Student Tax Credits & Tax Benefits
As students file their taxes, there are common questions that arise. Most of the issues encountered are related to determining the amount of tax credits or deductions or determining eligibility for them. Most taxpayers who are enrolled in a college or institution offering a degree higher than a high school diploma should qualify for either deductions or student tax credits. However, married students who file separately from their spouses may not claim education credits or deductions. Taxpayers who think they may be claimed as dependents on their parents' tax returns should talk to them before attempting to claim student tax deductions or credits.
Student Tax Credits
Tax credits lower the amount of a filer's tax liability or the amount of tax the person owes. The two tax credits available to students are the Lifetime Learning credit and the American Opportunity credit. These credits are available to those who are enrolled in eligible institutions. Students should only use these credits if they receive grants, loans or scholarships or pay for their own expenses. If parents, friends or relatives pay these expenses, they can claim the credits themselves. Taxpayers who are claimed as dependents on their parents' tax forms cannot claim these student tax credits. Non-resident aliens cannot claim education credits. Use Form 8863 to claim either credit.
The American Opportunity Credit was formerly known as the Hope credit. To qualify, the individual must not have any felony drug convictions during the applicable tax year. They must be enrolled in a degree program at half-time status or more for at least one quarter, term or semester. Students cannot have completed their first four years of college when the tax year starts. Anyone claiming this student tax credit can only do so for a total of four tax years. The four-year rule also includes previous returns where the Hope credit was claimed.
The Lifetime Learning credit applies to tuition and qualified education expenses and can be as high as $2,000 in some cases. The taxpayer must be enrolled in an eligible institution at an undergraduate, graduate or professional level. It can also be used for people who are taking college courses to improve their skills for an existing job. There is no limit for the amount of years someone can claim this credit. Any qualified expenses paid by the individual, a parent or third party qualify.
Taxpayers who want to claim tax credits must use Form 8863. In the past, the IRS allowed people to leave spaces blank in place of writing "no" as an answer to a question. This requirement has changed. Always answer "yes" or "no" on any question in this form to avoid a delayed refund. Be sure to read the year's updated income limits for claiming credits. The nonrefundable education credits must be stated on line 23. Anyone planning to use the tuition and fees deduction cannot claim an education credit on top of it.
Student Tax Deductions
Student tax deductions lower the amount of a student's taxable income. If someone does not qualify for education credits, they may still qualify for the tuition and fees deduction. All qualified education expenses can be deducted. These include course materials and enrollment fees paid to an eligible institution. Books, supplies and other purchases that are required for the course can be counted. For example, a student enrolled in a class with both a lab and lecture portion may have to pay for liability insurance, lab safety gear and books. Since these costs are required to complete the course, they can be deducted.
If a tuition reduction was awarded, do not deduct the full original tuition cost. Only deduct the amount of tuition and education expenses that were paid individually. For example, a person attending a school where tuition would be $5,000 receives a 50 percent reduction. The individual pays the remaining $2,500 and could only deduct that amount.
Deducting veteran benefits is a common issue encountered. When receiving education benefits from the VA, do not count any money received as income. It is not taxed and should not be included as income. The awarded amount will reduce what a student can claim on taxes. Those who need help with this should contact the VA for these matters.
Form 8917 is the form used for the tuition and fees deduction. Someone who is claimed on another person's tax return cannot use this student tax deduction. One common concern with this form is what expenses can be deducted. Any education expenses that are required by the institution or paid to it qualify. Books and tuition are included. Living expenses should not be included. Students may also have to purchase a parking pass, professional liability insurance, rental fees for medical practice equipment and similar items. If the item is required for a course, it can be deducted.
5 Criteria for Determining if a Student Must Pay Income Taxes
As with all taxpayers, students must fill out a W-4 when starting a new job or, if self-employed a Form 1099-MISC. After this uniform requirement, however, there are a range of variations which may determine if a student needs to pay income taxes. Here are five scenarios commonly encountered:
1. While students must complete a W-4, they are not required to have federal and state income taxes withheld from their wages if they meet the following criteria:
- They do not owe taxes from prior filings.
- Their earned income does not exceed $6,300, which is the threshold for the return of withheld taxes.
- The student does not have more than $350 in "unearned income," which is interest, dividends, and capital gain income from investments.
2. If tips are part of a student's income while working as a waiter/waitress or in another service industry capacity, and this cash income exceeds $20 in any one month, it is taxable income and must be reported to the employer which, in turn, must report it to the IRS.
3. If earnings from odd jobs — mowing lawns, digging septic tanks, babysitting, sports referee/umpire — exceed $400, the student is subject to the self-employment tax, which covers benefits that accrue under the Social Security system. The self-employment tax is figured on Form 1040, Schedule SE, or on Form 1099-MISC. In this case, should income exceed $400 for the year, the self-employment tax — 15.3 percent of net income — must be paid even if income does not exceed $6,300.
4. Allowances issued to ROTC students while participating in summer training are not taxable. However, active duty pay for attending advanced exercises is taxable income.
5. Scholarship and fellowship money that is not directly used to pay for tuition, school fees, required books, or school supplies may be calculated into the total earned income equation. In other words, used to calculate the $6,300.
Quiz: What Student Income is Taxable?