10 Tax Tips for Students

What could be more carefree than being a student? You indulge in leftover pizza for breakfast, manage your laundry once a month, and occasionally grace your class with your presence when the equation of grades versus effort leans in your favor.

That’s the idyllic image many non-students envision: college life as a leisurely stroll down a predictable, sleepy path. However, the reality for most students over the age of 18 is quite different. They grapple with hefty college bills piling up over their academic journey and the pressing need to earn a paycheck to cover expenses like textbooks and living costs.

And guess what? Taxes aren’t something they can evade. So, let’s delve into some ways students can stay ahead of their annual April tax responsibilities for the next few minutes.

If your income exceeds the standard deduction, which was $12,400 in 2020, you’re required to file taxes. This includes earned income, such as wages or fees from working. Additionally, unearned income over $1,100 must also be reported, which could come from sources like investment accounts or interest. However, parents have options for reporting their children’s unearned income on their own tax return.

It’s risky to assume that filing taxes isn’t necessary if your earned income falls below $12,400. Even if you earned less than this threshold, you might still be eligible for a refund if taxes were withheld from your income. Check your pay stubs to see if taxes were deducted; if they were, filing a return could result in a refund.

If you’re proceeding with filing your taxes, it’s crucial to communicate with your parents or guardians to ensure everyone agrees on who will claim what. Your parents might still intend to claim you as a dependent, even if you’re earning your own income and filing your own tax return. This is because they may be eligible for a partially refundable tax credit, which can be significant.

While it might be disappointing for a student hoping for a $250 refund, consider that if your parents are providing more than 50 percent of your support, claiming you could benefit them with a larger tax credit. They might be willing to share some of that refund with you if you ask politely. However, attempting to claim both independent status and dependency status is not advisable. The IRS frowns upon such attempts, and it could lead to complications for you and your parents.

If you’re unhappy that your potential beer money is now part of a tax credit for your parents, try to negotiate with them for a portion of the refund. If successful, maybe you can share your strategy with my parents too!

For full-time college students, there are tax credits available to help ease the financial strain of higher education. One notable credit is the American Opportunity Tax Credit (AOTC), offering up to $2,500 per eligible student. This credit is applicable for the first four years of post-secondary education, with 40 percent of it being refundable. This means you could receive up to $1,000 as a refund if you owe no taxes. The AOTC can be claimed if your single income is up to $80,000, or $160,000 for joint filers.

For students beyond their fourth year (or fifth, or sixth), there’s the Lifetime Learning Credit (LLC). Sharing the same income limits as the AOTC, the LLC can be claimed for any number of years of higher education. It offers a credit of up to $2,000 for eligible college costs and is particularly beneficial for graduate students. It’s important to note that you can’t claim both the AOTC and the LLC in the same tax year.

Now, let’s be real: While there might be a few college students out there with complex tax situations akin to a young Bruce Wayne, most of us are more like Peter Parker. Our financial affairs aren’t exactly intricate, and our income isn’t likely to raise any red flags with the IRS.

Given this, you probably don’t need to splash out on a high-priced accountant or tax preparer. In all likelihood, filling out Form 1040 yourself is more than sufficient, provided you meet certain criteria — such as filing without dependents, earning less than $100,000, and having income from specific sources (you can find more detailed rules on the IRS website). Doing it yourself online will likely save you both time and money.

Got some student loans weighing you down from your college days? You’re not alone. Many people find themselves in the same boat, and the government offers a bit of tax relief for the interest you’ve accumulated on those loans. The good news? You can claim the Student Loan Interest Deduction even if you’re not itemizing your taxes. This deduction will lower your adjusted gross income, reducing your overall taxable income.

You’re eligible to deduct up to $2,500 of student loan interest. However, don’t try to slip in interest from that car loan. The loan must have been specifically taken out for educational expenses, and it can’t be from a relative or employer. Plus, this deduction only covers the interest you paid during the year; you can’t deduct future payments.

Participating in a work-study program may seem like a fantastic opportunity, offering a chance to earn money or reduce tuition costs while gaining valuable experience. However, it’s essential to understand that work-study earnings are taxable. This means you should ensure that your college or university is withholding taxes from each paycheck. If they’re not, it’s wise to set aside a portion of your earnings to cover taxes when tax time rolls around.

Even if your work-study program simply offsets your tuition expenses, the income you receive is still considered taxable. It’s a good idea to clarify any tax implications with a supervisor or financial aid adviser before starting the program.

However, there’s a silver lining: Most scholarships and fellowships are typically tax-free, as long as you use the funds for qualified educational purposes.

A smart move to consider before diving into college expenses is setting up a 529 plan. These plans, managed either by a state or educational institution, allow you to invest money into a savings account. You can establish one for anyone – whether it’s your child, yourself, or even someone else. (If you’re able to assist a stranger with their college fees, why not?) These plans typically offer both college savings and prepaid tuition options. Prepaid tuition plans are usually offered at the state level and may require residency to participate.

College savings plans offer a bit more flexibility, potentially providing more investment choices, and funds can generally be used at any educational institution. While contributions aren’t tax-deductible, any income earned within the investment account is tax-free. More importantly for students and families, withdrawals used for higher education expenses are also tax-free. However, it’s important to note that the plan’s owner holds more authority than the beneficiary. So, if Grandma decides to redirect the 529 plan she opened for you to your cousin, you won’t have a say. Better keep up those visits to Grandma’s!

Who wants to pay taxes twice? Not many. But unfortunately, some students find themselves liable for dual state taxes. If you’re earning income in both the state where you attend school and your permanent residence state, both states are keen on getting their fair share of your earnings.

In this scenario, seeking advice from a tax professional or consulting with parents or friends could prove beneficial. It’s crucial to recognize that there are numerous exceptions among states. Some states don’t impose an income tax, while others have reciprocal agreements with each other regarding income taxation.

Don’t assume you’re in the clear if you’ve paid taxes in one state. It’s essential to understand the tax requirements in both states to avoid any surprises down the road.

If you’re not utilizing either the Lifetime Learning Credit or the American Opportunity Credit, there’s still another avenue available. The tuition and fees deduction enables you to deduct qualified education expenses from your taxes for yourself, your spouse, or a dependent. Like the other credits, you don’t need to itemize your expenses; instead, the deduction lowers your adjusted gross income. This can often lead to a lower tax bracket overall.

The tuition and fees deduction offers similar benefits to student taxes as the Lifetime Learning Credit or the American Opportunity Credit. However, it’s wise to compare them to see which one provides the most significant advantage. While the AOC and LLC offer a fixed-amount credit, the tuition and fees deduction allows you to deduct specific costs. With this deduction, you can potentially subtract up to $4,000 from your income, provided you meet the criteria for qualifying expenses.

Your parents might advocate for the old-fashioned pen-and-paper approach to filing taxes, citing reasons like reduced audit vulnerability or making it harder for the government to process your return. However, in most cases, they’re mistaken.

For students, e-filing your return is often the obvious choice. It saves you considerable time and effort. With electronic filing, your return is processed much faster, eliminating snail-mail delays. This means you receive any refund due to you more quickly—a crucial priority for students needing rent money. Additionally, you can opt for direct deposit, ensuring the money lands directly in your account. Moreover, electronic filings tend to be more accurate; the IRS estimates that 20 percent of pen-and-paper returns contain errors, compared to just 1 percent of electronic filings.