Top Tax Tips for College Students!

Nothing is certain but death and taxes, Daniel Defoe first said in his 1726 Political History of the Devil. And it’s that time of year again, a time when a good many Americans would agree that a book about the Devil is certainly the right place to talk about taxes! Those tax forms torment us every year when we try to make our way through the byzantine labyrinth of IRS regulations. Figuring out your taxes can be especially difficult if you are a student, because student tax returns are more complex than submitting a W-2 or two, because of the array of scholarships, loans, and grants that all kinds of students need to pay for school, from full to part-time students and online students to graduate students.

Thankfully, students have more tax benefits than ever. First, students need to know that they can take advantage of two different aspects of the tax code to reduce what they owe: Credits and Deductions. The basic difference between Credits and Deductions is that Credits reduce the amount of tax that you owe, while Deductions reduce the total amount of your earnings that will be taxed.  By taking advantage of both Credits and Deductions, students can lower both their taxable income and their tax liability. Only qualifying students and qualifying educational institutions are eligible for these Credits and Deductions.

Tax Credits for College Students: A full explanation of college student tax credits is available at the Internal Revenue Service web site. That’s where you can also find out what forms you need for each kind of Credit, including Form 8863 for Education Credits. Here’s a basic introduction to the kinds of credits you may be eligible to claim:

1. American Opportunity Credit: More students qualify for this tax credit than any other education-related credit.  Single students with a modified adjusted gross income of $80,000 or less ($160,000 or less for married couples filing a joint return) are eligible for a credit of up to $2500 per student. This means that the credit amount you qualify for will be removed from your tax burden.
2. Hope Credit: The Hope Credit has more strict guidelines regarding eligibility and applies to the first two years of post-secondary education and is available to students who have attended at least part-time.
3. Lifetime Learning Credit: All students enrolled in eligible schools can take a lifetime learning credit of up to $2,000 per tax year. There’s no limit on the number of years you can claim this, so if you’re on the six-year graduation plan or working on an endless dissertation, you can still take the credit. The one limitation is that you cannot take this credit if you take the Hope or American Opportunity credit in the same year. The only way you can claim this credit is if you are a parent or guardian claiming multiple college student dependents, you may be able to claim different credits for each eligible student and maximize your credits that way.

Tax Deductions for College Students: Deductions are costs you can subtract from your adjusted income, to lower your amount of taxable earnings. Educational expenses are often tax-deductible, but most students do not realize this. Uncle Fed’s Tax Board is a great resource to help you think creatively about the kinds of deductions you are eligible to claim, but this list provides a general breakdown of the main areas in which you can claim deductions:

1. Tuition and Fees Deduction: This is the last year students will be able to claim this deduction, and it is worth up to a $4000 if you earn less than $65,000 per year. You don’t need to fill out a special form for this; you claim it directly on the 1040 or 1040A tax forms. Your school should send you a 1098-T form including the breakdown of tuition information to help you claim this credit.
2. Classes Required for Employment: Though there are some limitations, if you are taking a college course to maintain your employment, you can claim those costs as a deduction.
3. Student Loan Interest: If you have graduated or are still in school but already in repayment, you can take a deduction of up to $2500 a year.
4. Child and Dependent Care Credit: This is really only relevant to those who pay for child care while they work at income-generating employment, not while they  attend classes, but as so many college students today work while going to college and maintaining their families, it’s a deduction you shouldn’t forget to claim. This deduction is worth up to $3000 for single-parent families.
5. College Savings Plans: If you are saving for college, for yourself or a dependent, there are several deductions available if you participate in a college savings plan. Check out SmartMoney.com for tips on what’s available for you.

Remember that some educational expenses are not deductible. You cannot claim deductions for any costs related to the following:

• Room and Board
• Student health fees
• Textbook costs
• Travel and research costs
• Clerical help (usually associated with graduate-level work)

This information above is a general guideline and should not be used as your only resource as you seek the best credits and deductions for your 2011 Income Tax return. You should read IRS Publication 970, Tax Benefits of Education, very thoroughly. It is also very important to read the fine print, and speak with a qualified tax expert or someone at the Internal Revenue Service if you decide to claim one or more of these credits or deductions.  For example, there may be limitations you are not aware of in certain cases. For example, if you have been convicted of a drug felony, you will not be eligible for the Hope Credit. There are also income qualifications; you might lose eligibility for a credit if you reach a certain income level.

If you cannot afford a tax professional to assist you in preparing your tax return, check with your college, which might offer tax assistance.  For example, business and law school students at colleges across the country, including Northwestern, Auburn, and Valparaiso Universities, are trained to assist low income and elderly citizens in preparing their tax forms. It is good practice for the students and a great benefit for everyone!