School is expensive. Thankfully, there are a few deductions and credits to help offset these costs for schooling at some levels.
There's help for preschool for working parents, donations to education foundations, college, and education for disabled students. There isn't a lot of help directly for private elementary through high school education, but some planning can provide a bit of help. Presumably, Congress wants you to rely on public schools.
If both parents work (or a single parent works), preschool can be treated as dependent day care. See my post below related to dependent day care. Take advantage of dependent care pre-tax programs through your work if available, as well as the dependent care credit.
You can claim up to 4 years of the American Opportunity Credit per student, worth $2500 per year. Parents may claim it for dependent students - but there is a phaseout and it caps at $180,000 per year. If you are beyond year 4 or in grad school, the Lifetime Learning credit is available to you. This is worth $2000 per year, but there is a lower phaseout, capping at $124,000. Only tuition and fees are used for the Lifetime Learning Credit, but books and other expenses (not room and board) are available for the American Opportunity Credit.
529 Plans may be the best tax-advantaged way to save for college. They work similar to Roth IRAs - there is no tax break for putting money into a 529, but you pay no tax on the earnings as long as the money is used for college. There is a provision to gift 5 years worth of 529 contributions at once.
Elementary through High School
My daughter is heading off to a public elementary school. Unfortunately, our school system is not funded well enough to provide some of the basics, like PE, music, or art. A foundation has been set up to solicit donations to cover these programs. This foundation is a 501(c)3 nonprofit, therefore my donations to the foundation are deductible.
Special needs education is deductible if it meets certain tests. The primary purpose of attending the school must be to alleviate the handicap through the school's resources. There are a few other requirements as well. Lodging, meals, transportation, and tuition would all fall as a medical deduction (subject to either a 10% or 7.5% AGI floor).
Private education is generally not deductible. There are a few tax-advantaged opportunities which may indirectly help.
If a person other than a parent is funding the tuition, that person can pay the tuition directly to the school and avoid gift tax limits. UTMA accounts have some benefit for funding private education as well. UTMA accounts are simply accounts in your child's name, but the person setting up the account can control the money until age 18 (in California). There's no specific tax break to UTMA accounts, but they take advantage of the fact that the first $1000 in unearned income per year is tax-free. So, if you were going to invest an amount which will earn less than 1000 per year, you would get some savings with an UTMA. This of course may be a drop in the bucket for private education costs.
As always, email me if you have any questions on these topics.
I'm Hiring a Nanny (a nurse, a gardener, a maid...) do I need to give them a W-2 and withhold taxes?
There are specific rules regarding whether a 1099 or a W-2 is needed, and it often comes down to the level of control you have over the individual. You to use the following factors to determine whether you have hired an employee or independent contractor.
Its often not clear cut - but nannies are often employees when you add it all up. Gardeners, not so much.
Why does it matter? Payroll taxes are expensive, and the cost of running payroll is expensive too. You can handle it yourself, but most end up using a payroll service. In addition to payroll and taxes, there are additional compliance concerns.
Household Payroll Procedures
Federal household payroll taxes are handled on your income tax return, but you will need to handle the state taxes separately (or through a service). If you pay $1900 in a year, or $1000 a quarter, you will file Schedule H with your 1040. On this schedule, you report Social Security (12.4%), Medicare (2.9%), and FUTA (0.6% of the first 7k). You can withhold half of the social security and medicare from the nanny pay, however, if you agreed with the nanny on a flat amount, you may end up paying the full amount of payroll tax yourself, raising the cost more than 15%.
For California, the threshold is $750 a quarter. If you pay more than $20,000 a year, you move from annual reporting to quarterly reporting. There are specific payroll tax forms for California. The state taxes aren't high, but there are several of them (SDI, UI, ETT).
If you determine that you are hiring an employee, I'd recommend that you contact a payroll service to help you with the paperwork.