Transition from high school to college or university brings plethora of changes. It is often young person’s first step into independence and that also means taking care of finances. Many college students pick up part time jobs to pay for new necessities and that employment typically triggers tax consequences.
Many students are claimed as dependents on their parents’ tax return but if you, a student, had taxes withheld from your paycheck, consider filing taxes as you may qualify for a refund.
Filing taxes as a student doesn’t have to be expensive, and in many cases the only cost is the time students put to filing tax returns. In general, student tax returns tend to be relatively simple with one source of income and few education credits and deductions.
For the simplest tax return, you can either use the IRS offers no-fee Free File or use one of the free options every major tax preparation software maker offers; those include TurboTax Free Edition and H&R Block Free Edition. It is a good idea to first file it on paper just to get prepared for some questions that will come sooner or later and put together the necessary information. Once you do that, have someone to look over it (talk to your parent or family members to go over your paper return) and then file it electronically.
Tax credits available to students
There are two tax credits available to students:
- American Opportunity tax credit – Can be claimed for no more than 4 tax years; the maximum amount of benefit is $2,500 and the student has to be enrolled in a program that awards a degree or other type of recognized credential; up to 40% of credit may be refundable.
- Lifetime learning tax credit – Up to $2,000 for qualified education expenses and there is no limit on how many years the credit can be claimed; this credit is limited to the amount of tax you have to pay on your taxable income (if credit larger than what you owe to Uncle Sam, you will not receive a refund for the difference).
It is important to know that only one of the credits can be claimed. Before deciding which one to select, I suggest crunching the numbers because there might be a significant difference in benefits between the two. Also, if a student was claimed as a dependent by the parents, it’s the parents who decide on the tax credit and include it with their return.
Students and/or parents may also qualify to deduct tuition, fees, and related expenses from tax return for up to $4,000. Deductions are not as beneficial as credits but if a student does not qualify for any of the education credits available, it can still provide significant break.
One question that often comes up is whether or not money received from scholarship(s) is taxable. The answer is, it depends. If the scholarship funds are used to pay tuition and fees, books, supplies, and other costs directly related to attending school, that amount of scholarship is excluded from taxation. On the other hand, any scholarship amount spent on room and board or other personal expenses is taxable.