Private School Tuition and Tax Deductions

[mike]

This is a thread for those attending a church that sponsors a school. Others may participate, but I'd like to hear from folks who have experience with this.

Under federal tax law, private school tuition isn’t tax deductible unless your child is attending a private school for special needs.

In our congregation, the school is funded in three ways.

1. School tuition assessed at a flat rate per patron family. This however is not tracked or enforced if someone is unable to pay, except for patrons that are not church members.
2. Monthly church offerings for the school fund.
3. Funds received from donors through the state's EITC program.

All large capital expenses (building and major improvements) are funded by the church's building fund.

I am aware that a sizeable amount of the tuition payments are made through the church's monthly school offering, rather than directly to the school, specifically to be able to write off the tuition as a tax deduction since it is given to the church, not the school.

Questions:

Does your church/school accept tuition payments in this way?
Is this illegal and/or unethical in your view? If so, would switching entirely to a donation basis solve the issue?
How likely is this practice to be discovered by tax authorities, and if so, what would the consequences be?

[Ernie]

Why doesn't the state want private school tuition to be a tax deduction? Seems like the answer to that question might help me think about the ethical implications.

"In Pennsylvania, the federal share of education funding is approximately 11%; the state pays for nearly 36% and the balance of 53%, comes from local taxes, typically from property taxes."

https://www.google.com/url?sa=t&rct=j&q ... i=89978449

With EITC, it seems to me that PA wants business owners to help fund private schools.

When you give a donation to a non-profit, the non-profit needs to stipulate that no goods or services were given in exchange for the donation. So it seems that "all donations" might be a problem. In Washington/Franklin, the tuition is extremely low, which means that the majority of the budget is covered by church offerings. But it has always been that way. If you were to switch to this, I suppose the IRS could wonder what's going on that tuition dropped so drastically.

[Ken]

Why doesn't the state want private school tuition to be a tax deduction? Seems like the answer to that question might help me think about the ethical implications.

Generally speaking, charitable tax deductions are supposed to be for things that you do not personally benefit from. If you directly benefit then you aren't really doing charity are you?

So if you donate money to a food bank but get an equivalent amount of free food back in exchange, that really isn't charity, you are just buying food and deducting it when you can't deduct the money you spend at a regular grocery.

Or similarly, if you donate $10,000 to a hospital but then get $10,000 worth of free medical care in exchange then you aren't really doing charity are you? You are just buying medical care through a tax deductible charitable donation and making a fraudulent tax deduction.

Private school donations work the same way. You are absolutely free to donate as much money as you want to any private school or university. People do it all the time. And such donations are considered charitable. However if you are sending your child to that school and paying tuition then it isn't charity, you are benefitting from the money you are giving the school just like in the above two examples.

Now there is a movement in some states to make private school tuition tax deductible (from state taxes). But at the Federal level it is not tax deductible for the reasons I just explained.

Does that mean people and churches don't come up with loopholes and work-arounds as you have described? I expect they do. I'm just explaining the rationale behind the IRS rules regarding tax deductible charitable donations.

[joshuabgood]

This is a thread for those attending a church that sponsors a school. Others may participate, but I'd like to hear from folks who have experience with this.

Under federal tax law, private school tuition isn’t tax deductible unless your child is attending a private school for special needs.

In our congregation, the school is funded in three ways.

1. School tuition assessed at a flat rate per patron family. This however is not tracked or enforced if someone is unable to pay, except for patrons that are not church members.
2. Monthly church offerings for the school fund.
3. Funds received from donors through the state's EITC program.

All large capital expenses (building and major improvements) are funded by the church's building fund.

I am aware that a sizeable amount of the tuition payments are made through the church's monthly school offering, rather than directly to the school, specifically to be able to write off the tuition as a tax deduction since it is given to the church, not the school.

Questions:

Does your church/school accept tuition payments in this way?
Is this illegal and/or unethical in your view? If so, would switching entirely to a donation basis solve the issue?
How likely is this practice to be discovered by tax authorities, and if so, what would the consequences be?

It is legal to cover costs "through the church" if all church members benefit with this "perq" by writ of being in the church - and not connected in anyway to what they personally give in the offering. Conversations around how much it costs per student are fine. In other words, no one is personally cleansing money. However, if it is a "charge" and not a ministry of the church, it is problematic. In Lancaster, there have been in some circles, pushes to get through such a plan, however, the "competing school" market, along with the competing homeschool market, along with some public school stragglers, and most moderates and progressives haven't figured out how to unify and get it done. (In the Hebrew world it works much better...likewise with the Catholics. We are pretty individualist though...). In other words, if the church holds as a strong enough conviction, and part of its ministry, Christian education, it can work.

In my mind it is a rather "good" model so long as everyone buys in and none feel like they are paying more than their fair share etc...

[joshuabgood]

A somewhat common scenario in CA circles is where somebody will "donate" the tuition for a needy family specifically and then ask for a tax deductible receipt. This is not acceptable/legal. If it were we could all pay each others tuition (I pay yours you pay mine) and have it be tax deductible. Specific gifts to individuals can be given, however, they are not deductible. Same is true in church offerings incidentally.

[Josh]

A somewhat common scenario in CA circles is where somebody will "donate" the tuition for a needy family specifically and then ask for a tax deductible receipt. This is not acceptable/legal. If it were we could all pay each others tuition (I pay yours you pay mine) and have it be tax deductible. Specific gifts to individuals can be given, however, they are not deductible. Same is true in church offerings incidentally.

I’m not sure why you think this isn’t legal. It is entirely legal and tax deductible to donate scholarships; nonprofit foundations do it all the time. A scholarship does eventually end up being for a specific person.

You can also pay for K-12 with a 529 plan which lets you invest tax free, albeit in rather crummy investments hand picked by your state. The obvious answer is to have church supported schools and not to charge families tuition, but to expect all families will contribute in some way, including so that the needy can also attend school.

[Josh]

This is a thread for those attending a church that sponsors a school. Others may participate, but I'd like to hear from folks who have experience with this.

Under federal tax law, private school tuition isn’t tax deductible unless your child is attending a private school for special needs.

In our congregation, the school is funded in three ways.

1. School tuition assessed at a flat rate per patron family. This however is not tracked or enforced if someone is unable to pay, except for patrons that are not church members.
2. Monthly church offerings for the school fund.
3. Funds received from donors through the state's EITC program.

All large capital expenses (building and major improvements) are funded by the church's building fund.

I am aware that a sizeable amount of the tuition payments are made through the church's monthly school offering, rather than directly to the school, specifically to be able to write off the tuition as a tax deduction since it is given to the church, not the school.

Questions:

Does your church/school accept tuition payments in this way?
Is this illegal and/or unethical in your view? If so, would switching entirely to a donation basis solve the issue?
How likely is this practice to be discovered by tax authorities, and if so, what would the consequences be?

Entirely legal, although in PA #3 is a better deal for everyone involved.

It’s also a more Christian way since I think tuition should be free or a very nominal amount, with families expected to participate and to donate to provide for the needy, and the wealthy expected to donate quite a bit more (even if they have no kids in school).

You may need to have a written policy that church members may use the school regardless of ability to pay and set tuition to a smaller amount. Tidings of Peace did a sliding scale but required everyone to give some nominal amount like $20 a week. This fixed problem with families who didn’t bother to pay. If they couldn’t afford it they would accept community service in lieu of payments. Most their patrons were not church members.

[mike]

Church finances just don't seem to get audited. I don't think it's likely to ever be an issue with tax authorities. However, this doesn't mean these "loopholes" are legal or ethical.

Anybody with experience on this have some insight?

[joshuabgood]

A somewhat common scenario in CA circles is where somebody will "donate" the tuition for a needy family specifically and then ask for a tax deductible receipt. This is not acceptable/legal. If it were we could all pay each others tuition (I pay yours you pay mine) and have it be tax deductible. Specific gifts to individuals can be given, however, they are not deductible. Same is true in church offerings incidentally.

I’m not sure why you think this isn’t legal. It is entirely legal and tax deductible to donate scholarships; nonprofit foundations do it all the time. A scholarship does eventually end up being for a specific person.

You can also pay for K-12 with a 529 plan which lets you invest tax free, albeit in rather crummy investments hand picked by your state. The obvious answer is to have church supported schools and not to charge families tuition, but to expect all families will contribute in some way, including so that the needy can also attend school.

Donating scholarships is fine. Personally benefitting or specifically directing them to individuals is the problem.

[joshuabgood]

Church finances just don't seem to get audited. I don't think it's likely to ever be an issue with tax authorities. However, this doesn't mean these "loopholes" are legal or ethical.

Anybody with experience on this have some insight?

My theory is it is really dicey territory for the government to go after a church. The aesthetics aren't good.