Deductions, IRS Audit, IRS Audit Help, IRS Audit Process

Back to School Already?!

August 8, 2013 - Deductions, IRS Audit, IRS Audit Help, IRS Audit Process

It’s still summer according to the weather reports. But here in Arizona, it is back to school. School starts in August and gets out in May—we don’t have snow days.  The newscasters were cautioning drivers today to watch out for children. Parents were advised to accompany their children walking to school these first few days. Do your children walk to school? Do they take the bus? Are they old enough that they drive themselves? Do you home-school them? Are YOU the student? What does school have to do with taxes? There is more than one place on your tax return for education-related expenses. It can get complicated. I believe that our learning never really ends. As a tax professional I am required to attend a certain number of hours of continuing education in tax law and in ethics every year. I also enroll in other courses for personal development. All these classes are deductible as business expenses. Any classes I chose to take that are hobby-related or are just fun are not deductible for me. But if you are in the food business, the cooking class I might want to take for fun could be a deduction for you. Sending your children to school is generally not deductible. It is considered a normal cost of living. We normally cannot deduct our personal meals, or clothing, and we cannot deduct the expenses we incur to send our children to school. But if you pay to send a little one in pre-school, that may qualify for a child care credit. If your child is under the age of 13, after-school care may also qualify for a child care credit. Usually school for grades K-12 do not provide you any tax benefit. Depending on your state’s tax laws, you may qualify for a state credit if you help support extra-curricular activities. College tuition and fees paid to enroll yourself, your spouse or your dependent child may also qualify for a tax credit. If you buy your required books from the college bookstore you may include them in your tax credit expenses, Books purchased from the student selling books from last semester and room and board expenses are not deductible and do not qualify for tax credit. When I went to college I worked all summer to pay for the coming year’s tuition. Going to school in my own state helped reduce my costs. Going to school at the junior college level was also less expensive the first two years. I never had a student loan. But most of my clients do. Student loan interest can be deductible. But there are limits on how much of your expenses can be used for tax purposes. What is the difference between a deduction and a credit? Deductions are subtracted from your total income and then your tax is calculated. Tax credits do not reduce your income, they reduce your tax. An easy example would be if you were in the 15% tax bracket and had a $1000 deduction, you could save $150 in tax. A tax credit of $1000 would save you $1000 of tax. Most of the time you cannot decide to take a credit instead of a deduction. Congress makes those decisions for us when they create the tax laws. And it’s those laws I want you to understand so you are always paying your lowest legal tax.