Yahoo Finance Tax Tips for College Students (and Their Parents)
Forget final exams. The stressful season for many students -- and their families -- is tax time.
Tax filing for those who pay college costs is a complex affair. There are different credits, deductions and risks to consider. A student's tax situation can tweak his financial aid eligibility. Plus, students who receive scholarships and grants will have to eye the impact of their awards on taxes owed.
[See: Answers to 7 Burning Tax Questions.]
Sound complicated? It is. When it comes to student financial aid and tax time, "there are a lot of moving parts," says Marguerita M. Cheng, certified financial planner and co-founder of Blue Ocean Global Wealth in Gaithersburg, Maryland.
Here's what to know about filing your taxes as a student -- or as the parent of a student.
Tax credits. The Internal Revenue Service, or IRS, offers credits and deductions to filers who pay eligible college expenses. Savvy filers should examine and claim the appropriate educational credit to minimize their bill -- and save money.
These college-cost credits are:
-- American Opportunity Credit: This credit, which can save eligible 2016 filers up to $2,500, allows filers to claim costs incurred covering tuition, fees, textbooks, supplies and other necessary materials. The student must attend university at least part time and have no felony drug convictions. This credit can only be claimed for four tax years -- sorry, super seniors.
-- Lifetime Learning Credit: This credit is available for students who attend at least one class and are in any year of their education. It can save eligible filers up to $2,000 and covers tuition, fees and other supplies purchased directly from the school. Felony drug convictions do not make students ineligible for this credit.
-- Tuition deductions: The IRS permits filers to deduct up to $4,000 in tuition and fee payments, even those paid with a student loan. This is available for filers who don't itemize their tax return.
Filers can only select one tax credit per student per year, so choose carefully. The IRS' education credit tool can walk you through your eligibility for these benefits.
"You need to be aware of these credits and plan ahead with them, including when you pay tuition and how you pay tuition," says Kalman Chany, author of "Paying for College Without Going Broke, 2017 Edition" and president of Campus Consultants, a Manhattan-based firm that helps families maximize eligibility for aid.
[See: 10 Smart Ways to Spend Your Tax Refund.]
If you aim to use one of these credits, make sure you're not paying your entire tuition bill from a tax-advantaged account, such as a 529 college savings plan, experts say. "I always advise families to have a nonqualified brokerage account or cash reserve, above and beyond their emergency fund, so that they can pay for educational expenses with some taxable money, too," Cheng says.
Consider student loans. Your student loan situation can impact your tax bill in several ways.
-- Student loan interest deduction: The IRS allows eligible student loan borrowers to deduct a certain amount of loan interest from their tax bills. Borrowers can deduct up to $2,500 from the interest paid on a qualified student loan. Those who deduct the interest must have a modified adjusted gross income of less than $80,000 (or $160,000 if married and filing a joint return).
-- Refund garnishment: Defaulting on student loan payments won't just cost you in interest and fees -- the government may garnish your tax refund. Borrowers in default should work through a student loan rehabilitation program to repay the debt and receive future refunds.
-- Student loan forgiveness discharges: Depending on the situation, student loans that are forgiven or discharged may be taxable. "Some [loans] are taxable and some aren't, which can be confusing," says Megan Coval, vice president of policy and federal relations for the National Association of Student Financial Aid Administrators. For example, federal student loans discharged in cases of death or disability are taxable, potentially triggering a major bill for borrowers or their families. Student loans wiped away via public service loan forgiveness, on the other hand, aren't taxed.
Consider scholarships and fellowships. Academic awards won't count against your tax bill ... up to a certain point.
"Scholarships and grants are generally tax free if they're applied to qualified tuition and fees and qualified supplies," Chany says.
But students who use scholarship money earmarked for room, board, travel and other expenses not required by the program may find it taxed as income. Likewise, scholarship funding doled out in exchange for work, such as teaching an undergraduate student course, may also be taxed.
Fortunately for parents, students are generally responsible for this bill.
[See: 7 Most-Missed Tax Deductions and Credits.]
Think ahead. Students and their parents ought not to procrastinate when filing their taxes. The more complex the tax situation, the more planning required. "You really need to be thinking ahead," Chany says.
Still, the good news is that students and parents have more time to tackle their taxes this year. The recent introduction of prior-prior year filing means that filers don't have to sprint through their return in order to file the Free Application for Federal Student Aid, or FAFSA, as early as possible (to beat certain financial aid deadlines). This year, filers are instructed to use their return from the previous year to complete the FAFSA.
The bad news is that the IRS data retrieval tool, which aims to help financial aid applicants accurately input tax information when filing the FAFSA, is sadly currently out of commission.
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