Navigating Private School Tuition: Tax Deduction Opportunities

As school choice gains momentum, families are exploring avenues to make private K-12 education more affordable, particularly through the tax code. While federal tax relief for private K-12 educational expenses is limited, a growing number of options are helping parents reduce out-of-pocket costs. This article explores these opportunities, including deductions for special needs education, Coverdell ESAs, 529 plans, and state-level tax credits and deductions.

Tax Deductions for Special Needs Education

Addressing a child's physical and learning disabilities can be a substantial financial burden for parents. Educating these children to achieve maximum independence is often both difficult and costly.

Medical Expense Deduction for Specialized Schools

The IRS has specific provisions for deducting educational expenses related to special needs. As of 2011, the IRS ruled that tuition for a special school designed to help students manage or overcome disabilities can be counted as a deductible medical expense if the child’s primary reason for attending that school is its medical benefit. The school may offer subjects included in an ordinary school curriculum, but it must differ from an ordinary school in that it utilizes specialized education techniques to address handicaps.

Parents cannot claim a medical deduction for the entire tuition of an ordinary private school simply because they believe their special needs child will perform better in that environment or in the special education program at that school. However, they can claim a deduction if they send their child to a specialized school whose curriculum is tailored to address a particular disability or set of disabilities. For instance, parents of a child who is legally blind could claim a deduction for sending their child to a Braille school; parents of a deaf child could claim the medical deduction for sending their child to a school that focuses on lip reading; and parents of a child with a developmental disorder inhibiting visual or spatial learning could claim the deduction for sending their child to a school that focuses on auditory learning.

Requirements for the Deduction

To qualify for the medical tax deduction, a child's doctor must recommend attending the specialized school. If the child does not qualify to attend this kind of school or if no such school is available in the geographical area, a doctor can recommend tutoring by a qualified teacher who is trained to work with children who have mental and/or physical impairments. In this case, the cost of tutoring counts as a medical deduction.

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Limitations and Resources

Like other medical expenses, the cost of tuition or tutoring for a special needs child is only deductible if it exceeds 7.5 percent of the parents' adjusted gross income. Up to the 7.5 percent mark, the parents are responsible for covering their child's medical expenses.

For more information about medical deductibles, consult IRS Publication 502, "Medical and Dental Expenses." Information about special education can be found on page 13 of this document.

Federal Tax Benefits for Education

While direct federal tax relief for private K-12 education is limited, several federal programs can indirectly assist families with these expenses.

Coverdell Education Savings Accounts (ESAs)

Parents of students not enrolled in public schools can contribute up to $2,000 each year to a Coverdell account with tax-free interest. The Coverdell ESA is a preferred option to a regular savings or investment account since the interest is tax-free for parents who know they’ll send their student to a private school. The Coverdell ESA can be used to pay either qualified higher education expenses or qualified elementary and secondary education expenses.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax.

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Income limits apply to contributors, and the total contributions for the beneficiary of this account can't be more than $2,000 in any year, no matter how many accounts have been established.

Section 529 Savings Plans

Section 529 savings plans are authorized by federal law but are operated by states. For decades, 529 plans have helped families save for future college expenses, but in 2017, the federal government passed a law allowing funds to go toward K-12 tuition expenses. Families can withdraw up to $10,000 annually or the cost of tuition - whichever is less - from the 529 account per year.

State-Level Tax Credits and Deductions

A lesser-known tax break available to families in many states are the various individual K-12 tax credits and deductions. The programs are popular too, as every year, hundreds of thousands of taxpayers in these states claim credits on qualified expenses they made for their child’s education. In recent years, refundable tax credits have emerged as a model allowing families to receive tax credits for not only tuition but also other private educational expenses such as tutoring costs, textbook expenses, curriculum costs, and fees for nationally standardized assessments.

Examples of State Programs

Oklahoma Parental Choice Tax Credit: All Oklahoma students are eligible for a refundable tax credit under the Oklahoma Parental Choice Tax Credit program, provided they have education expenses at an accredited private school or are “educated by other means”.

Idaho: All Idaho residents who are 18 or younger are eligible to participate.

The Rise of Refundable Tax Credits

Until recently, with the growth of refundable tax credits, funding levels had been much higher in other school choice program options, such as Education Savings Accounts and Vouchers, compared to individual tax credits and deductions.

Other Educational Tax Benefits

It's important to note that there are other educational tax benefits that may be applicable in certain situations, though they are typically geared towards higher education.

American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC)

An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. You can't claim the AOTC if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes. To claim the AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).

Qualified education expenses are tuition, fees and other related expenses paid for an eligible student to enroll or attend an eligible educational institution. Eligible expenses also include the payment of student activity fees required to enroll or attend the school. For the American Opportunity Credit: Expenses paid for books, supplies, and equipment the student needs for a course of study are considered qualified education expenses, even if it is not paid to the school. You must pay the qualified education expenses for an academic period that starts during the tax year or the first three months of the next tax year. Academic periods can be semesters, trimesters, quarters, or any other period of study such as a summer school session. The school determines academic periods.

You can’t take more than one education benefit for the same student and the same expenses. You cannot claim a credit for education expenses paid with tax-free funds.

Student Loan Interest Deduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $80,000 ($160,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. The student loan interest deduction is taken as an adjustment to income. For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school.

Work-Related Education Expenses

If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income.

Your work-related education expenses may also qualify you for other tax benefits, such as the the American opportunity credit, tuition and fees deduction and the lifetime learning credit. You may qualify for these other benefits even if you do not meet the requirements listed above. You can deduct the costs of qualifying work-related education as business expenses. The education is required by your employer or the law to keep your present salary, status or job. Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education.

Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work.

Qualified Tuition Programs (QTPs)

States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses.

You can't deduct either payments or contributions to a QTP. No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Qualified expenses include required tuition and fees, books, supplies and equipment including computer or peripheral equipment, computer software and internet access and related services if used primarily by the student enrolled at an eligible education institution.

Scholarships and Fellowships

A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. This is true even if the fee must be paid to the institution as a condition of enrollment or attendance.

You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them.

Child and Dependent Care Tax Credit

Families with children under 13 can receive up to $3,000 for one qualifying child or $6,000 for two or more qualifying children.

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