By Chris Roth, Associate
August is back-to-school month for many students in Virginia. The youngest children will head to their first day of preschool and recent high school graduates will head off to college. Fortunately, there are tax deductions and credits that can be taken for the expenses of both kids and new adults.
Recent high school graduates heading off to any postsecondary educational institution that is eligible to participate in a student aid program administered by the U.S. Department of Education, including over 400 foreign institutions, can reap the benefits of a 529 college savings plan. The major benefits of these plans include:
- Investment earnings which are not subject to taxation when withdrawals are applied to eligible expenses.
- Eligibility for Virginia residents contributing to the Virginia529 plan for a $4,000 tax deduction per contract on their Virginia state income tax returns. Each student can have multiple contracts, so keep this in mind when you decide on the amount you plan contribute on an annual basis. Contributions in excess of $4,000 per account can be carried forward to future tax years. Account owners over the age of 70 may be able to take a deduction for amounts contributed in excess of $4,000 per account.
Distributions from these plans can be sent directly to the school and/or the student’s bank account. Eligible expenses include:
- Tuition and fees
- Books and supplies
- Computers, printers, software, and internet access during post-secondary education
- Room and board (must be at least a half-time student). This is not to exceed the amount included in the cost of attendance by the institution.
Distributions that do not exceed the total of qualified expenses (minus any tax-free scholarships received) are tax free.
A 529 plan can also be transferred to a sibling or other family member tax-free.
Parents paying expenses for preschool, summer camp or daycare for children under the age of 13 in order to work are eligible for a child and dependent care credit. The credit can be claimed for up to $3,000 for one child, or $6,000 for more than one child provided the credit does not exceed the lesser of either parent’s income, (except for additional qualifications for full-time students or those actively looking for work).
Tax- free purchases
Both Virginia and Maryland offer tax-free shopping days in August. For 2017, purchases of school supplies (not exceeding $20 per item), clothing or shoes (not exceeding $100 per item) in Virginia during the weekend of August 4-6 were exempt from state sales tax. In Maryland, purchases of backpacks (only the first $40), clothing, or shoes (not exceeding $100 per item) are state sales tax free during the week of August 13-19.
If you have questions about these income tax credits or other tax issues, please consult with your CPA.