College costs are overwhelming to many students and parents today. Financial aid barely covers the cost of tuition in some instances. Students are often put into debt regarding their student loans because their personal finance situation becomes unmanageable. This even happens with those who have graduated and are using their degree!
With education costs being so high and student loan debt becoming so cumbersome, what are students supposed to do? Often students can find financial relief through debt consolidation or through refinancing their student loans through a government agency.
In this article, we will cover how to file taxes as a student and the tax benefits you can expect to receive from the government during tax season. You may not recover much, but the tax advantages for students and parents are worth noting.
If you are wondering how you can save big on taxes as a student, we’ve got you covered! Here, we’ll go over a five-step process for filing your tax return come tax season. Don’t worry; even though the process involves taxes, it’s very simple to follow, and of course, if you get stuck along the way, we are more than happy to help!
The five steps you need to follow include: (1) Determining if you need to file a tax return, (2) Finding out your dependency and filing status, (3) Gathering your tax documentation, (4) Discovering which tax breaks (deductions and credits) you will take, and (5) Filing your annual tax return.
If you are a student, filing your tax return for the first time, don’t worry; this tutorial is simple to follow for all taxpayers.
Step One: Do I need to file a tax return?
There are many factors that determine whether you need to file a tax return or not. These factors are often adjusted each year by the IRS to account for inflation and other factors.
The requirements you will need to consider when determining if you need to file a tax return include your gross income for the year, your filing status, your age, and your dependency status.
If you meet specific requirements, you will need to file a tax return. The IRS (Internal Revenue Service) has an interactive tax assistant that can help you determine if you need to file a tax return or not.
Keep in mind that even if you are not required to file a tax return, you still may want to so that you can claim certain educational credits or deductions.
Step Two: What is my dependency and filing status?
Are you a dependent?
You will want to know whether someone can claim you as a dependent or not before trying to file your tax return. However, even if someone can and will claim you as a dependent doesn’t mean you shouldn’t file a tax return. In other words, your parents may claim you as a dependent; you still may need or want to file a tax return.
To determine whether someone will be claiming you as a dependent, simply ask the person if they will be doing that or not. It may be useful to get the advice of a tax accountant if you have a complicated tax situation.
Typically, you can be a dependent if you are a student under the age of 24 who was supported over half of the year by your parents or whoever has been supporting you during the year. If you are claimed as a dependent, depending on your gross income, you may still need to file a tax return. You cannot claim most educational tax benefits if you are a dependent.
What is your filing status?
Your filing will affect your tax rate and determine whether you can claim certain education credits and deductions. If you are married, usually you would file a joint tax return; most taxpayers do this because it yields the greatest tax benefits.
However, there are other reasons that you may wish to file a separate tax return; unfortunately, if you file a separate tax return than your spouse, you will not be eligible for many of the education tax breaks.
Other filing statuses available include the single, head of household, and qualifying widow/widower with child filing status. Generally, the head of household filing status is most beneficial.
Once you know which filing status will yield you the most significant benefit and have determined your eligibility to see if you can receive said filing status, you can look up the tax rate and file your tax return.
You may find it helpful to have someone help you when filing your tax return, especially if it is complicated or if you expect to be audited.
Step Three: Which tax documents do I need to put together?
Before tax season begins, you should receive the tax documents and forms you need from employers you have had and any college or school you attended during the year. Make sure you have tax documentation together before filing your taxes. Otherwise, you may have an incomplete tax return and could have an unexpected tax debt.
Some of the tax documents you will need include:
- W-2: Wage and Tax Statement – You will receive this from every employer you have had during the tax year. This form will show any taxes withheld from your paychecks.
- Form 1099: MISC – You will receive this from any entity or individual who paid you other than those who sent you a W-2 form. You will only get this form if you received funds in excess of $600.
- Form 1098-E: Student Loan Interest Statement – You will receive this form from any educational lender you borrowed from during the year. If you paid more than $600 in student loan interest, you should receive this form.
- Form 1098-T: The Tuition Statement – You will receive this from any college you attended during the year. You will need this form to claim certain items on your tax return.
- Form 8863: Educational Credits – You will receive this form and need it if you want to claim certain education credits on your tax return.
If you have changed addresses, be sure these institutions know that. If you are living away from home and your parents still receive your mail, be sure to tell them to be on the lookout for these forms so that you may receive them to use when filing your tax return.
Step Four: Which tax credits and/or deductions can I claim?
- Lifetime Learning Credit (LLC)
With the Lifetime Learning Credit, you can claim up to $2,000 for qualified education costs incurred during the tax year. You cannot claim both the LLC and AOTC for the same taxpayer in the same tax year.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit is generally the best tax break and should be taken if you are eligible. You are eligible to claim up to $2,500 for the first four years of school for the cost of tuition, books, supplies, and equipment. It does not apply to room and board, though.
The Tuition and Fees Deduction
This tax deduction lets you deduct up to $4,000 for qualified education expenses that you incurred during the tax year. You are limited by your modified adjusted gross income (MAGI), so read all requirements before taking this deduction.
Student Loan Interest Deduction
This tax deduction lets you deduct all or part of the interest you paid on your student loans. The student loan interest deduction is worth up to $4,000 off your taxable income.
Step Five: How can I file my tax return?
You should now have all of the tools you need to file your tax return. You know your filing status and dependency, have the correct forms ready to go, and understand what education credits and deductions you plan to take.
You must now decide if you want to file your tax return yourself or if you want to pay to have someone file your tax return for you.
It is most likely in your best interest to get a consultation with a tax professional to receive the best tax breaks available. Be sure to meet with a qualified tax consultant to avoid penalties and protect you in the event of an audit.
You should now have a solid understanding of how to file a tax return for a college student, which will help you, whether you are the student or the student’s parent.
We have covered the details on how to determine if you need to file a tax return if you are a college student, the different education credits and deductions you can take, and what you will need to have handy when you are ready to file your tax return.
If you need help to determine which education credit or deduction to take to reduce your tax liability or want assistance in completing your income tax return, please contact our office. We are more than happy to help you calculate your taxable income and get the most from your taxes this year.
Did you know that we also help with business consultations and audit representation? We are more than qualified to help you in many areas, so don’t hesitate to get in touch today!
You can trust Indiana’s tax expert!