The decision to send your child to a public or private school is a personal choice. If you settle on private K-12 schooling, there are a few benefits that can help to reduce your federal tax liability and, in some states, your state tax as well. You’ll really see a tax benefit, though, when you send your child to college. Both private and public post-secondary educations come with some generous tax breaks for your family to help make education more affordable.
For information on the third coronavirus relief package, please visit our “American Rescue Plan: What Does it Mean for You and a Third Stimulus Check” blog post.
Tax Breaks for Private K-12 Schooling
In most circumstances, you won’t get a significant break on your taxes by sending your kids to a private school from kindergarten to grade 12.
- The Internal Revenue Service doesn’t allow you to deduct private school tuition to lower your federal tax liability.
- But in some states, like Arizona, you can claim private school tuition to help reduce the amount of state tax you’ll owe.
If your child is attending private school for special needs, however, you may be able to get a tax break on your K-12 private school tuition. To qualify, you’ll need a physician’s referral proving that your child requires access to specialized private education. And, if your child qualifies, you may also be able to deduct the cost of special tutoring or training in addition to tuition.
- To claim this deduction, you must itemize rather than choosing the standard deduction.
- The expenses would need to qualify as deductible medical expenses that are reduced by 7.5% of your adjusted gross income (AGI) for 2020 and 2021.
Coverdell Education Savings Accounts
While you can’t generally use private school tuition to directly reduce your tax liability, the government may offer some tax relief in the form of Coverdell Education Savings Accounts, or ESAs. These accounts allow you to invest your education savings without paying tax on the earnings. ESA funds must be used to cover qualified education expenses, like
- textbooks, or
- other supplies required by your child’s program.
The tax benefits of contributing to a Coverdell ESA are capped—contributions for each beneficiary are limited to $2,000 a year. For example, if your child’s grandparents contribute $1,000 to her Coverdell account, you'd only be able to contribute $1,000.
Your income might also reduce your contribution limits.
- If your modified adjusted gross income is above $95,000 (or $190,000 if you're filing jointly), you'll notice a gradual reduction in your contribution limits.
- If you're eligible, you can contribute to the account until your child turns 18, or beyond age 18 if your child has special needs.
529 Education Savings Plans
Like the Coverdell accounts explained above, beginning in 2018, your can also use savings from 529 plans to pay for K through 12 grade tuition. Each year, up to $10,000 per student can be withdrawn tax-free from these accounts. However, unlike Coverdell accounts, to retain the tax free benefit, the 529 money can only be used for tuition and not for textbooks, computers, or other fees or activities.
Tax Breaks on Post-Secondary Education
You’ll get the majority of potential tax breaks if your children attend private or public colleges or universities. You—or your child—can use education tax credits to deduct the costs of tuition fees, books, and other required supplies that you pay to a qualified education institution.
- The American Opportunity Tax Credit and Lifetime Learning Credit can help lower your tax liability by up to $2,500 or $2,000, respectively.
- You may also be able to avoid paying tax on some or all of your scholarship money. In many cases, scholarship funds used for qualified education expenses don’t count toward taxable income, which means they won’t increase your tax liability for the year.
Other Potential Tax Deductions
If your school offers child care services outside of school hours, such as daycare before and after school for the convenience for working parents, you may be able to deduct some of the cost of that care via the Child and Dependent Care Credit.
To qualify, you must pay child care costs separate from tuition and other expenses.
For the 2020 tax year:
- You can claim the credit for up to $3,000 for care for one child or $6,000 for care for two or more children.
- The credit can be up to 35% of your qualifying expenses.
For the 2021 tax year:
The American Rescue Plan brings significant changes to the amount and way that the child and dependent care tax credit can be claimed. The plan increases the amount of expense eligible for the credit, relaxes the credit reduction due to income levels, and also makes it fully refundable. This means that, unlike in other years, you can still get the credit even if you don’t owe taxes.
- The amount of qualifying expenses increases from $3,000 to $8,000 for one qualifying person and from $6,000 to $16,000 for two or more qualifying individuals
- The percentage of qualifying expenses eligible for the credit increases from 35% to 50%
- The beginning of the reduction of the credit is increased from $15,000 to $125,000 of adjusted gross income (AGI).
Also for tax year 2021, the maximum amount that can be contributed to a dependent care flexible spending account and the amount of tax-free employer-provided dependent care benefits is increased from $5,000 to $10,500.
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