Whether you’re heading off to college for the first time or well on your way to finishing your degree, being a college student presents special financial challenges.
Knowing how college might affect your taxes can help you plan ahead and identify tax benefits that may make your finances a little easier while you’re hitting the books.
Scholarships may be taxable or nontaxable
Most scholarships are not taxable income. Scholarship and fellowship amounts that you use to pay for your tuition, books, supplies and equipment while pursuing a degree are tax free.
Typically, if you are paid for services that you must perform as a condition of the scholarship, you must include these payments in taxable income.
Education credits and deductions can save you money
The first credit you should look into is the American Opportunity Credit. It basically pays for up to the first $2,000 you spend on tuition, fees, books, supplies and equipment. If you qualify, it also gives you 25 percent of the next $2,000 back, for a maximum credit of up to $2,500. The American Opportunity Credit is good for all four years of undergraduate studies.
Another credit of which you should be aware is the Lifetime Learning Credit. It gives you a tax credit equal to 20 percent of your tuition and certain related expenses up to $10,000. The credit maximum is $2,000.
Both education credits are phased out for higher income taxpayers. If you are a dependent, you cannot claim the credit, but your parents may be able to.
You can’t use the same expenses for more than one tax benefit, and you cannot claim both credits for the same student in the same year.
Avoid the penalty for not carrying health insurance
If you don’t have health insurance in 2015 you may have to pay a $325 per person penalty or 2 percent of your annual household income, whichever is higher. You don’t have to worry about the penalty if you are uninsured for no more than two months of the year, or if your income is low enough that you don’t have to file a tax return.
You may be able to get fully or partially subsidized insurance through the health insurance marketplaces, also known as exchanges. Your state may have its own marketplace or you can use the federal government’s Health Insurance Marketplace.
If your parents have health insurance, you may be able to stay on their plan until you turn 26. The coverage probably isn’t free, but it’s often cheaper than trying to buy insurance yourself.
How to know if you need to file a tax return
If you are not a dependent on your parents’ or anyone else’s return, you generally must file if your gross income is $10,300 or more for 2015 ($20,600 if filing jointly). If you file as Head of Household (usually because you have a child), you must file if your gross income is $13,250 or more.
Even if your gross income is lower, you may have to file if your parents or other persons can claim you as a dependent on their return (whether they actually do or not). If your filing status would be Single, you must file a return if any one of the following are true in 2015:
- Your unearned income, such as interest and dividends, was more than $1,000, or
- Your earned income, such as wages, was more than $6,300, or
- Your gross income was more than the larger of $1,000 or your earned income (up to $6,300) plus $350.
Even if you are not required to file a tax return, you should file if you had federal or state income tax withheld from your pay. It’s worth the few minutes it takes to find out if you have a tax refund coming.