With student debt growing and becoming a burden to recent graduates, college students will want to take all the tax deductions they can to save money. Federal tax filing is very complicated and the information here provides just a few tips. Always seek advice from a tax professional or accountant before filing your returns.
Preparations before filing taxes
Before beginning the tax filing process, students and parents need to make a few decisions. If your parents live in one state and you attend college full-time in another but go home for the summer, you will need to determine which state is your primary residence. As each state has different qualifications for residency, both states could claim you as a resident.
Also, decide who will claim you as a dependent. According to Bankrate, if your parents are paying more than 50 percent of your expenses, they are entitled to list you as a dependent on their taxes. And whoever claims the student as a dependent is the one who is eligible for the tax credit.
Major tax credits for college students
There are three major tax credits available to college students, plus basic deductions for tuition and fees. You or your parents may claim only one credit or deduction per student per year. Pick the deduction that best fits your situation and financial needs.
American Opportunity Tax Credit (AOTC). Good for full-time undergraduates and offers the biggest deduction. AOTC has been extended for another five years. “The credit reduces your federal tax bill dollar-for-dollar by up to $2,500 per year for each eligible college student for whom you pay qualified tuition expenses. It can be claimed on behalf of an undergraduate for four years,” said Troy Onink in “You Can Get $10,000 Per Child in College Tax Credits, Thanks To The Fiscal Cliff Deal,” posted on Forbes.com January 16, 2013. Forty percent of the credit is refundable, meaning students can get back up to $1,000 on their refund, even if they don’t owe any taxes. Qualifying expenses are tuition, fees, course-related books, supplies and equipment. The credit is not available to couples filing jointly who earn more than $160,000.
Lifetime Learning Credit. Good for part-time students and graduate students, and single students earning less than $60,000. You can receive a tax credit equal to 20 percent of your tuition and education-related expenses up to $10,000 for a maximum of $2,000.
Hope Scholarship Credit. For moderate income parents of dependent children, and for independent students. Offers a tax credit of up to a maximum of $1,500 per year on tuition and fees for the first two years of undergraduate college.
Tuition and fees deduction. Also called higher education expenses deduction. Students can deduct up to $4,000 for tuition and fees. According to Dana Dratch in “A dozen tax tips for college students,” posted on Bankrate.com: “The downside: Deductions usually give you less bang for your buck than credits. You get to subtract a credit amount from the actual tax you owe, whereas a deduction reduces the income you pay tax on.” NOTE: This deduction expired December 31, 2013 and will NOT be available for the 2014 tax year.
Your college will send you a 1098T form if you were billed for qualifying tuition and fees. You can request this form hardcopy or electronic. Make sure your mailing address is correct before the form is sent to you. You might be able to claim your tuition and fees for an educational tax credit. For information filling out this form, visit the IRS at http://www.irs.gov/pub/irs-pdf/p970.pdf. 1098T forms must have been sent to you before January 31.
Student loan interest deduction
“If you’ve taken out a federal or private student loan, you’re eligible to deduct up to $2,500 worth of interest paid on the loan as an ‘above-the-line’ exclusion from your income. You don’t have to itemize your deductions in order to claim it,” recommends Mandi Woodruff in “Four Tax Breaks Every College Student Should Know About,” posted January 7, 2013 on Business Insider.
The IRS allows for other deductions for:
• Qualified student loan
• Qualified education expenses
• 529 plans
• Coverdell Education Savings Account
• Business deduction for work-related education
• Qualifying work-related education
• Education required by employer or by law
• Education to maintain or improve skills
Ask accounting students for help
For assistance filling out your tax forms this season, see if your own classmates can help you. At some colleges, business and accounting seniors offer clinics or free tax information for students and for the local community. But before mailing your tax forms in, remember to have your parents or a professional look over your documents.
What kinds of deductions will you claim on your taxes this year? Let us know in the comments below.