$10,000? $12,000? $14,000? For 1st grade?! Yep, that’s the reality of Yeshiva tuition. Ever climbing, ever growing, ever ridiculous. The unfortunate reality is that if you want to send your child to Yeshiva those are the kind of numbers you come to expect. So it may come as a bit of a relief to know there is a way to save for your child’s education and get a tax break for it. Make no mistake; we are talking Yeshiva here, not college (there are many ways to save for college tax efficiently, but not as many for Yeshiva). I am referring to getting tax breaks while saving for Yeshiva. Oh yes, it can be done.
Your friendly neighborhood federal government has established what is referred to as a Coverdale IRA. It’ the new and improved Education IRA of years past. This IRA lets you make non-deductible deposits for your child’s education. These deposits then grow tax free, and if used for qualified education expenses, you never pay tax on them. The nice part about that is Yeshiva tuition (for a school recognized by the state which is almost all schools) and related expenses are eligible expenses. You can even pay for your child’s computer and Internet access with those funds (alas, games are not eligible unless they are educational).
OK, so where is the catch? There are catches, of course. But they aren’t too bad. Any number of people can contribute to one child’s account; however, total contributions for the year cannot exceed $2,000.00 per recipient. So if Bubby and Zaide want to give a nice gift to their bubbella they can use a Coverdale IRA, but their gift and your contributions cannot exceed a total of $2000 for that child (I think this is the first time in recorded history that the words bubbella and Coverdale IRA were ever used in the same sentence). In addition, there are income limits for those making contributions. The contributor’s Modified Adjust Gross Income (don’t you just love accounting terms like that?) must be lower than $95,000 for single filers and $190,000 for joint filers, in order to be able to make use of the full $2,000 limit. Above those limits phase-outs begin until you reach $110,000 for single filers and $220,000 for joint filers, where you are phased-out completely. Got all that?
There are other restrictions as well, such as contributions must be made before the child turns 18, and only cash gifts can be made (sorry, no Picassos are eligible). Also these provisions are technically set to sunset along with a host of other tax breaks in 2010. While it is widely expected to be made permanent there is a chance that it won’t, in which case some of the tax savings will be limited.
For more information on this topic you can read Publication 970 of the Internal revenue service (because everyone loves to read IRS publications. Ooh, did you catch the one about the alternative minimum tax? A real page-turner) or you can contact your accountant or financial advisor.
So while there isn’t much you can do to keep those Yeshiva bills down, at least there is a way to pay for part of it with money you would have otherwise paid to Uncle Sam.