More Tax Tips for Students
Work-study sounds like a terrific deal: Your school will pay you to do somewhat menial, but possibly even interesting, tasks in exchange for a paycheck or tuition break. But beware: Work-study programs are taxable. That means you need to make certain that your college or university is withholding taxes from each paycheck. And if they're not? Best you set aside a chunk of each check to pay the IRS come tax time.
Even if the work-study program is simply taking money off your tuition, it's still considered income. It's prudent to check with a supervisor or financial aid adviser so you know what you're getting into before the program starts.
But do take comfort in the fact that the government isn't trying to take all your educational expenses. Most scholarships and fellowships are tax-free as long as you're actually using the money for qualified educational purposes [source: IRS].
4: Open a 529
One tax tip that you might want to take advantage of before you enroll for college -- perhaps even long before -- is a 529 plan. These nifty plans are either operated by a state or educational institution, and they allow you to put money into an investment savings account. You can set one up for anyone -- your kid, yourself, a stranger. (And if you can afford to help pay a stranger's college tuition, go for it.) Both college savings plans and prepaid tuition plans are offered; prepaid tuition is generally offered as an in-state option, and you might have to be a resident to take advantage.
College savings plans can be a little broader; you might have more investment opportunity, and the money can generally be used at any educational institution. While contributions aren't tax deductible, you don't have to pay tax on any income the investment account accrues. More importantly to students and families, you don't have to pay tax on any withdrawals that you use for higher education. Do keep in mind that the owner of the plan has more control than the beneficiary: If Grandma decides the 529 she opened for you should go to your cousin instead, you can't stop her. Be nice to Nana.
3: Dual State Taxes
Like paying taxes so much you want to pay them twice? Doubt it. But unfortunately, many students qualify for dual state taxes. If you're making money in both the state you go to school and the state where you permanent address is, you better believe that both states want to make sure they're getting their share of your income.
This is one case where talking to a tax professional -- or just asking for help from parents or friends -- might be worthwhile. It's important to note that there are myriad exceptions between states: Some states don't even have an income tax, for instance, while other states have reciprocal agreements with each other regarding income tax.
The one thing you don't want to do is assume you covered it if you paid in one state. Check with the tax requirements in both states to make sure you're not getting a call from Uncle Sam.
2: Tuition Deductions?
If you don't claim either the Lifetime Learning Credit or the American Opportunity Credit, you still have another option. The tuition and fees deduction allows you to write off qualified education expenses on your taxes for you, your spouse or a dependent. Again, you don't have to itemize your expenses to take the deduction: It will reduce your adjusted gross income instead. (Which is usually a good thing, because less adjusted gross income might mean a lower tax bracket in general.)
The tuition and fees deductions offer similar benefits to the Lifetime Learning Credit or the American Opportunity credit, but you'll want to comparison shop to see which one will give you the biggest break. For instance, the tuition and fees deduction will allow you to write off specific costs; the AOC and LLC offer a flat-fee credit. With the tuition and fees deduction, you can take up to $4,000 off your income, subject to qualifying expenses.
Listen: It's possible that your parents will try to convince you that filling out your taxes with good old pen and paper is the best way to go. They might argue that you're less vulnerable to an audit, or maybe even that it's making the government's job too easy to just accept your digital return. They are probably wrong.
In most cases, this is a no-brainer for students. Obviously, e-filing your return is going to save you a lot of time and effort. For one, your return is processed much faster. No snail-mail turnaround times. That means you get a refund faster, which is probably priority number one for any kid looking to make rent money. You can also direct-deposit the money, so it's whisked straight into your account. Furthermore, you're probably going to actually get your taxes right: The IRS estimates that 20 percent of pen-and-paper returns are inaccurate, versus 1 percent of electronic filings.
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