College can be expensive, but the IRS offers a number of tax benefits for college students to make higher education more affordable for more Americans.
Whether you’re a parent of a college student or paying your own way through school, here are 10 important things to know about college and taxes:
File even if you don’t have to.
Technically, you only have to file a tax return if you reach a certain level of income.
For example, if you were a dependent who earned more than $6,100 or an independent single filer who earned more than $10,150 in 2014, you’re required to file.
But even if you earned less than that, you might be due a refund if your employer withheld taxes from your check.
Take 20 minutes to file, and you might discover you’re owed a refund.
Consider going alone.
In most cases, it makes perfect sense for a traditionally aged college student to remain a dependent for tax purposes.
But there are certain situations in which it might be advantageous for a college student to file his or her own return.
For example, some higher education tax credits are only available to moderate income earners. If parents earn too much to qualify, the student might be better off filing independently.
Check out the Lifetime Learning Credit.
The Lifetime Learning Credit is one of two tax credits available to cover college tuition. It will pay up to $2,000 per year per family to help cover qualified educational expenses.
The credit is good for every year in which a student is enrolled in college, graduate school or part-time learning.
Apply for the American Opportunity Tax Credit.
The American Opportunity Tax Credit is even more generous, offering up to $2,500 per year per student, compared to the Lifetime Learning Credit cap of $2,000 per family.
One drawback: You can only claim it for four years per student, so no credit for graduate work.
The AOTC might pay you!
One more excellent perk of the American Opportunity Tax Credit: The $2,500 credit is refundable, meaning that if you owe less than $2,500 in taxes, you’ll get a refund in the amount of the difference.
If you’re eligible for the Lifetime Learning Credit and the American Opportunity Credit for the same student in the same year, you can only choose one credit, but not both.
Deduct your student loan interest.
Tens of millions of current college students and college graduates make student loan payments every month. Like mortgage interest, student loan interest is deductible (up to a limit of $2,500).
Even better, you can take the deduction even if you don’t itemize.
Get a refund for work-study.
Unlike other types of college financial aid (like grants and scholarships), the money you earn from a work-study job is considered taxable income.
But that’s not all bad.
The school will withhold income taxes from your paychecks. So when it’s time to file your taxes in April, you will likely get a refund.
Pay college expenses tax-free.
There are two types of college savings accounts that every parent of a future college student should know about: 529 plans and Coverdell Education Savings Accounts.
In both cases, money in the accounts grow tax-free, but even better, you can withdraw money tax-free if the funds are used to pay education expenses.
In a crunch, tap the IRA.
It’s generally not a good idea to make an early withdrawal from a retirement account. Not only are you taxed on the cash, but you’re also hit with a 10% penalty.
There’s a loophole, though, for qualified education expenses.
If you withdraw money to pay for college costs, you’ll still owe taxes, but the 10% penalty is waived.
If you attend school in a different state than your tax home (aka your parents’ house), make sure you pay taxes on any earnings from both states.
For example, if you have a summer job at home and a part-time job at school, different tax rates may apply.
You might even get lucky and work in a state without income tax. Read up on both states’ tax laws and be prepared to file twice if necessary.