October 6, 2003

Some Home Schoolers Excluded from Education Savings Accounts

U.S. President George W. Bush's recent tax cut package has expanded Education Savings Accounts (ESAs), previously known as education IRAs. These IRAs were only used for higher education expenses, and contributions were limited to $500 per child, per year. With the president's recent tax cut package, education expenses are now also covered in grades K–12, with an annual limit of $2,000 per child. Qualified expenses—including tuition, tutoring, books, or computer hardware and software—remain the same for all grades and levels of education.

How do these education savings accounts work?

An ESA is an account in which interest and capital accumulate tax-free for educational purposes. For example, upon the birth of their first child, a family invests $2,000 in an ESA. They deposit $2,000 each year until the child reaches the age of six, at which time the parents will have saved $12,000. If their money has been compounding annually at 13% during that time, they will have earned $4,645.41 of tax-free money toward their child's education expenses. A little math demonstrates that the $4,645.41 in interest, divided by 12 years of education, would give parents approximately $387.12 per year to spend on their child's education.

Home school families would especially benefit from the fact that anyone, not just parents, can contribute to a child's ESA. Friends and relatives can give, as long as annual contributions do not exceed $2,000. These new provisions are effective for tax years beginning January 1, 2002.

Unfortunately, some homeschoolers do not qualify for Educational Savings Accounts. Homeschool students qualify only in states that define homeschools as private schools. These states include: AL, CA, IL, IN, KS, KY, LA, MI, NC, NE, OH, TN, and TX. (Note: In states where more than one option is provided the homeschooler may take advantage of the ESA only if they operate under the option which establishes the homeschool as a private school.) Five other states—CO, FL, ME, VA, WV, and UT—recognize groups of homeschoolers as private schools, but individual home schools do not qualify.

Home School Legal Defense Association's National Center for Home Education is working to change this inequality. "Because the U.S. Department of the Treasury will write the regulatory guidelines for this legislation, we have petitioned key members in Congress to request that Treasury Secretary Paul O'Neill include home schoolers in ESA regulations. Several congressmen have already done this," said Caleb Kershner, acting director of the National Center for Home Education. "If this approach is unsuccessful, a technical amendment to include all home schoolers, regardless of state classification, may be necessary later this year," Kershner added.