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.
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
The most sweeping tax overhaul in decades became law in December 2017. HowStuffWorks explains what taxpayers can do to benefit from the tax changes.