Search Results for: 529

My homeschool is a private school. Can I use 529 funds?

I explained in “Can homeschoolers use 529 plans? Maybe!” that you can use 529 savings account funds for tuition paid to a public, private, or religious school.

Some homeschool students take classes from private schools (locally or online). The tuition payments to these schools can use 529 funds without  penalty or taxes.

So that begs the question,

“In my state, my homeschool is considered a private school. So can I use 529 funds for my private school/homeschool expenses?”

No. Sorry!

Here’s why:

The expenses must be to pay tuition. You don’t pay yourself tuition! That would be silly and not tax-smart.

Your other homeschool expenses such as books, curriculum, school supplies, field trips and are not paymnets for tuition and so you cannot use 529 funds without paying a hefty penalty!

Tuition payments to organizations that are not schools like your local co-op, Classical Conversations, etc.  cannot use 529 funds either (without incurring taxes and a 10% penalty!)

Carol Topp, CPA

Does using a distance learning program mean I can use 529 funds?

 

If you are homeschooling using an accredited, distance learning program like Mother of Divine Grace where you pay tuition, can you then use your 529 plan money?

Katie in Indiana

 

Katie,

529 plans have been a popular way to save for college expenses and have the gains be tax-free when used for qualified educational expenses. The Tax Cut and Jobs Act or 2017 expanded the use of 529 plans to include K-12 expenses. The laws says this about using 529 plans for K-12 expenses:

the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.” (emphasis added)

There are 2 conditions for you to use 529 funds for K-12 expenses:

1) the costs must be for tuition and

2) the institution you pay must be “a public, private, or religious school

Mother of Divine Grace (MODG) is a California for profit corporation that describes itself as a private school and a private distance school in their California filings.

So if your children are enrolled at MODG (or similar private schools offering distance learning), you paid MODG tuition, and MODG is a school, then you can use your 529 plan to pay for tuition.

Homeschool parents should check with the program to whom they are paying tuition to determine if it is a school according to their state’s definition. If you have any concern about their status as a school, then do not use 529 funds to pay for the tuition. Withdrawals from a 529 fund that are not “qualified” (i.e. tuition paid to a public, private, or religious school) then you must pay income tax and a penalty of 10%. Ouch!

Your other homeschool-related expenses such as books, supplies, equipment, and payments to organizations that are not schools (like a homeschool co-op) cannot use 529 funds.

Carol Topp, CPA

 

 

Can homeschoolers use 529 plans? Maybe!

Congress decided to expand 529 savings plans to be used for K-12 expenses in the Tax Cut and Jobs Act or 2017. 529 plans were originally set up to save for college. The earnings on the savings is tax free. But they specifically excluded homeschool expenses from using 529 funds.

That seemed unfair to a lot of homeschoolers.

But there may be a way for homeschoolers to use their 529 savings accounts for some K-12 expenses.

The Tax Cut and Jobs Act or 2017 says this:

the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.”. (emphasis added)

There are 2 conditions for you to use 529 funds for K-12 expenses:

1) the costs must be for tuition and

2) the institution the family pays must be “a public, private, or religious school”

Some homeschool students take classes from private schools (locally or online). The tuition payments to these schools can use 529 funds.

But the cost of books, supplies, equipment, and payments to organizations that are not schools cannot use 529 funds.

Be careful that the tuition payments are going to a public, private, or religious school. In my experience most homeschool programs (co-ops, tutorials, etc) are NOT schools.

Homeschool parents should check with the program that they are paying tuition to to determine if it is a school according to their state’s definition.

If you have any concern about their status as a school, then do not use 529 funds to pay for the tuition. Withdrawals from a 529 fund that are not “qualified” (i.e. tuition paid to a public, private, or religious school) then you pay income tax and a penalty of 10% on the withdrawn earnings. Ouch!

Carol Topp, CPA

What homeschool expenses can I deduct on my taxes?

Here’s a list of homeschool expenses you can deduct on your federal income tax return (Form 1040):

1.

Yes, that’s the list! It’s empty. There are NO homeschool expenses that you can deduct on your individual federal income tax return.

(Sorry for the click bait in the title!)

Homeschooling expenses are personal expenses, like groceries or clothes, and are not tax deductible on the US federal income tax return.

You cannot deduct your groceries or your clothes on your tax return and you cannot deduct your homeschooling expenses on your federal income tax return, either.

A few states may allow a tax deduction, a tax credit, or an educational saving account. But not your Uncle Sam (the US federal government).

 

Clever ideas to dodge taxes (that won’t work)

Sometimes homeschool families try to get clever and think that they will form a homeschool business and deduct the expenses. The idea is for the dad to hire his wife to teach their children. Then they can deduct school supplies, the mom’s wages as a homeschool teacher, etc.

Sounds pretty clever, huh? Except it doesn’t work anymore than paying mom to cook and feed the family by running an “in-house restaurant” won’t work. That’s because in both these plans (homeschooling as a business and in-house restaurant) there are no customers that are paying for the mom’s services.

Also, the mom has to declare her income to the IRS and she will have to pay taxes on it! That’s why families don’t hire mom to run an in-house restaurant and they shouldn’t hire mom to homeschool the kids either.

So forget the idea of forming your family homeschool as a business.

Homeschools as private school. Any tax breaks?

Some states treat homeschools as private schools, so some families think they can avoid taxes by declaring their private homeschool as a nonprofit organizations and get tax exempt status as a private school. That’s pretty clever too, huh? Only it won’t work.

Briefly, a nonprofit organization exists to serve a group, not an individual. The IRS will not grant “recognized charity” 501(c)(3) tax exempt status to a group that is formed solely to benefit the founder’s family. A tax exempt organization must serve a public good.

The IRS forbids private “inurement” in 501(c)(3) tax exempt organizations. Inurement means to be beneficial or advantageous. Inurement occurs when an organization is formed or operates with an incorrect charitable purpose that allows individuals in control to directly and personally benefit from the organization. 501(c)(3) organizations can lose their tax exempt status for practicing inurement.

So forget the idea of your family homeschool becoming a nonprofit organization.

 

In the end, do what the rest of use do, pay your taxes.

Don’t look to Uncle Sam to give you a tax break because you choose to educate your children at home. Instead appreciate the freedom we have an Americans to homeschool.

 

Carol Topp, CPA

Can our homeschool group get sued if we’re not a recognized nonprofit?

Carol,
We are a Christian homeschool group and co-op. The church that hosts our co-op classes is concerned with the possibility of us getting sued if we are not a recognized non-profit.  We are comprised of like-minded believers for a specific cause.  Can you comment on this?

TW

 

TW,

I usually recommend nonprofit incorporation to protect the leaders and members of a homeschool organization.

Nothing can stop a lawsuit, but forming as a corporation means the liability is limited to the corporation’s assets and it protects the personal assets of the leaders and members from the lawsuit damages.

Unfortunately, being like-minded does not mean you’re immune from lawsuits. One group told me that a co-op member’s health insurance sued the homeschool group for medical bills when a child was injured while at co-op. The co-op member did not bring the lawsuit, her health insurance company did.

If you need more information on the benefits of nonprofit incorporation for your homeschool group, read The IRS and Your Homeschool Organization. It includes a chapter on nonprofit incorporation.

I hope that helps,

Carol Topp, CPA

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Recording of Business Failure in the Homeschool Marketplace webinar

Yesterday I presented a webinar “Business Failure in the Homeschool Market that many of you (about 90!) attended.

 

Here’s the link to download the recording of the webinar.
The webinar lasted 2 hours because of all the questions asked, so it may take a few minutes to download.

 

Here’s a handout of the information I discussed.

 

We talked about
  • What triggers an IRS audit into worker classification
  • Factors to determine independent contractors or employee status
  • Consequences of misclassification and IRS programs to avoid penalties
  • What options are there for a homeschool co-op or academy
  • Are homeschool tutors or teachers at risk

I referenced my book Paying Workers in a Homeschool Organization which may be helpful to many of you.

 I also mentioned that I offer a Worker Classification determination service if you need help determining if your workers are independent contractors or employees.

I’m happy to help and relieve any anxiety you have about this confusing topic.

Carol Topp, CPA

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Checklist for homeschool co-op

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We are going through the process to create a non profit homeschool co-op and were wondering how much it would cost for you to review our paper work or how much it would cost for you to do and submit our paperwork.

Candace

Candace,

I have a listing of my fees here: http://homeschoolcpa.com/services/

My services vary depending on what you mean by “filing your paperwork.” There’s paperwork with your state and paperwork with the IRS. I can help with both types of filings.

Here’s a helpful checklist to keep it all straight!

Carol Topp, CPA

 


 

Candace’s question prompted me to update my Checklist for Homeschool Organizations Applying for Tax Exempt Status.

I know that forming a nonprofit organization and applying for tax exempt status can be confusing. There are just too many unfamiliar terms, IRS thresholds, steps to take and numbers!

This checklist will help you know the steps to take and the correct order.

If you need help at any step or want a personal consultation to discuss your unique situation, please contact me.

I am available to assist your homeschool organization every step of the way. Through my blog posts, books, podcast, and consultations, I try to make confusing IRS rules easy to understand. I have assisted over 80 organizations receive 501c tax exempt status.

Carol Topp 1200x1800

Carol Topp, CPA

HomeschoolCPA.com

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Checklist for nonprofit tax exempt status

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The process to form a nonprofit homeschool organization and apply for tax exempt status can seem daunting.

This checklist will help you know the steps to take and the correct order.

If you need help at any step or want a personal consultation to discuss your unique situation, please contact Carol Topp, CPA.

Checklist for Homeschool Organizations Applying for 501c3 Tax Exempt Status

Phase I: Setting Up Your Organization

  • Choose a name for your nonprofit. Research the IRS Charities web site, the internet, and your state’s Secretary of State’s Office to be sure it is not already taken.
  • Choose a board of directors (often only three people are needed, a president/chair, a treasurer, and secretary). Board members should be unrelated to each other. More is usually better, including a vice-president/chair.
  • Develop organizational by laws—the rules by which you will operate. Sample bylaws.
  • Create a budget  and list sources of income and expenses.

 

Phase II: Forming a Nonprofit Organization

  • Hold your first board meeting. Get approval of the by laws and approval to form a nonprofit corporation.
  • Draft an organizing document (Articles of Incorporation or Articles of Association) including a statement of your purpose. Specific language required by the IRS needs to be included in your Articles to be granted 501c3 status by the IRS. Read  Sample Articles and the IRS-required language.
    • Carol Topp, CPA can review your Articles for compliance with the IRS requirements. Contact Carol.
  • Read about Nonprofit Incorporation and it benefits. Have the board vote to form a nonprofit corporation or stay as an unincorporated association.
  • Incorporate as a nonprofit organization in your state. Submit Articles of Incorporation to the appropriate office in your state government with the required fee. This is usually the Secretary of State’s Office.Cover Money Mgmt HS Org
  • Obtain a Federal Employer Identification Number (EIN) using the name of the corporation, submitting IRS Form SS-4 either on-line. Go to IRS.gov and type EIN in the search box.

 

Phase III: Apply for 501c Tax Exempt Status

  • Read all you can on filing for tax exempt status. Carol Topp’s book, The IRS and Your Homeschool Organization will be very helpful.
  • Consider a phone consultation with Carol Topp, CPA to discuss the details of your particular organization.IRS and Your Homeschool Org cover
  • Have the board vote their approval for filing 501(c)(3) tax exempt status.
  • File IRS Form 1023 or Form 1023-EZ to become a 501(c)(3) tax exempt organization, preferably within 27 months of the date of incorporation. Carol Topp, CPA can help with this rather daunting task. Her specialty is homeschool organizations and she has helped over 100 nonprofits receive tax exempt status from the IRS. Contact her.
  • Pay filing fees to the IRS of $600 if you anticipate having revenue of over $50,000 per year, or $275 if you anticipate having revenue of less than $50,000 per year.  Carol’s fees are in addition to the IRS fees.
  • Register as a charity within your state. Visit Harbor Compliance to see what your state requires. They have a listing by state on their left sidebar. Carol Topp, CPA can also help you determine what your state filing requirements will be for your organization. Contact Carol.

 

Carol Topp 1200x1800Carol Topp, CPA, the HomeschoolCPA, is available to assist your homeschool organization every step of the way. Through her website HomeschoolCPA.com, books, podcast, and consultations, she makes confusing IRS rules easy to understand. Carol has assisted over 80 organizations receive 501c tax exempt status.

 

 

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Workshops on micro business, career exploration and more in Cincinnati 2016

Here are my workshops for the Great Homeschool Convention 2016 in Cincinnati.

MBizIdeas2016 A fun, fast-paced workshop to inspire and equip teenagers to start their own business.

CareerExpl2016 Help for teenagers who have no idea of what they want to be!

 

Author2016 Dream of holding your book in your hands?

 

I hope I see you there! Don’t forget to stop by my booth #1411 and chat a bit.

 

Carol Topp

 

Any tax breaks for homeschoolers? Dollars and Sense Show #11

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In this episode of the Dollars and Sense Show host Carol Topp discusses tax breaks for homeschoolers.

Listen to the show here

Show Notes:

There is no federal tax credit or deduction for homeschool expenses

Some states do allow a deduction, usually on state income tax. Proposed in Ohio: Property tax deduction for homeschool expenses

Arizona, Illinois, Indiana, Iowa, Louisiana and Minnesota and 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.

Links:
This website has a comparison of state programs that offer a tax credits for educational expenses or for a donation to a scholarship fund. It was last updated in September 2011. http://www.house.leg.state.mn.us/hrd/pubs/educcred.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

Ann Zeise of A to Z Home’s Cool has a great, detailed and lengthy post of tax write-offs for homeschoolers:
http://a2zhomeschooling.com/laws/homeschool_laws_legalities/tax_writeoff_educational_writeoffs/

 Disadvantages of tax breaks for homeschool expenses:
We have an overly complex tax system already
Fear of government regulation, proof of homeschooling, etc.

 

Remember tax deductions and credits just reduce the tax you pay.

Your state government is not putting cash in your hand to purchase books. You must do that first.

Then you pay a little bit less in tax via a tax deduction.

 

Tax breaks for parents

  • Exemptions: $3,900 per person in 2013.
  • Child tax credit. $1,000 per child. Ends when child turns 17, not 18! Law says child “was under age 17 at the end of the year.”
  • Earned Income Credit
  • Child care deduction (if working for pay)
  • Educator Expense deduction (not allowed for homeschoolers because the teacher-parent is not employed by a school for 900 hours in a school year)
    • There is a bill in the US House of Representatives to allow home school parents to take this deduction. HR 1850 sponsored by Rep Tom Cole, R-OK.

Education credits/deduction

  • American Opportunity Credit (used to be called the Hope Credit) up to $2,500 per student. Tuition, books and equipment. First 4 years of undergraduate college.
  • Lifetime Learning Credit: up to $2,000 per tax return. Tuition, books and equipment. Undergrad, graduate and courses to acquire or improve job skills.
  • Tuition/fees deduction: Up to $4,000. Cannot claim tuition deduction and AOC/Lifetime for same student in same year.
  • Student loan interest deduction. $2,500 deduction.
  • Some states allow 529 deduction (Ohio)

College savings incentive

  • 529 plans offered in many states. Known an Qualified Tuition Programs (QTP). Tax free earnings when used for tuition, books, room and board.
  • Coverdell Education Saving Account (also known as Education IRA). $2,000 contribution per beneficiary per year. Tax free earnings when used for tuition, books, room and board. Can also be used for k-12 expenses.

 

Tune in for the next Dollars and Sense show on DATE when Carol will discuss NEXT EPISODE TITLE