Private School Tuition and Tax Deductions

[Neto]

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.

The scenario you describe is remarkably similar to the way "faith missions" (such as WBT, under whom we served) operate. The "fine line" is that when you send in donations to the mission agency, you may REQUEST that the monies go to a certain project or missionary couple or team (NOT on the check - on a separate paper), but you may not SPECIFY that it go to them. If it is specified, or designated, that is a personal gift, and falls under separate tax law. The mission agency respects the request of the donor, and the funds flow through as though they had been designated. But the mission agency has the full legal right to divert the funds, should they choose to do so. The difference is that the donor has completely released control over the funds.

EDIT TO ADD: I did the book work for our mission fund for 12 years, and it sometimes happened that a parent would make a donation to the fund to assist in their own child's expenses for a mission or youth out-reach effort. It bothered me, but I always did as they had pretty much specified, with a clear designation for their own child.

[Ken]

I personally do not think that a person should evade federal tax in the manner you describe, and would consider it at least illegal in the sense of the "spirit of the law". Is it "fair" that parents are required pay into the local (public) school system, which they are not using? Probably not, but that is the law, and to intentionally bypass it does seem unethical to me.

Parents don't pay into local public school systems. Property owners who own property of any kind in that district do so. Whether or not they have children or are even a family. Just like all property owners pay taxes to support police, fire, sheriff, country roads, snow removal, country parks, and all other public services provided by the county regardless of whether they ever use those services. I don't get to opt out of road maintenance or parks maintenance even if I don't own a car and never use them.

Pretty much every single property address in the entire US falls into some school district and so school taxes collected in the form of property taxes are pretty much a universal aspect of owning property whether you are a family, single person, or company that owns commercial or industrial property where children never set foot.

Around here a whole lot of property is owned by out-of-state investors, investment trusts, and even foreign investors who have been buying up property in urban areas along the west coast. Is it fair to charge them taxes to pay for local schools even if they never send any children to them or don't have children? Absolutely. That comes along with owning property in this jurisdiction.

But charitable contributions are not deductible from your property taxes. They are deductible from your income taxes which is a completely separate issue.

[Neto]

I personally do not think that a person should evade federal tax in the manner you describe, and would consider it at least illegal in the sense of the "spirit of the law". Is it "fair" that parents are required pay into the local (public) school system, which they are not using? Probably not, but that is the law, and to intentionally bypass it does seem unethical to me.

Parents don't pay into local public school systems. Property owners who own property of any kind in that district do so. Whether or not they have children or are even a family. Just like all property owners pay taxes to support police, fire, sheriff, country roads, snow removal, country parks, and all other public services provided by the county regardless of whether they ever use those services. I don't get to opt out of road maintenance or parks maintenance even if I don't own a car and never use them.

Pretty much every single property address in the entire US falls into some school district and so school taxes collected in the form of property taxes are pretty much a universal aspect of owning property whether you are a family, single person, or company that owns commercial or industrial property where children never set foot.

Around here a whole lot of property is owned by out-of-state investors, investment trusts, and even foreign investors who have been buying up property in urban areas along the west coast. Is it fair to charge them taxes to pay for local schools even if they never send any children to them or don't have children? Absolutely. That comes along with owning property in this jurisdiction.

But charitable contributions are not deductible from your property taxes. They are deductible from your income taxes which is a completely separate issue.

Yes, I know that it is property tax, and not a "parent tax". But even renters pay this tax indirectly, because the property owner considers that cost in determining the rental fee, basically passing that cost along to the renter.

[RZehr]

Of course it is perfectly legitimate to run a church school.

What is shady is to donate $5000 to your church. Then deduct that entire $5000 from your taxes when part of your donation is paying for your children’s education.

Assuming that $5,000 covers the cost of one student, is it also shady to donate only $1 and send your child to school there? Is it shady to donate $50k, and send your child to school there?
Or is it only shady if the donation amount is within the ballpark of the tuition? Or exact?
Or, can we not ever donate to the same church that operated a school that ones child attends?
What about if the donation to the church is $5,000 but the church sends 50% of its offerings to things besides running the school?

The law is exactly as depicted in the screen shot that I provided above.

"If you receive or expect to receive a financial or economic benefit as a result of making a contribution to a qualified organization, you can't deduct the part of the contribution that represents the value of the benefit you receive."

Do people do it anyway? I'm sure they do. How you determine the "value of the benefit that you receive" is something for your tax accountant to help you determine. I'm sure there is IRS guidance on how to do this. There is very little about the tax code that is ambiguous. I'm not interested enough to try and look it up.

People who attend a church school without contributing to the church or school aren't running afoul of any IRS guidelines. So the "shadiness" of doing that is more a question for the church to decide for itself.

And (at least here) the church members are giving money to the church without any earmarks. This is, according the IRS guidelines, acceptable. If the money given to the church is specifically earmarked for the school, only then does it begin to be viewed differently. The school is free to all students who meet the requirements - of which financial compensation and tuition are not one of them.
Every wage earning member ought to feel a desire to give to the offering, 15 years old, 75 years old, and it’s irrelevant whether you have children in the school or not. I was putting money in 10+ years before I had children in school.

[ken_sylvania]

I personally do not think that a person should evade federal tax in the manner you describe, and would consider it at least illegal in the sense of the "spirit of the law". Is it "fair" that parents are required pay into the local (public) school system, which they are not using? Probably not, but that is the law, and to intentionally bypass it does seem unethical to me.

Parents don't pay into local public school systems. Property owners who own property of any kind in that district do so. Whether or not they have children or are even a family. Just like all property owners pay taxes to support police, fire, sheriff, country roads, snow removal, country parks, and all other public services provided by the county regardless of whether they ever use those services. I don't get to opt out of road maintenance or parks maintenance even if I don't own a car and never use them.

You're getting the picture. In our case, "Parents don't pay into the church school system. Church members who are able do so. Whether or not they have children or are even a family. Just like those church members who are able to do so donate funds to support the ministry, pay for the church building, and all other services provided by the church regardless of whether they ever need those services..."

[Ken]

Yes, I know that it is property tax, and not a "parent tax". But even renters pay this tax indirectly, because the property owner considers that cost in determining the rental fee, basically passing that cost along to the renter.

This is getting a little astray. I personally don't object if the government wants to subsidize private schools. But take the money to do that out of general tax revenues, or tax oil windfall profits or liquor or raise income taxes on the wealthy. In other words pay for it directly. Don't just cut money going to public schools which are already underfunded in many parts of the country.

And no, property taxes aren't always passed on. Landlords can only charge rent that the market will bear. They aren't in any way entitled to pass along all their expenses to their renters. The world doesn't work like that.

Imagine two four-unit apartment buildings across the street from each other. The first is owned outright by a little old lady who inherited it free and clear 20 years ago. Her son does the upkeep and maintenance and so she has no real costs except for property taxes of $500 per month. The going rate for apartments in that town is $1000 per month and so she pockets $3500 per month. She isn't going to lower her rents down to $125/mo. because that is her cost. She is going to charge the market rate unless she is foolish.

The second building is owned by investors who bought it recently at the peak of the housing boom and are paying 7% mortgage on the property and another 10% for a professional property management service to maintain the building since they live out of state. They have mortgage costs of $4000 per month and property management costs of $500/month in addition to the property taxes of $500 per month. So they are paying out $5000 per month and earning $4000 per month. Since the market rate of rents in that town are $1000 per apartment and they won't get the place rented if they try to charge $1500 per month. The market doesn't care what their carrying costs are on that apartment. Perhaps they are operating at a loss and expecting the property to appreciate. Or perhaps they just made a bad investment. But there is no rule of property investing that says you get to pass all of your costs onto your tenants. You can only charge the rents that the market will bear. Every single property owner in a city will have a different balance sheet. But the rental market in that city is determined by supply and demand.

[Ken]

Assuming that $5,000 covers the cost of one student, is it also shady to donate only $1 and send your child to school there? Is it shady to donate $50k, and send your child to school there?
Or is it only shady if the donation amount is within the ballpark of the tuition? Or exact?
Or, can we not ever donate to the same church that operated a school that ones child attends?
What about if the donation to the church is $5,000 but the church sends 50% of its offerings to things besides running the school?

The law is exactly as depicted in the screen shot that I provided above.

"If you receive or expect to receive a financial or economic benefit as a result of making a contribution to a qualified organization, you can't deduct the part of the contribution that represents the value of the benefit you receive."

Do people do it anyway? I'm sure they do. How you determine the "value of the benefit that you receive" is something for your tax accountant to help you determine. I'm sure there is IRS guidance on how to do this. There is very little about the tax code that is ambiguous. I'm not interested enough to try and look it up.

People who attend a church school without contributing to the church or school aren't running afoul of any IRS guidelines. So the "shadiness" of doing that is more a question for the church to decide for itself.

And (at least here) the church members are giving money to the church without any earmarks. This is, according the IRS guidelines, acceptable. If the money given to the church is specifically earmarked for the school, only then does it begin to be viewed differently. The school is free to all students who meet the requirements - of which financial compensation and tuition are not one of them.
Every wage earning member ought to feel a desire to give to the offering, 15 years old, 75 years old, and it’s irrelevant whether you have children in the school or not. I was putting money in 10+ years before I had children in school.

I don't think that is true. At least not by my reading of the IRS guidelines. It has nothing to do with whether or not the funds are earmarked. It has to do with what benefits are received.

And again, none of this restricts donations to a church of any kind. The restriction is on claiming an itemized tax deduction for a donation that you make to a religious organization that provided you or your immediate family with any sort of substantial benefits.

Page 29 of IRS Publication 1828 (Tax Guide for Churches & Religious Organizations) states the following with respect to the tax deductibility of religious contributions. Namely that any benefits received in exchange for the contribution must be entirely of an intangible religious nature: https://www.irs.gov/pub/irs-pdf/p1828.pdf



Page 4 of IRS publication 1771 https://www.irs.gov/pub/irs-pdf/p1771.pdf on disclosure of charitable donations defines what they mean by "intangible religious benefits" and the IRS specifically exclude education

[mike]

Page 4 of IRS publication 1771 on disclosure of charitable donations defines what they mean by "intangible religious benefits" and the IRS specifically exclude education

Read the rest of the sentence. “Leading to a recognized degree.”

[Ken]

Page 4 of IRS publication 1771 on disclosure of charitable donations defines what they mean by "intangible religious benefits" and the IRS specifically exclude education

Read the rest of the sentence. “Leading to a recognized degree.”

elementary and secondary school degrees are recognized degrees. Whether or not you even give them a formal name and have a formal graduation.

If one of the graduates of a Mennonite church school applies to college, nursing school, or trade school they most certainly expect their degree to be recognized. Or even if the student transfers to a different private school or public school. They would expect their transcript and coursework to be recognized.

Whereas something like Sunday school or vacation Bible school would not be.

This actually came up in a case before the 9th Circuit when a Jewish family wanted to deduct contributions that funded a religious Yeshiva school and they made a calculation that 55% of the student's time was occupied with religious teaching and 45% was occupied with other ordinary education. So they tried to deduct 55% of the cost saying it was for "intangible religious benefits" and the court said "nope". If there is any non-religious content then it is non-deductible.

[Neto]

I have largely come down on one side of this discussion, but I can see the other side as well. Take as an example, the East Holmes County school district. The local school system here is very well supported, not only by the high property tax rates, but lots of people who really support the school, and financially, too. Then consider how many of the potential students are not attending the public school, because of the many, many students (Amish and otherwise) who are attending private schools, at additional cost to their parents. Then add in those who stop formal schooling after 8th grade. In that sense, let the parents who pay twice have an extra deduction. The public school still claims that they do not have enough funds to do all they would like to do. Just think how it would be if all of the private school students were attending the public schools, and none were quitting at the 8th grade level. (And yes, I know that the funds for schools are not collected from only parents, and technically not from renters, at least not directly. It would be interesting to know how many families with children attending school in this school district are actually renters. I would venture to guess that the rate of renting parents to home owner parents in this section of Holmes County is very low. I know that it is much lower than in the West Holmes school district.)