Qualified tuition programs -- often called 529s -- may help you avoid paying tax on a good chunk of your income. However, you must follow the rules on a 529 plan, or face penalties that end up increasing your overall tax bill. One major forbidden expense under a 529 is to withdraw funds to pay for a private high school.
As of 2011, the Internal Revenue Service does not let taxpayers use a 529 plan to pay costs for high school. You may only use contributions to a 529 plan to pay expenses at an eligible institution. In general, eligible institutions consist of any accredited vocational school, university or college. If you withdraw money from a 529 plan to pay for high school tuition, the IRS will charge a 10 percent penalty on the distributions, on top of whatever you pay in income tax.
Paying for Private High School
Private boarding schools can cost well over $30,000, according to Dana Dratch of Bankrate. However, most parents who send their child to a private high school receive at least some aid from the institution itself. Parents also tend to live more frugally, keeping cars longer and working more, to pay for private school tuition, and may even sell off assets like a vacation property.
Consider using a Coverdell education savings plan to save for your child's private high school tuition. A Coverdell ESA offers some of the same benefits as a 529 plan. As of 2011, distributions from a Coverdell account are tax-free when they do not exceed the cost of qualified education expenses, such as tuition and books, according to the IRS. However, the IRS restricts qualified expenses to those required to attend the school, so you may not be able to use distributions to pay for transportation and boarding. At the very least, contributions to a Coverdell account grow tax-deferred until you withdraw them.
It never hurts to ask the financial aid office at a private school about help paying tuition. You can even appeal a financial aid decision if you feel your family has mitigating circumstances, such as unexpected medical bills. If you can, you should keep contributing to a 529 plan. A 529 plan lets you make tax-deferred contributions, and you tend to have more control over how to use the money once the child starts college.