Back-to-School Tax Perks & 529 Plan Strategies

As summer winds down and the back-to-school season arrives, business owners in New Jersey often face a fresh wave of family expenses. Between summer day camps, ongoing daycare, and preparing for future tuition bills, educational and childcare costs accumulate quickly. Fortunately, federal tax laws and New Jersey specific rules offer tax planning opportunities that can help offset these expenses when structured properly.

Here are three actionable tax strategies for small business owners to consider as the school year begins.

1. Maximize the Child and Dependent Care Credit (Including Day Camp)

Many parents assume the Child and Dependent Care Credit only applies to standard year-round daycare. However, day camp expenses incurred during summer break can also qualify if the care was necessary to allow you (and your spouse, if filing jointly) to work or look for work.

To ensure your camp and care expenses qualify:

• Focus on day camps: Expenses for specialty day camps (such as sports, computer programming, or art camps) qualify. Overnight camps do not qualify under IRS rules.
• Track provider information: You must collect and report the camp or daycare provider's legal name, address, and Taxpayer Identification Number (TIN or EIN) on Form 2441.
• Account for age limits: Qualifying dependents must generally be under the age of 13 when the care was provided.

If your business is set up to offer a Dependent Care Flexible Spending Account (FSA), you may also be able to pay for these expenses using pre-tax dollars, which often yields higher tax savings depending on your marginal tax bracket.

2. Take Advantage of New Jersey's 529 Plan Tax Deduction

For business owners saving for college or qualifying K-12 tuition, contributions to a 529 college savings plan offer substantial long-term benefits. Earnings inside a 529 account grow tax-free, and withdrawals are completely tax-free when used for qualified higher education expenses.

New Jersey resident taxpayers with New Jersey Gross Income of $200,000 or less can claim a state income tax deduction for gross contributions of up to $10,000 per year to an NJBEST 529 plan.

Key considerations for NJ 529 planning:

• Contribution deadlines: Contributions must be completed by December 31 to count toward the current tax year's state deduction.
• Multiple beneficiaries: If you have more than one child, contributions can be divided across separate 529 accounts to build dedicated funds for each student.
• Gift tax treatment: Contributions are treated as completed gifts, allowing you to remove assets from your taxable estate while maintaining control over the account.

3. Hire Your Children in Your Business

If you own an owner-operated business, hiring your children to perform legitimate, age-appropriate work is a proven strategy for shifting income and funding educational costs.

When implemented correctly, hiring your child provides several distinct tax benefits:

• Business deduction: Wages paid to your child for actual work performed (such as filing, administrative tasks, marketing support, or cleaning) are deductible business expenses for your company.
• Lower tax rate: Your child can use the standard deduction to offset a significant portion of their earned income, often resulting in zero federal income tax liability on those wages.
• Funding future savings: Earned income enables your child to make their own Roth IRA contributions or fund their 529 plan, helping build long-term wealth early.

To withstand IRS scrutiny, you must pay fair market wages for actual services rendered, keep detailed timesheets, issue a Form W-2, and deposit wages directly into a bank account held in the child's name.

What to Do Next

Review your year-to-date expenses for summer camps, daycare, and education savings to ensure every eligible deduction and credit is captured. If you own an owner-operated business in New Jersey and want to build a proactive, multi-year strategy for family education costs, feel free to schedule a consultation with Andrew Chen, CPA by calling (908) 660-0090 or emailing Andy@andrewchencpa.com.