5 Tips for College Students at Tax Time
As a student, you have many things to think about during a semester. Every spring semester, you may need to add filing your federal income tax return to that list. Here’s a few tips to get you started.
Do You Need to File?
First, determine if you need to file a tax return. In general, the tax laws state that you are only required to file a tax return if your gross income (how much you made) is more than your standard deduction ($6,200 for a single filer).
In reality though, if you follow those rules you might be hurting yourself. Sure, you might not have made enough money to require you to file a tax return, so why go through the hassle of filing that return if you are not required to file? The reason is you might be missing out on a tax refund. If you have had any of your money withheld for taxes from your paycheck, even though you don’t owe taxes, you will have a refund coming. To get that refund, you will have to file a tax return.
Also, even if you did not work, you might still owe taxes and have to file a tax return. How can this be? It’s because the IRS doesn’t just consider money for work income when it comes to taxes. Scholarships, many fellowships, and some federal grants, such as the Pell grant, may count as income for tax purposes.
Do you have to pay taxes on these types of benefits? It depends on how much you received compared to how much you paid. If you receive more money in grants and scholarships than you paid in tuition, fees, books and required supplies, that extra money is considered income and is taxable.
So how do you know if you received more, or how much you paid for expenses? You should have received a Form 1098-T from all of the schools you attended last year. The instructions to get yours from Angelo State are here. You can also go to 1098T.com and download that form. Once you have your forms, look at Box 1 or Box 2 of the form (only one of these boxes will be filled out). That is how much you were charged or paid for required tuition and fees. Add to that number how much you spent on books and required supplies. This number will be your qualified education expenses.
Once you have that number, go back to your Form 1098-T and look at the amount in Box 5. That is the amount that you received in scholarships and grants. Note that loans are not included in this amount and do not have to be added to the amount you received.
Now it is just a matter of comparing the two numbers:
- If you received less in scholarships and grants compared to what you paid in expenses, you do not have income and do not owe taxes on any of the scholarships and grants listed in Box 5. In addition, any expenses you paid that were more than what you received in scholarships and grants can be deducted or claimed as a tax credit by either you or your parents (see the deductions and credits for education items section below).
- If you received more scholarships and grant money than you paid in expenses, then you have taxable income and you will have to report the amount you received, minus your expenses, as income on your tax form and possibly pay taxes on this income. In addition, since you received more than you paid, you will not be entitled to any of the deductions or credits listed in deductions and credits for the education items section below.
Can You Being Claimed?
For many of you, even though you work and are away from home, your parents will probably still be able to claim you as their dependent on their tax return.
Since your parents’ income is probably more than yours, it is almost always in the best interests of the family as a whole to let your parents claim you as a dependent on their tax return.
It’s important that you know whether they are claiming you on their tax return before you try to claim yourself on your tax return. If both you and your parents claim you, then the IRS will reject both returns and delay any refunds both of you may have coming.
Choose the Right Form
There are three choices of forms to use for your return:
- 1040A (short form)
While it is possible to use any of these forms for most tax returns, they are designed for different users and you might end up doing more work than necessary or cheating yourself out of valuable deductions and tax credits.
So which form should you use?
Most students will use either the 1040EZ form or the 1040A form to file their taxes. If you are using the 1040EZ, make sure you carefully follow the directions (Line No. 5 on the 1040EZ) regarding someone else, usually your parents, claiming you as a dependent. If your parents claim you as a dependent, you will probably be fine using the 1040EZ as long as you closely follow the directions.
However, if your parents don’t claim you as a dependent, you will probably not want to file the 1040EZ. This is because you cannot claim any of the deductions or credits allowed for education expenses on this form (see the following section below).
The 1040A or “short form” is the form most taxpayers use to file their returns. The main difference between the 1040A and the regular 1040 form is whether the taxpayer will “itemize” their deductions or use the standard deduction.
Most students, and taxpayers in general, do not itemize deductions. Itemizing deductions means to list each deduction that you are eligible for and have receipts and documentation to support those deductions. These deductions include items such as medical bills, home mortgage interest, charitable deductions, etc.
While we all have at least some of these expenses, you need to be able to document more expenses than the standard deduction amount to benefit from itemizing deductions. That amount for the 2014 tax year is $6,200 for a single person and $12,400 for married taxpayers.
Deductions and Credits
Whoever claims you on their tax return (usually you or your parents) can probably also claim one of the many deductions or tax credits that are available for qualified education expenses that you pay. Those last three words, “that you pay,” are important.
If you (or your parents) did not pay all of your education expenses because you had a scholarship or grant, then only the amount that you paid can be counted toward these deductions and credits. On the other hand, if you paid for these expenses by using loans that you will repay, then you can count these as expenses.
There are generally three major deductions or credits available to help cover the cost of higher education, but you only get to pick one of the three. Pick the one that best suits you and your family’s circumstances. The three most commonly used are (listed in the usually preferred order):
- American Opportunity Credit (formerly called the Hope Scholarship Credit) – This credit can reduce your taxes by up to $2,500. The credit is 100 percent of the first $2,000 of qualified education expenses and then another 25 percent of the next $2,000 of qualified education expenses.
- Lifetime Learning Credit – This credit is worth 20 percent of your qualified education expenses up to a total amount of $10,000 of education expenses. This means that the credit can be as much as $2,000 (20 percent of $10,000).
- Higher Education Expense deduction – This deduction allows you to reduce your (or your family’s) taxable income by up to $4,000 for qualified education expenses that you paid.
As a note, these credits and deductions are not available to taxpayers with higher incomes ($80,000 single or $160,000 married).
In addition to the above tax credits and deductions, you may also be able to deduct any interest that you paid on student loans during the year.
You should file as soon as you have all of your information available for two very important reasons.
First, the quicker you file, the quicker you will get back your refund. And who can’t use that extra money?
Second, and perhaps even more important, the last several years have seen a huge growth in identify fraud associated with the filing of false tax refund claims.
Many fraudsters will file thousands of tax returns with either stolen or made up Social Security numbers hoping that the IRS will process these returns and send them refunds before the legitimate returns of these taxpayers are filed. The longer you wait to file, the more opportunity there is for fraud. Of course, you have to wait until you have all of the information you need to file.
I hope this information can help guide you through a complex problem of when, what and even if you should file a tax return.