Tax Breaks for School Expenses

As summer begins to draw to a close, students of all ages are preparing to head back to school, and parents are shelling out money for everything from school supplies to tuition and fees.  This presents a great opportunity to summarize the various education-related tax benefits that are in place for these and other expenses.  Even though this benefit won’t be seen until tax time, it’s nice to know all this spending may result in some tax breaks.

Minnesota K-12 Expenses

Minnesota offers two different benefits for K-12 expenses; a subtraction (deduction) from income, and a credit against tax.

The subtraction allows for up to $1,625 of K-6 expenses and $2,500 of 7-12 expenses per child to be deducted from income before calculating Minnesota tax.  Some of the items allowed for the subtraction are listed below, though this is not a complete list.

  • Private school tuition
  • Fees for all-day Kindergarten
  • Music lessons
  • Tuition for summer camps which are primarily academic in focus, such as fine arts or language

For some, claiming a credit against tax would provide a greater benefit.  The credit is allowed for those with incomes between $37,500 and $43,500, depending on the number of children in the household.  In this case, the same expenses above that qualify for the subtraction qualify for the credit, with the exception of private school tuition.

As always, we’re here to help with areas like this, as we have been for nearly 40 years.

July 1st Update

Starting today, a number of tax-related changes agreed to during the last legislative session go into effect, along with the effect of one key U.S. Supreme Court ruling.  Below is a summary of the key points.

  • The new, 9.85% top Minnesota tax rate went into effect, but is retroactive to January 1st, 2013. Those that are single with taxable income of more than $150,000, and married couples with more than $250,000 in taxable income will see the new 9.85% rate imposed on income over those amounts. This also points to a significant marriage penalty, since two single people can earn $50,000 more than a married couple before the new tax kicks in.
  • Starting with Minnesota tax refunds issued in 2014, those not choosing direct deposit will instead be issued a prepaid debit card; paper checks will no longer be issued.
  • The following items paid by an employer on behalf of an employee will now be subject to Minnesota income tax (these items are still exempt on the Federal level, but starting January 1, 2013 not for Minnesota). In these cases, Box 16 of the employee’s 2013 W2 will likely exceed Box 1.
    • Up to $5,250 of education expenses for education not directly related to the employees job. This includes many tuition reimbursement programs.
    • Up to $12,970 of adoption expenses paid on behalf of an employee or reimbursed to them.
    • Transit passes and vanpool expenses in excess of $125 per month.
  • The U.S. Supreme Court overturned the Defense of Marriage Act (DOMA), which clears the way for same-sex couples that are legally married in their state of residence to file joint tax returns. Beginning August 1st, 2013, same-sex couples will be allowed to marry in the State of Minnesota, allowing them to file jointly on both the Federal and State tax returns, which simplifies the process significantly. Those couples with income from states other than those that allow same-sex marriage will still face significant hurdles to correctly filing in multiple states.

We’re working hard to keep up on the changes as they come about, including the impending enactment of most of the Affordable Care Act.

Minnesota Tax Changes

Late last night, the Minnesota Senate passed a comprehensive tax bill that makes significant changes to individual, corporate, and sales taxes in Minnesota.  The governor is expected to sign the bill into law.  Below are some of the key points that have been announced since the law’s passage a few hours ago.

  • Individuals with taxable income of more than $150,000, and married couples with taxable income of more than $250,000 will pay a new, 9.85% rate on the dollars over those limits.
    • This means Minnesota now has the 4th highest top individual income tax rate in the country.
    • This also imposes a significant “marriage penalty” on these earners, since the threshold for married couples isn’t twice that for single people.
  • The taxes on a pack of cigarettes will increase by $1.60 to a total of $2.83.
  • Businesses purchasing capital equipment will be allowed an up-front exemption from sales tax on those purchases, though the definition of “capital equipment” and the procedure for taking advantage of the exemption haven’t yet been announced.
  • Commercial warehousing and storage services, electronic repair services and the sale of telecommunications equipment will now be subject to sales tax. These items were previously exempt.
  • There is money in the law to help hold down property tax increases, and possibly increase the number and amount of property tax refunds available to homeowners and renters, but the details on this are also yet to be announced.