Deductible education expenses in 2015

|| Part 1 of a 2 part series – Education expenses
Those with school-age children are accustomed to take particular care in the back-to-school season to record educational expenses for deduction in the following income tax return. This year many parents may still be unaware that the rules on education deductions have changed under the 2015 IRS Reform legislation. Many of former deductible expenses are no longer considered as education costs.

Which education expenses are no longer accepted by the IRS this year?
For many parents, this is one of negative surprises from the IRS reform. As of this year, invoices related to the purchase of most school supplies (pens, bags, cases, notebooks, pencils, erasers, markers, rulers, etc.) can no longer be considered as education outlays. Only disbursements that are exempt from VAT or have a reduced VAT rate can be considered. Since most school supply items are subject to the standard VAT rate (23%), they are no longer eligible. However, many of these former education costs have merged into the “basket” of general family overheads that also enjoy tax relief, albeit with lower limits (€250) than the category of education (€800).

Which education expenses can be used on my next IRS declaration?
As mentioned in the previous point, only those VAT exempt or reduced VAT expenditures can be seen as education expenses. School textbooks are a key element in this category. Notwithstanding, to be accepted as education expenses, the bills still must meet further requirements. Education expense invoices are only accepted when the issuers are classified under the Portuguese classification of economic activity (CAE) in the following sectors:
▪ Section P, Group 85 – Education;
▪ Section G, class 47610
– Retail sale of books in specialized stores;
▪ Section G, class 88910 – Child care activities without accommodation.

In addition, Finanças accepts as education expenses charges for payment of nurseries, kindergarten, infant nurseries, schools, educational institutions and other educational services as well as manuals and textbooks associated with school attendance integrated into the national education system or recognised by the Ministry of Education.
Invoices for education expenses can also be considered when issued by professionals in the field, such as babysitters (1312), tutors (8010), instructors (8011) and teachers (8012).

What is the limit of expenses that can be included in the IRS?
The limits of educational deductions have also changed. Until last year, the IRS accepted 30% of expenses incurred up to €760. The old rules for families with three or more children provided for an additional increase of €142.50 per dependent. Under the IRS reform, the values have increased overall: 30% of education expenses up to €800. However, there are no longer specific increases for dependents.

Nevertheless, the revised Income Tax Code does provide for the possibility of a 5% bonus for each dependent to the maximum amounts of the major deductions that families may have with the tax authorities. This increase applies only to households with three or more dependents.

Take the example of a family with a taxable income of €25,000 and two children. This family can have overall IRS tax deductions (including expenses of education, health, housing, homes, maintenance payments, etc.) up to €2,130. If this family has three dependents, the maximum amount of deductions goes up to €2,449.

Large families may also benefit in their next IRS return due to the introduction of the family quotient in the IRS calculation formula. Starting in 2015, the taxable income for a family will take into account not only the parents but also how many dependents they have (both children and elderly family members). This means income tax goes down based on the number of dependents in the family.

By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.