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Tax credits and education: What you should know

Which education costs can you deduct on your taxes? We asked the experts.

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As inflation drives up prices, parents are doing everything they can to save money—including asking themselves how they can lower their annual tax burden. Certain types of education expenses, such as 529 Plan contributions, offer families the opportunity to make tax-deferred contributions for their children’s future. Other types of education or dependent care expenses, including pre-K child care programs, could qualify for the child and care tax credit.

That’s why we asked a Certified Financial Planner® professional what parents need to know about the upcoming tax year. Are supervisors tax deductible? How about the teaching? What about other expenses related to education, such as textbooks?

The school year is only half over – but tax preparation season has just begun. Here’s what parents need to know, whether they’re planning for preschool or paying for college.

In this article:

Contributes to a 529

Many families use 529 Plans to save money and invest in their children’s education. These educational savings plans allow parents, grandparents and other family members to make tax-deferred contributions that can be used for future educational expenses. The account beneficiary — that is, the child — does not have to report 529 income as income, and any distributions used for qualified educational expenses are not taxed.

Whether you’re planning for elementary or high school tuition or hoping to help your child pay for college, contributing to a 529 plan is a way to get the most out of your money—and potentially reduce your tax burden.

“529 plans became more appealing after the passage of the Secure Act 2.0 at the end of last December,” said Betty Wang, CFP and founder of BW Financial Planning. “People used to be afraid that their children would decide not to go to college. Then they would be stuck with the unattractive choices of cashing out the money with taxes and penalties or changing the beneficiary to someone who is not their child.”

Fortunately, you now have another option. “With the new Secure Act, you can now make a tax-free transfer from your child’s 529 account to you or your spouse’s Roth IRA.” This provision goes into effect in 2024, so keep that in mind when planning your financial goals for 2023.

You may also want to consult with a CPA, CFP or tax professional to ensure you are following the new guidelines. “There are conditions,” Wang explains, “like the account must be opened for more than 15 years. The government wants to make sure you’re using 529 accounts for their primary purpose of saving for college, not as a conduit to save money for a more tax efficient way.”

Pay tuition

The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are both designed to help students and families save money on the cost of tuition. AOTC offers a credit of up to $2,400 per eligible college student. LLC offers a credit of up to $2,000 to students enrolled in undergraduate, graduate and professional programs, as well as students taking courses to acquire or improve job skills.

If your child can still be claimed as a dependent on your tax return, you may be able to use the AOTC or LLC to save for the cost of their education. Depending on where you are in your educational journey, you may even be able to use these tax credits to save on your own tuition costs.

As mentioned above, parents can also use 529 plans to cover the cost of college tuition for higher education, high school tuition, or elementary school tuition. If you use 529 account money to cover these qualified education expenses, you don’t have to pay taxes on the distributions you take from your 529 plan.

Preschool education and other forms of preschool expenses do not qualify as tax-advantaged educational expenses under the current 529 Plan rules. However, you may be able to claim the Child and Carer Credit, which is a tax credit to help cover the costs of looking after children while you work, look for work or go to school. This credit covers a percentage of your child care expenses, including pre-school and preschool expenses.

Although the expanded credits offered under the American Rescue Plan Act of 2021 have since expired, parents can still claim the credit to save up to $3,000 on one qualifying dependent or $6,000 on two qualifying dependents.

Hiring a supervisor

In most cases, money you pay for tutoring services is not tax deductible. Parents of children with special needs may be eligible for a tax deduction if the tutoring is recommended by a doctor and classified as a special education expense.

Parents may still want to keep track of the money they spend on tutoring, though — especially if they hire a tutor directly instead of working through an education service like Pearson or Princeton Review. If your tutor qualifies as a freelancer or independent contractor, you may need to file Form 1099-MISC with the IRS so your tutor can pay taxes on the money you pay them.

That said, it’s still worth hiring a tutor for your child. “Parents spend thousands of dollars a year on youth sports,” explains Wang. “Some say it’s because they’re aiming for athletic scholarships, but only 1.3% of high school kids get partial or full athletic scholarships to college. If parents are aiming to reduce the cost of college, their money would be better spent on AP classes or a tutor to get better grades.”

Other education costs

The costs of college go far beyond tuition, as many families quickly learn. Fortunately, so do many educational tax credits. For example, your child’s textbooks and other education expenses may qualify for the American Opportunity Tax Credit. They can also help you or your child qualify for student loan interest deductions.

“Costs have skyrocketed,” explains Wang. “For four years of college, families could be looking at a total cost of $109,000 to $316,000.

“For many families, paying for their child’s college education is the largest investment of their lives,” she adds. “But there are ways to reduce costs. Tax credits can reduce the financial burden of college costs, but as with most things tax-related, there are rules about who qualifies and how to use these tax credits. Consult with a tax professional to see if your family is qualified.”

Tax deductions and education can be complicated – so see it as a learning process. Take your time, check your work and don’t be afraid to ask for help.

After all, it is the same advice you would give your children.

Our editorial policy

Haven Life is a customer-centric life insurance agency supported and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe that navigating life insurance decisions, your personal finances and overall well-being can be refreshingly simple.

Our editorial policy

Haven Life is a customer-centric life insurance agency supported and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe that navigating life insurance decisions, your personal finances and overall well-being can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less difficult if they fit your situation.

Haven Life is not authorized to provide tax, legal or investment advice. This material is not intended to provide and should not be used for tax, legal or investment advice. Individuals are encouraged to obtain advice from their own tax or legal advisor.

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