Any Tax Breaks for Homeschoolers?

Since tax season 2012 has officially launched, I’ll address a question I am frequently asked,

Do homeschoolers get any tax breaks for their homeschooling expenses? Can a homeschool family deduct any of their homeschool expenses?

The simple answer is “No; there are no tax credits for homeschool expenses from the federal government.”

The longer answer is “Maybe, depending on what state you live in.”

Several states have an educational tax credit. Iowa, Arizona, Minnesota and Illinois all have some sort of  tax break for individuals. The credit is available to any public or private school student, so it is not unique to homeschoolers. Florida and Pennsylvania offer businesses tax credits if they sponsor a scholarship.

This document has a chart of education tax credits and deductions by state (updated November 2008). Scroll to page 6 to see the chart.

http://www.house.leg.state.mn.us/hrd/pubs/feelaw.pdf

Home School Legal Defense Association has an explanation of some states’ tax breaks or credits:

http://www.hslda.org/docs/nche/000010/200504150.asp

Homeschoolers can get creative and think perhaps they can start a business or a nonprofit organization of their homeschool activities and then deduct their expenses.  Ann Zeise of A to Z Home’s Cool addresses these ideas:

http://homeschooling.gomilpitas.com/articles/031401.htm

You cannot contribute to your own child’s K12 education and get any tax deduction for it, no more than if you sent him to a private school and tried to write off the tuition.

Carol Topp, CPA

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What tax forms does a homeschool co-op teacher file?

Hi Carol.

Thank you for all the help you have already given our homeschool community!

There is a homeschool co-op that allows teachers to charge the parents $0-$45 per student.  As a teacher, how would I report any net income on my income tax return? (payments are made directly to the teacher).

Best regards,

Lynn (New York)

Lynn,

You report all your income and expenses on a Schedule C or the shorter form Schedule C-EZ as part of your federal form 1040.
The net amount is carried onto page one of your 1040 and added to your other income  from W-2s etc.

If you made more than $400 in net income in 2011, you will also have to fill in a Schedule SE and pay Self-employment tax (its Social Security and Medicare taxes for self-employed people).

Hope that helps!

Carol Topp, CPA

Homeschool leaders: If you hired and paid a teacher in 2011 you may need to filing some paperwork with the IRS! The deadline is January 31, 2012 to give your workers a 1099MISC or W-2.

Find out what to do in my ebook Paying Workers in a Homeschool Organization.

Only $3.00.

What tax forms do I file for a homeschool co-op?

photo credit: stevendepolo

Carol’s book has been so helpful in getting our co-op organized. We have determined we are going to file Articles with our state and create by-laws and set ourselves up for a non profit corporation. With our fundraising and dues, we never bring in more than  $5,000. We probably have around 50-60 families returning this year. We are 100% volunteer based for our fundraising (silent auctions, garage sale.)
Come tax time, do we file with the IRS (like I do for our household every year?) For example, do we use turbo tax and file for our co-op? And if we have let’s say, $1,000 left at the end of the year, is that taxable? We do not want to zero out our account as it is nice to have a cushion for various reasons.

Lisa

Lisa,

Good questions!

Q: Come tax time, do we  file with the IRS (like I do for our household every year?) For example, do we  use turbo tax and file for our co-op?

A: Nope. This is a nonprofit organization, not part of your family/individual income, and not a for-profit business, either. Don’t use TurboTax. Please! (we tax preparers are not crazy about TT in general)

Technically, you would file a corporate tax return (Form 1120), but I would not recommend doing that.

Since your group qualifies as an automatic 501(c)(3) tax exempt organization (under $5,000 gross annual income), you could file a Form 990N. It’s an online form of only 5 questions. You may have to call and register with the IRS first, since you are not in their database. But many small nonprofits do not file the Form 990N at all.

(If you make more than $5,000 gross annual income, you must apply for tax exempt status and then will file the Form 990N or the Form 990EZ or the full 990 depending on the gross income of your organization. If your nonprofit has gross income of $50,000 or less, you file the Form 990N. That covers 99% of all homeschool organizations.  So the paperwork is quite small and easy to deal with.)

The IRS expects nonprofit corporations to file for tax exempt status with in 27 months of formation (the date of your nonprofit incorporation status from your state). So you have about 2 years to run your program before you have to file for tax exempt status. In the meantime, you can file Form 990N each year.

Q: And if we have let’s say, $1,000 left at the end of the year, is that taxable?
A: Taxable, unless you qualify for tax exempt status (either automatically or by application).
Q:We do not want to zero out our account as it is nice to have a cushion for various reasons.
A: Yes, that the reason why groups want tax exempt status. To reserve their surplus for future use. It’s a wonderful blessing in the USA that our gov’t allows charitable, religious and educational organizations to exist tax free. Not every country allows that!

Hope that helps!

Carol Topp, CPA

P.S. I’m glad my books were helpful. I have just updated my book on  501(c)(3) tax exempt status for homeschool groups. It’s called  The IRS and Your Homeschool Organization and covers all this information in greater detail. Read about it here.

Paying teachers in a homeschool co-op is a sticky situation!

Amy asks a common question: paying teachers at a homeschool co-op

For the past several years, our group has spent more (thousands more) than we have charged our members. We’re not technically “in the red” because of more prosperous years in the past. The reason   we are spending so much money is that over 90% of our income goes to paying our parent-teachers ($15-$20/hour)! The rest of the money goes toward classroom supplies. I am sure that most parents are unaware of how the finances of this group are managed.

Have you heard of groups paying their teacher/parents? What do I need to understand about the various homeschool support and cooperative group structures that I don’t currently comprehend?  Help!
-Amy

Amy,

Your situation sounds very familiar to me. I too was treasurer of my 40 family co-op and found that 75% of our budget was going to pay 4 paid teachers. The other 20 teachers were volunteer parents, myself included. Not all the families were using a paid teacher, but all were chipping in to pay for them. We also were finding that people were offering to teach because they thought they could get paid. We were losing our cooperative spirit. I knew something needed to change.

About the same time I was helping another homeschool group with some independent contractor/employee issues with the IRS. I wrote about it on my blog. You can read about it here:

Is your homeschool group’s hired teacher really an employee?

Update on Independent Contractors.

We decided to follow IRS guidelines and have the parents pay the teachers directly, like you would pay a piano teacher. The co-op was no longer paying the teachers.

I did some number crunching and found that we could lower our co-op fee from $150/family/semester to $75/family/semester. In addition we offered a $50 discount for teaching a class.

What happened was amazing! Wonderful, talented homeschooling mothers volunteered to teach a class! We had more volunteers than we could accommodate. REALLY! If a mother volunteers to teach a class she only pays $25/semester for her family to attend 3 hours of classes at our co-op. If her child attends one of our paid classes (there are only 3, guitar, art and Spanish) then she pays the teacher directly. For example, I pay $65/semester for my daughter to take an art class. I think the teacher is worth it.

This got us out of the sticky employee/IC situation with the IRS. I’m writing fewer checks. It made my job as treasurer a lot easier and no 1099MISC forms at the end of the year. No one complained. The spirit of cooperation has returned. YEAH!  I’ll also add that we let the volunteers decide what they wish to teach. If we cannot find a Spanish volunteer, no Spanish class is offered. If enough parents want Spanish we may see if a teacher can come to the co-op. We give her a room and she collects her fees from the parents directly.

I wrote an ebook Paying Workers in a Homeschool Organization. For only $3.00, I think you’ll find it very helpful. Order here

The issue of paying teachers as employees is too important to ignore.

Your group may have to consider some big changes.

Good Luck!!

Carol Topp, CPA

What is Unrelated Business Income Tax?

Sometimes a homeschool group brings in a lot of money from fund raising. These efforts are so successful you may wonder if your group owes anything to the government in taxes. For the most part, fund raising is not considered part of your group’s mission; it is just a means to the end. After all, your group’s mission is to encourage homeschooling, not to sell ads, pizza or other products.

The Internal Revenue Service calls the money you raise “Unrelated Business Income,” meaning it is money collected in a trade or business that is not related to your primary mission. The IRS assess a tax on unrelated business income called the Unrelated Business Income Tax or UBIT. The purpose of this tax is to prevent nonprofit, tax-exempt organizations from having an unfair advantage over the for-profit marketplace.

The best example of unrelated business income is a gift shop in a nonprofit hospital. The income from a gift shop is not related to the hospital’s primary purpose of giving medical treatment, so the profits from the gift shop are taxed.

Your homeschool organization could have unrelated business income if you sell T-shirts, candy bars, entertainment books, candles, pizza coupons and a host of other products or if you make money from ads or Amazon commissions on your website.

Fortunately the IRS has several exceptions to paying the UBIT tax:

• A $1,000 threshold allows that the first $1,000 in profit from an unrelated business will not be taxed.

• If the fundraiser (or unrelated business) is run by volunteer efforts (i.e., no paid staff) then the proceeds are not taxed.

• If the fundraiser is not regularly carried on, such as a once-a-year spaghetti supper, then the proceeds are not subject to UBIT.

• If you are selling donated items, like in a garage sale, the income raised is not taxed.

One of these exceptions are bound to apply to most homeschool organizations.

The rules regarding UBIT are complex. You can read more about UBIT in IRS Publication 598 Tax on Unrelated Business Income of Exempt Organizations (http://www.irs.gov/pub/irs-pdf/p598.pdf).

Carol Topp, CPA

Educator Tax Deduction for Homeschoolers?

The IRS gives a $250 tax deduction to educators for unreimbursed supplies they spend in the classroom.

Can homeschoolers take this deduction?

The IRS guidelines say to be an eligible educator:

“You work at least 900 hours a school year in a school that provides elementary or secondary education, as determined under state law.”

To work means to get paid for your work as a teacher-employee. Homeschool parents are not employees of a school. We do not get paid; we do not get a W-2. The IRS will check for a W-2 from a school if a taxpayer takes the Educator Expense deduction. Homeschoolers would not have a W-2 from a school, even if your state classifies your homeschool as a private school.

The Educator Expense Deduction was initiated by President Geo W. Bush  attempting to get support from teachers and their powerful unions. It was extended at the end of 2010 for one more year.

I do not recommend that homeschool parents take the Educators Expense deduction. Sorry.

Carol Topp, CPA

P.S. Here are my required “lawyer” words:
Internal Revenue Service Circular 230 Disclosure: Advice relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing or recommending to another party any transaction or matter addressed herein.

Do homeschool teachers get the Educators Expense deduction?

I am frequently, “Are there any tax breaks for homeschooling parents?”  My usual reply is, “No; there are no tax credits or deductions for homeschool expenses at the federal level.” There are tax breaks offered by some states that I discuss in another blog post.

But here’s a bit of a new twist on the question from a homeschool mother.

I spoke with an IRS representative just today about an educator’s expense tax break.

The IRS rep stated that IRS laws specifically prohibit homeschoolers from getting up to $250 credit for educational items purchased. However, he stated congressional law overrides IRS law and that congressional law requires teachers work in a school as defined by state law. In our home state, Kentucky, we are considered private schools. The IRS rep suggested I give the credit a go next year but be prepared for an audit. Can you shed some light on the situation?

She is referring to the Educators Expense deduction of up to $250 in unreimbursed expenses.

The IRS guidelines say to be an eligible educator:

“You work at least 900 hours a school year in a school that provides elementary or secondary education, as determined under state law.”

To work means to get paid (to the IRS, not to all of us SAHMs!).  Homeschool parents are not employees of a school.  We do not get paid; we do not get a W-2.  I attended a tax workshop where we were told that the IRS will check for a W-2 from a school if a taxpayer takes the Educator Expense deduction. Homeschoolers would not have a W-2 from a school, even if your state classifies your homeschool as a private school.

The intention of the tax deduction was to move the deduction from the Schedule A (Itemized deductions) Miscellaneous Deductions where it was subject to a 2% of Adjusted Gross Income limit (meaning anything over 2% of your AGI could be deducted) and put the deduction on the front page of the 1040, so even teachers who don’t itemize deductions can take advantage of the $250 deduction.

The Educator Expense Deduction was nearly eliminated in 2006, but received an extension.  I predict the deduction will not be around for much longer.  IMHO, it was President Bush’s attempt to get a few votes from paid teachers.

So in short, I do not take the Educators Expense deduction, nor recommend that other homeschool families take the deduction.  The IRS rep was right, be prepared for an audit.  But without a W-2 from a school, you won’t win.

HTH,
Carol

P.S.  Here are my required “lawyer” words:
Internal Revenue Service Circular 230 Disclosure:  Advice relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of  avoiding penalties under the Internal Revenue Code or  promoting, marketing or recommending to another party any transaction or matter addressed herein.

Bank account for your family homeschool

This homeschooling mother in NC ran into a problem when she tried to open a bank account for her family homeschool.

I live in North Carolina, homeschool my children and want to do some fund raising for some projects and field trips and also school supplies.

I went to the bank, wanting to open an account in the homeschool’s name and they said that I would have to open up an account in my name doing business as my homeschool’s name.

My question to you is, how do I go about paying taxes on the money? I do not want to get into trouble with the IRS. Was that the right thing for me to have done? Waiting to hear from you soon!
Kim

Dear Kim,

I’ve been asked questions like yours before. I answered them in two posts on my blog.

Can we (an individual homeschool) be allowed to do fund raising similar to youth sports groups, scouts,etc?

Yes, you can participate in a fund raiser if the fund raising organization allows it. BUT, the profit you make is taxable income and you’ll need to report it on your tax return.

Can my individual homeschool have a fundraiser?

Individual fundraisers and homeschool groups

I hope that answers your question; let me know if it doesn’t.

Carol Topp, CPA