Mike Szydlowski, Woodberry Forest School's Director of Financial Aid, and independent tax preparation and financial planning professional, was kind enough to talk with us about the tax implications of private school tuition and financial aid awards for boarding school families.
His position as professional who knows the financial process from both the family and school sides gives unique insight into many of the questions that families ask about tuitions and financial aid awards.
1. Can private school tuition be tax deductible — like preschool/childcare? Or, for a special needs child?
Mike Szydlowski (MS): In my opinion, usually no. However one could take a position that this is a deductible medical cost subject to the 10% floor if the following applies:
If, on a doctor's recommendation, the costs of sending a mentally or physically disabled dependent to a school or institution with special programs to alleviate or overcome his/her disability would be deductible. Such costs may cover: teaching braille or lip reading, training, caring for and supervising a mentally retarded person, training for a child with dyslexia, costs of meals and lodging if boarding is required at the school and the cost of other regular educational courses taught at the school provided that they are only incidental to the special courses taught to overcome the disability.
The school must have a professional staff competent to design and implement a program to overcome the particular disability.
2. Does private school/boarding school tuition hold any tax implications for a family?
MS: Currently there are no tax implications when paying tuition for K - 12 and/or PG year Independent School tuition or receiving financial aid which covers tuition.
3. Financial aid awards — do any of them in their various forms present any implications for a family?
MS: If a family receives a full grant from a boarding school the amount of the grant that covers room, board, travel and medical costs is taxable to the recipient; see IRS Publication 970 page 5 and Appendix B, pp. 80 & 81.
4. Are the various forms of financial aid taxable income? Some but not all forms?
MS: The amount for tuition, books and fees only is tax free. For more details, check the references in question 3.
MS: Tuition remission is a tax free benefit.
MS: Loans are never taxable, unless they are a below interest loan made between related parties or if the loan balance is forgiven, then you move into a cancellation of debt income situation which can be taxable.
5. When a family applies for financial aid are there any pieces of their tax returns and financial statements to which families should pay special attention?
MS: Certainly some areas trigger detailed verification from the financial aid office: conservation easements on Schedule A; self employment income/loss in the form of sole proprietorship (Schedule C), rental income, Partnership income and/or S Corporation income (all three on Schedule E); untaxed cash flow on Schedule D, farm income/loss on Schedule F and net operating loss (NOL) on line #21 of the 2012 Form 1040. Also, when itemized deductions exceed about 50% of AGI and the amount of income tax actually paid (not withheld) is $0.
6. Many families now have grandparents contributing toward a a grandchild's private school tuition. Are there any rules of which they need to be aware?
Yes, a current feature of the tax code allows a grandparent (or anyone) to sidestep the $14,000 annual gift exclusion when paying tuition (tuition only, not room and board) or medical expenses for a grandchild.
The grandparent can pay the tuition directly to the school and not trigger the $14,000 exclusion amount or the need to file a gift tax return (IRS Form 709).
An important reminder: if Grandparents take advantage of this direct payment of tuition, they cannot claim a charitable deduction...they are not making a gift to the school; they are paying tuition.
Disclaimer: This is general information in reply to these questions. Each family's situation is unique. You need to check with your tax preparer when working through these questions on your own.