Most college students probably aren't spending too much time worrying about the financial implications of their offshore accounts or stressing about capital gains taxes. But that doesn't mean they won't have some questions about how some basic college expenses could positively benefit their taxes. So, here we'll take a look at some ways that you (and your parents) can get a tax boost from things like deductions and credits -- and we'll even throw in a few tips, to boot.
One big benefit for college students (a college student might argue) is that they might not have to file a return at all. Between possibly being claimed as a dependent and just not making enough money, you may find that filing isn't for you. So let's start by taking a look at whether filing your tax return might actually present a benefit you weren't expecting.
10: File for a Refund
Say you're thinking that filing your taxes might not be worth it this year. Remember that you don't have to file if you're under a certain income limit ($6,200 in 2014) and you're a dependent; if you're not a dependent, you can make up to $10,000 and still ignore the tax deadline. But before you pump your fist and celebrate the extra 20 minutes you'll get to spend not filing a return, you might want to reconsider.
Even if you don't need to file your return, you might be due a refund if you do go ahead and give your paperwork to Uncle Sam. Remember that if you made any wages or salary from an employer, they should have withheld federal taxes from your check. Even though you might not have made a ton of money, a sizable chunk of that might be due back to you.
9: Give Yourself a Break
Now, not all college students receive assistance from their parents; many young learners are making their own way without financial help from Mom or Dad. But if you are a dependent, it's definitely to your benefit to make sure you're getting the best bang for your tax buck by filing your own taxes -- or letting your guardian get the tax breaks on your behalf.
We'll get into the specific tax credits next, but where you put them -- whether on your own tax return or your folks' -- might provide an advantage. If your folks, for instance, make too much money to meet some of the income thresholds for the college tax credits, you should consider filing a return. (Just remember that they can't claim you as a dependent if you take the college credits.) As we'll see, one of the credits has a refundable percentage, meaning that while it can't just eliminate your tax liability, it can provide you with a refund if it exceeds your tax bill.
8: Lifetime Learning Credit
So now let's get to the good stuff. How are we going to make those higher learning expenses disappear from our tax returns? There used to be three different credits or deductions that families could use to offset the cost of college, but one -- the tuition and fee deduction -- expired in 2013. (There was some criticism that it didn't help lower-income students, since it was deducted from the income subject to tax; those who made more money could take more of a deduction, even if they were paying the same costs [source: Burd]).
One option that was left over was the Lifetime Learning Credit. The credit limit is $2,000, or 20 percent of up to $10,000 in expenses. While we'll see that there's a more exclusive credit for four-year college students, the Lifetime Learning Credit can be taken for any kind of higher education, including graduate work and part-time learning. Remember that you can't just write in "Lifetime Learning Credit" on the old tax form and expect a $2,000 deduction; only qualified expenses count. Tuition and mandatory fees apply, as do some course materials.
7: Student Loan Interest Deduction
Before we discuss another college tax credit you can take on your return, there's another deduction that many students qualify for -- one that's a real lifesaver if you're trying to keep your head above water with borrowed money to pay for college.
The Student Loan Interest Deduction is just that: a way to write off the cost of your student loan interest. (Alas, you can't write off the whole bill itself.) In general, the limit of the write-off is $2,500, or the actual amount of interest you paid during the year. (Unfortunately, the IRS makes you take whichever is less.) But the even better news is that you can write off the cost without itemizing your deductions. Because the Student Loan Interest Deduction is an adjustment to income, you can take it even if you opt for the standard deduction on your tax return.
6: American Opportunity Tax Credit
OK, we've waited long enough. There's a credit that's a little more substantial than the Lifetime Learning Credit, and it has benefits that are pretty appealing in comparison. The American Opportunity Tax Credit (AOTC) replaces the former Hope Credit, and it has higher phase-out limits than Hope did -- meaning more people can take it.
The AOTC covers 100 percent of the first $2,000 of qualified expenses, plus 25 percent of the next $2,000. (This means the maximum credit is $2,500, $500 more than the Lifetime Learning Credit.) You can't claim the credit if you have more than four years of college credits under your belt -- so grad students don't get to snag it. But here's some great news: It applies to every student in the family. So, if you and 17 siblings are all enrolled in college (impressive), then your parents can take 17 credits (just expect some questions from the IRS).
More Tax Benefits for College Students
5: The AOTC Might Pay You
But we're not done with the American Opportunity Tax Credit yet. There are some other tax benefits that come with the credit that shouldn't be overlooked -- and that's extra important to keep in mind, because you can't select both the Lifetime Learning Credit and the AOTC; you can only choose one for the taking.
One advantage to both the AOTC and the Lifetime Learning Credit is that they don't hurt your financial aid; the credit will not increase the family's contribution limit. But there's another distinct advantage to the AOTC: Unlike the Lifetime Learning Credit, it's also refundable. So while the best the Lifetime Learning Credit can do is limit your tax liability, the AOTC will give you a refund. Now, the whole thing isn't refundable (only 40 percent of it qualifies), but if your tax liability is less than the credit, then you'll get a check in the mail for the difference [source: Onink].
4: Work-study Programs
Now that we know the tax breaks that apply to college students, it's time to dive into what students might be using as income in college -- and how it affects their taxes. For a lot of college students, financial aid is a huge part of paying for college. Grants, scholarships and the like are all generally going to be nontaxable as income.
But work-study is a different story. Money you make as wages is absolutely eligible for federal taxes, and it's best you're prepared for it. But here's a benefit: Most salaries or wages you're paid through work-study will already have federal tax withheld. That's a benefit, because it goes back to our very first point: If you've had tax withheld from work-study, you're probably due for a refund. So file that return if you're in a work-study program; you just might get a check in the spring.
3: Coverdell or 529 Benefits
Paying for college is a tricky matter, and some parents (or just really nice fairy godparents) will set up certain accounts to save for higher education. Before we get into the tax benefits for the student in general, we should point out that these plans -- like Coverdell Education Savings Accounts or 529 plans, offered through a state or educational institution -- are a good way to put cash away for a child's schooling. Be warned: Contributions you make to them are not tax-deductible, so you can't write them off on your return.
But here's where the benefits come in for the beneficiary of the plans: As long as they're covering higher education expenses, the person who receives them doesn't have to pay tax on them. That's a significant benefit for parents or students who are using money from 529 or Coverdell plans.
2: Consider That IRA for Education
If you or your family is struggling to come up with tuition money, you could benefit from a not-so-well-known part of the tax code for IRAs. Sound weird? Probably: IRAs, of course, are retirement funds. They're not designed for educational expenses, and you're even subject to a penalty if you touch the money before the age of 59 and a half. (The IRS, like those under the age of 10, puts a lot of stock in that half-birthday mark.)
But wait, there's an exception. If you're using the funds for qualified higher education expenses, the 10 percent additional tax penalty is waived for early distribution. This doesn't necessarily mean that it's the best deal, though. While you won't get the additional penalty, most IRAs still require you to pay taxes on the money distributed, just like regular income [source: Wells Fargo]. And Roth IRAs -- which have tax-free distributions -- will make you pay taxes on any earnings you take out. (So if you contributed $10,000 to an IRA and it grows to $20,000, expect to pay a tax on any amount over $10,000 you take out early.)
1: Making Income in Two States
Forewarned is forearmed: This "benefit" doesn't apply to all college students, but it's a super useful tip if it does affect you.
For a lot of students who go to school in a college away from their resident state, you might find that you worked a summer job at home and then got a part-time gig in your new town. In other words, you made income in two different states. Now, as you can imagine, one state isn't going to give up its share of income tax just because you were earning in a different state. You're on the hook for paying tax in both the states in which you were making money.
But don't panic; there are exceptions. Some states don't have state income taxes, so you'd be totally off the hook for any of those states. And some states actually have reciprocal agreements, so you can request exemption from withholding in another state. So keep in mind that your double income isn't always a double whammy come tax time; it just might require a bit of due diligence.
Many Americans don't think about their tax bills until the new year. But there are things you need to do before Dec. 31 if you want to pay less later.
Author's Note: 10 Tax Benefits for College Students
Doing your taxes as a college student can be quite intimidating; you might feel like you can't afford professional help or simply don't know the right questions to ask. But don't assume you're doomed. As you can tell, there are lots of ways that being a student can decrease your tax burden. Check out the links below to learn more about income tax and help feel confident in your return.
- Burd, Stephen. "Congress Should Let the Tuition and Fees Deduction Rest in Peace." New America Foundation. Jan. 7, 2014. (Nov. 6, 2014) http://www.edcentral.org/congress-let-tuition-fees-deduction-rest-peace-2/
- Caplinger, Dan. "Tax Breaks Every College Student (and Parent) Should Know About." Daily Finance. July 13, 2012. (Nov. 6, 2014) http://www.dailyfinance.com/2012/07/13/college-tuition-tax-breaks-deductions-credits/
- Dratch, Dana. "A Dozen Tax Tips for College Students." Bankrate. Jan. 27, 2005. (Nov. 6, 2014) http://www.bankrate.com/brm/itax/news/20040130a1.asp
- Federal Student Aid. "Tax Credits for Higher Education Expenses." U.S. Department of Education. (Nov. 6, 2014) https://studentaid.ed.gov/types/tax-benefits
- Internal Revenue Service (IRS). "Coverdell Education Savings Account (ESA)." 2013. (Nov. 6, 2014) http://www.irs.gov/publications/p970/ch07.html
- Internal Revenue Service (IRS). "Tax Benefits for Education: Information Center." Aug. 19, 2014. (Nov. 6, 2014) http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center
- Internal Revenue Service (IRS). "Topic 456." Aug. 18, 2014. (Nov. 6, 2014) http://www.irs.gov/taxtopics/tc456.html
- Onink, Troy. "You Can Get $10,000 Per Child in College Tax Credits, Thanks to the Fiscal Cliff Deal." Forbes. Jan. 16, 2013. (Nov. 6, 2014) http://www.forbes.com/sites/troyonink/2013/01/16/american-opportunity-tax-credit-pay-for-college-and-pay-less-tax/
- TurboTax. "Education Tax Credits." Intuit. 2014. (Nov. 6, 2014) https://ttlc.intuit.com/questions/1901172-education-tax-credits
- TurboTax. "Take Advantage of Two Education Tax Credits." Intuit. 2013. (Nov. 6, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/College/Take-Advantage-of-Two-Education-Tax-Credits/INF12132.html
- TurboTax. "Tax Filing Requirements for Children." Intuit. 2013. (Nov. 6, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/Tax-Filing-Requirements-for-Children/INF14501.html
- TurboTax. "What is IRS Form 1099-Q?" Intuit. 2013. (Nov. 6, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/What-Is-IRS-Form-1099-Q-/INF14817.html
- TurboTax. "What is a Reciprocal State and How Does That Work?" August 2014. (Dec. 5, 2014) https://ttlc.intuit.com/questions/1899178-what-is-a-reciprocal-state-and-how-does-that-work
- TurboTax. "When Do You Need to File Tax Returns in Multiple States?" Intuit. April 2014. (Nov. 6, 2014) https://ttlc.intuit.com/questions/1900021-when-do-you-need-to-file-tax-returns-in-multiple-states
- Wells Fargo. "Tapping Retirement Funds to Pay for College." 2014. (Dec. 5, 2014) http://www.wellsfargoadvantagefunds.com/wfweb/wf/college/aid/retirement.jsp
- Woodruff, Mandi. "4 Tax Breaks Every College Student Should Know About." Business Insider. Oct. 25, 2013. (Nov. 6, 2014) http://www.businessinsider.com/college-student-tax-breaks-2013-10