Updated for Tax Year 2015 (for returns filed in 2016)
College is awesome, right? For most of us, it’s the first time we tasted freedom. The freedom to do whatever, whenever you want.
The downside is that you have more responsibility, too, especially on financial matters. You get bombarded with credit card offers designed to put you in debt and keep you there. You may have to work to support yourself, at least partially. And your parents may no longer be doing your taxes for you.
If you’re new to taxes they can be overwhelming. Especially for college students, given the special rules and benefits you may be eligible for. Don’t worry, we’ve got you covered with this Ultimate Guide to Student Taxes. And, unless you’ve got some offshore bank account in the Cayman Islands, it’s really not that complicated.
This guide covers the following topics:
1. Do you need to file a tax return?
2. Determine if you can be claimed as a dependent by your parents
3. Student Tax Credits
4. Form 1098-T
5. Scholarships and Grants
6. Tax-free Savings Accounts
7. Student Loan Interest (Form 1098-E)
1. Do you need to file a tax return?
The short answer – if you earned any income in 2014, you should file in 2015 even if you’re not required to. Why? To get a refund! Most likely Uncle Sam withheld taxes from your paychecks. Usually he takes too much. File a return and get some of your money back! You may also be eligible for valuable tax credits. Read more about filing requirements.
2. Determine if you can be claimed as a dependent by your parents.
There is a reason almost all tax software asks if you can be claimed as a dependent early on. It impacts your taxes in important ways, especially for students. Generally, it determines who receives any education related tax benefits you may be eligible for. If your parents can claim you as a dependent, then they receive the benefits. Unfortunately, you only get these benefits if no one can claim you as a dependent on their return.
How do you know if someone else can claim you as a dependent? Most full-time students can be claimed by their parents (or other relative). The main reasons you can NOT be claimed are:
- You are 24 years or older at the end of 2015 (or 19 or older if not a student), or
- You provided more than half of your own financial support throughout the year. Scholarships and grants received by the student do NOT count as the student providing their own support.
That’s fair though, right? If your parents are supporting you financially, they should get the write-offs from Uncle Sam. At least that’s the way the IRS sees it.
3. Tax Credits (American Opportunity Credit and the Lifetime Learning Credit)
You or your parents may be eligible for one of these two tax credits. You may only claim one, however, not both.
If your parents claim you as a dependent, then they're eligible for one of these credits. If no one claims you as a dependent, then you maybe eligible for them.
The American Opportunity Credit (formerly The Hope Credit)
This the more valuable of the two credits and should be claimed if possible. To be eligible for it, you must be in the first four years of post-secondary school education (college, vocational school, etc.). Students taking a “victory lap” aren’t eligible and should look at the Lifetime Learning Credit instead. Here’s the rest of the 411:
- You can claim up to $2,500 per eligible student, per year.
- The credit covers 100% of the first $2,000 of qualified tuition, required fees, and qualified expenses, plus 25% of the next $2,000.
- 40% of the credit is refundable, so you may receive $1,000 per eligible student as a tax refund even if you owe no tax.
- Each student for which you claim the credit must have been enrolled at least half time for at least one academic period which began during the tax year.
- Qualified expenses include tuition and required fees, books, supplies, equipment, and other required course materials (but not room and board).
- If your (or your parents) income exceeds $80,000 ($160,000 if married filing jointly), the credit will be gradually reduced. Income has to be under $90,000 ($180,000 if married filing jointly) to receive a credit.
- Students with a felony drug conviction are not eligible for this credit.
Lifetime Learning Credit
If you do not qualify for the American Opportunity Credit, you may still be able to claim the Lifetime Learning Credit. Deets:
- It applies to undergraduate, graduate, and professional degree courses, and even to post-graduate courses that help improve your job skills.
- The credit is available for any and all years of post-secondary education, and also for adult and continuing education courses. There is no limit on how many years you can claim the credit.
- There is no minimum enrollment requirement.
- The amount of your credit will be 20% of the first $10,000 of combined post-secondary tuition and fees you paid, totaling no more than $2,000 (per year, not per student).
- Qualified expenses include tuition, fees, books, supplies, equipment, and other course materials as long as they are required (room and board is not included).
- The Lifetime Learning Credit is not refundable, so it will not be paid to you in a refund--it simply decreases your tax liability.
- For 2015, the limit on modified adjusted gross income is $62,000 ($124,000 if married filing jointly).
4. Form 1098-T, Tuition Statement
Form 1098-T is the tax form your school will send you that documents the qualified tuition and other expenses you paid during the year. The data from this form will help us determine if you (or your parents) are eligible for the American Opportunity Credit or Lifetime Learning Credit.
It's also used to determine if you or your parents qualify for the Tuition and Fees Deduction, an "above the line" deduction (meaning you don’t have to itemize to claim it) worth up to $4,000.
5. Scholarships and Grants
Generally speaking, scholarships, fellowships, and Pell grants are considered tax-free benefits if you received them while enrolled at an eligible institution. For tax purposes, federal assistance or Pell Grants are considered scholarships. They are tax-free to you if:
- You attend an accredited educational institution
- You are pursuing a degree at a college or university
- You use the scholarship, grant, or fellowship to pay qualified education expenses (such as tuition, fees, books, supplies, and equipment required for courses at the educational institution)
Assuming it’s tax-free, you do not need to report it on your tax return.
6. Tax-free Savings Accounts
There are two tax-free savings plans available to students and to those paying for someone's education. One of the savings plans is a state-sponsored account, the other is a special account sponsored by a bank or other financial institution. Both plans allow you to save money for college expenses and to withdraw the funds tax-free.
Qualified Tuition Programs (QTPs) - 529 College Savings Plans
A Qualified Tuition Program, or "529 Plan,” is a special state-sponsored savings account set up to pre-pay for college expenses. The owner of the 529 account can make contributions which may be withdrawn by the beneficiary when they attend college (or other eligible educational institution). The money in the account may be withdrawn tax-free if the funds are used for qualified education expenses at an eligible college, university, or other institute of higher learning.
529 Plans have no age or income restrictions for contributions or withdrawals, and the only limit on contribution amounts is that the total contributions may not be greater than the amount needed to pay the beneficiary's qualified education expenses.
The following expenses are qualified uses of funds from a 529 Plan:
- Supplies required for class attendance
- Computer (if required for class attendance)
- Internet access (if not provided by the school, and if required for class attendance)
- Room and board (if the student is enrolled at least half-time)
- Special needs services
Coverdell Educational Savings Accounts - Coverdell ESAs
A Coverdell ESA is a savings account, sponsored by a bank or other financial institution, set up to pre-pay for K-12, college tuition, and other education expenses.
The savings account's beneficiary must be at least age 18 (or is a special needs beneficiary) to withdraw Coverdell funds, and must withdraw the funds before age 30 or the funds will be distributed and taxed. If the age requirements are met, the funds may be withdrawn tax-free if they are used to pay qualified education expenses. If the beneficiary turns age 30 before withdrawing the funds, they may avoid taxation by transferring the account to another qualifying relative or by rolling the ESA into a 529 Plan.
Coverdell ESAs have certain restrictions that 529 Plans do not:
- Funds must be withdrawn or transferred after the beneficiary is age 18, but before age 30
- Qualified expenses do not include computers or internet access
- You may not contribute if your income is more than $110,000 ($220,000 if married filing jointly)
- There is a maximum annual contribution of $2,000 per beneficiary (not per account and not per contributor)
The following expenses are qualified uses of funds from a Coverdell ESA (note that a computer and internet access are not covered):
- Supplies required for class attendance
- Room and Board (if the student is enrolled at least half-time)
- Special needs services
7. Student Loan Interest Deduction
Once you graduate (or not) and start to pay back your student loans, you may be able to reduce your taxable income by up to $2,500 of the student loan interest paid. Here’s the scoop:
- Your lender should send you form 1098-E, which reports the interest you paid
- If your parents claim you as a dependent, then they're eligible for this deduction. If no one claims you as a dependent, then you maybe eligible for it.
- To be eligible, the loan must have been taken out solely to pay qualified education expenses.
- Generally, the person whose name is on the loan gets to deduct the student loan interest. This person is legally obligated to make the interest payments on the loan.
- It can be taken even if you do not itemize deductions.
- The student must be you, your spouse, or your dependent.
- The student must have been enrolled at least half-time in a degree program
- As with the credits, there are income limits. The deduction is reduced if your modified adjusted income (MAGI) is greater than $65,000 ($130,000 if married filing jointly) and you’re ineligible if you’re income is $80,000 or more ($160,000 if married filing jointly).
Hopefully you found this information helpful. Don’t worry, there won’t be a test. In fact, you don’t really need to know this stuff, because we do. TaxAct takes care of all of this for you – they ask you simple questions and take care of all the tax complexity automatically.
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