age. Contribution limits are high; many 529 plans allow for balances of up to $400,000. Limited contributions to Iowa 539 College Savings Plans are deductible on the Iowa tax return.

Coverdell ESAs are a little different. Contributions are limited to $2,000 per year, but you have a much wider variety of investment options. In fact, in a Coverdell, you can invest in any stocks, bonds, or mutual funds you’d like. Plus, Coverdell funds aren’t limited to college expenses — you can use the account for any level of education.

As far as tax advantages go, both plans work like a Roth IRA: Contributions are not federally tax-deductible, but any withdrawals used for qualified education expenses are 100% tax-free.

For exact impact on your tax return, call Brooke at 319-239-9903 for tax planning!