As a new year takes hold it’s time to start looking at filing your tax returns. As students, there are some special perks and problems that you need to consider in preparing your taxes.
Let’s start with who claims you as a tax deduction. You may have been working, living on your own – stretching your wings – but if you are under 24, your parents may still be able to claim you as a tax deduction. For some of you this deduction has little impact, however for others, it could be significant – so, it’s a good idea to have a discussion with your parents to see who should take the tax deduction. *hint…. it’s usually the one in the bigger tax bracket!
Income and Earnings
The next thing to consider is what to include as income. Anytime you earn money by working you should receive a W-2 or 1099. These documents indicate that the earnings are taxable and you need to include in your tax returns. Any interest or dividends you get from investments (accounts your parents might have set up in your name – or other investments you might have made over the years) are also taxable. You’ll get a 1099INT or 1099DIV for these items. Most of that probably makes sense, but some items are not so clear. Any scholarships and fellowships that you receive where you didn’t use the money for tuition or school-related supplies such as books are taxable. So, if you received scholarship money for room and board – that is taxable. If you used your scholarship money for room and board – that is taxable.
Credits and deductions
What can you take as deductions or credits against this income to save you money? First, it might help to understand the difference between a deduction and credit. Deductions are things you can deduct from your taxable income to make the amount smaller and thus the tax smaller. Credits are things that come directly off of the tax amount. In most cases, credits are better than deductions since they directly reduce your tax dollars – and are sometimes refundable to you. For students, there are some special deductions and credits.
Let’s look at deductions first. You should receive a 1098T form that reports what you have paid in tuition dollars to your college or university. This amount is deductible on your tax return along with other costs that you might have paid such as textbooks, computer software, equipment, and other required course materials. The deduction is limited to $4,000, even if you pay it with money from a loan. If you take this deduction, you cannot take one of the available credits.
Student loan interest is another deduction and this one you can take even if you are claiming another credit or deduction. Student loan interest is reported on a 1098E and is deductible up to $2500.
The education credits are the better deal for students. There are currently two of them – the American Opportunity Credit and the Lifetime Learning Credit.
The American Opportunity Credit is the better credit in many cases because it allows for money to be refunded if you don’t owe taxes. This credit is for undergraduates only and covers tuition, fees, and course materials. This credit can be claimed all four years of undergraduate work, (yes, only four years). The credit amount is $2,500, and 40% of this, (up to $1,000) is refundable each year.
The other credit is the Lifetime Learning Credit, and this credit allows for up to $2,000 of qualified education expenses as a credit. It is non-refundable, however, it applies to undergrads, grads, and professional degree courses, even to postgraduate courses that help improve your job skills. There is no limit to the number of years you can take this credit. This credit allows for 20% of the first $10,000 of education expenses per year.
Some things to remember: Except for student loan interest you can only take one credit or deduction per year. Your parents might be thinking of taking some of these credits or deductions, especially if they are helping to fund your education. What this means is that you will need to have a conversation with them since only one of you can take advantage of these perks each year.
Of course, you’ll want to check with someone on the details to these things – they all come with various caveats and rules – but armed with the basics, it’s now time to get going – you may be getting some money back!