Child support can be paid into an education fund allowing tax deductions for the payor, a tax-free fund for the payee parent, and a growing education fund for the child. Most funds are designed to save for college expenses. Did you know that some of the tax-advantaged plans for education can benefit children in grades K 12? Most plans that we think of are designed to help college students, but there are at least two types of programs that can help pay for the school expenses of younger students.
Coverdell Education Savings Accounts (“ESA”s) can pay the expenses of a beneficiary beginning with kindergarten and going up through graduate school. A maximum of $2000 can be contributed per child, per year. There are income limits for the donor, but they are quite high: donations are restricted beginning at $95,000 of taxable income on a single return and $190,000 on a joint return.
Here’s how the Coverdell ESA works: money is contributed to a child’s plan or plans. Income earned in that account is tax-free as long as the plan assets are used to provide a surprisingly wide variety of education expenses. Funds for student K-12 can be used to provide tuition and fees, books, supplies, equipment, uniforms, transportation, tutoring, and computer access. Costs for special needs students may also be included. In addition, money in a Coverdell ESA may be rolled over into a Sec. 529 Qualified Tuition Plan.
Financial assistance can also be provided to children in grades K-12 via scholarships. While this isn’t something that parents can fund for their children, it is important to be aware that scholarships exist for children in grades K 12. Scholarship funds are not a taxable income as long as the scholarship is used to pay tuition, required fees, and course-related expenses, such as books, supplies, and equipment. Some scholarship grants permit funds to be used for other expenses, such as room and board. If funds are used for this second category of expense, the scholarship grant is subject to income tax.