H&R Block shows you the top two ways to save now and for the future on school expenses: Tax-Free Weekend and 529 Savings Plan
The end of summer is nearing which means millions of families are starting to think about going back to school. While a new teacher and new learning opportunities are exciting, the financial implications of buying school supplies and new clothes is a source of stress for many. But what if you saved on school supply shopping now and put that money into a fund to help with school expenses down the road? We’ll show you how.
- For a limited time, save valuable dollars during your state’s tax-free weekend. A tax holiday or tax-free weekend is a state’s way of temporarily reducing or eliminating a tax. Differing by state, typically a sales tax holiday makes certain back-to-school purchases, such as clothing, school supplies, computers, and other items exempt from sales tax for that time period.
The average American spends $685 on school supplies … not paying taxes on that equals a sizeable savings.
Depending on your state sales tax laws and the types of supplies you need, you may find the savings to be significant. For example, the average American spends $685 outfitting their children with clothing and school supplies. In Missouri, with an average sales tax rate of 7 percent, you’d save $47.95. However, if you purchased a new computer for school and clothing for multiple children, your costs may be as much as $3,000, which would bring your savings up to $210.
How do I know when my state’s tax-free weekend is?
State Dates Alabama July 19 – 21 Arkansas August 3 – 4 Connecticut August 18 – 24 Florida August 2 – 6 Iowa August 2 – 3 Maryland August 11 – 17 Massachusetts August 17 – 18 Mississippi July 26 – 27 Missouri August 2 – 4 New Mexico August 2 – 4 Ohio August 2 – 4 Oklahoma August 2 – 4 South Carolina August 2 – 4 Tennessee July 26 – 28 Texas August 9 – 11 Virginia August 2 – 4 Why doesn’t every state participate?
Some states like Alaska, Delaware, Montana, New Hampshire and Oregon don’t have a sales tax holiday because those states don’t have a sales tax. In Massachusetts, Minnesota, New Jersey, New York, Pennsylvania and Rhode Island, most clothing is tax-free year-round.
- It’s easy to then put the savings into a 529 plan for future school-related expenses. Created in 1996 and named for section 529 of the federal tax code, a 529 plan is an educated-related savings account exempt from federal taxes. Earnings in 529 plans accumulate on a tax-deferred basis and distributions are not taxed federally when used for qualified education expenses.
529 savings plans can be used for more than college tuition.
Most people don’t realize 529 savings plans can be used for undergraduate or graduate school, technical or trade schools, even cooking schools or golf schools in the U.S. and some accredited schools abroad. You can also use them to pay for room and board, fees, books, computers or other supplies. What counts as a qualified education expense is extensive and has been expanded recently, such as in 2015 to include computers and in 2017 to include up to $10,000 annually in K-12 tuition. Review the full list of qualified 529 expenses for even more information.
Contributing to a 529 education plan gets you more than a traditional savings account.
Each state offers its own 529 plan, and requirements can vary by plan. But if you start socking away the savings from shopping during a tax-free weekend and put it into 529 plan, your money will grow. For example, according to the FDIC, the national average interest rate on savings accounts currently stands at 0.09% APY (annual percentage yield, or interest). If you put $50/year for 18 years in one of these savings accounts, your total would be about $900. However, if you contributed $50 each year in a 529 plan for 18 years, your total would be more than $2,000 (based on an 8% before-tax return on savings and 10% marginal tax bracket.) That’s more than a $1,100 difference!
Don’t underestimate the savings shopping during a tax-free weekend can have, especially when putting it into a 529 account to help with school expense down the road. H&R Block’s Tax Information Center has more information about how to select the best 529 plan for you.
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