More Than Accounting

Back to School Notes

Posted by Rhonda Spaulding on October 3, 2007

Can you believe it is already October and the first six weeks of this school year is already finished? My oldest daughter started Kindergarten this year so I have been adjusting to the school routine for the first time in a long time!

Education can be expensive, but there are many tax savings available for parents, students and teachers. Here are a few that deserve some attention:

College Choice 529 Plans (Indiana) – Beginning in 2007, Indiana taxpayers may claim a credit of up to $1000 (20% of contributions up to $5000) on their Indiana tax return to the qualified state plans. The 529 plan is administered by JP Morgan Fund Management. You don’t get to pick the fund but all of the withdrawals are tax FREE as long as they are for qualified education expenses.

Coverdell Education Savings Accounts (ESA) – These are savings accounts that also grow tax free for higher education; however, you get to pick the fund where you invest your money. This is what we use to save for our children’s education. The easiest way is to find an investment adviser who can help you select a good mutual fund. You can set the fund up as an ESA and it works much like a Roth IRA. You make after-tax contributions but all of the withdrawals are tax FREE as long as they are for education. Private secondary education may also qualify.

Deductible Education Expenses – There are many tax deductions and/or credits available for parents or students who are currently paying for college. You can check out all of the details in the IRS Publication 970.

Teachers -save those receipts – The Educator expense deduction is available to all eligible educators whether you itemize deductions on Schedule A or not. Eligible educators include those who work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide in a public or private elementary or secondary school. This deduction is set to expire after this year, so be sure to save those receipts for books, software and supplies that you buy for use in your classroom!

On a final note, the IRS has issued some clarification on the changes to the deferred compensation rules that may affect teachers who elect to have their pay spread over 12 months rather than only being paid during the school year. The new rules do not apply to school years beginning before January 1, 2008 so your school district should have time to make the necessary changes. You can refer to the IRS guidance for more details.

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