Whether you’re a college freshman 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. It can help you identify tax benefits that make your finances a little easier to manage while you’re hitting the books.
Scholarships are taxable and nontaxable for college students
Most scholarships are not considered taxable income. For example, scholarship and fellowship money used to cover tuition, books, supplies, and equipment while pursuing a degree are all tax-free.
On the flip side, those payments are taxable if you must perform a service as a condition of the scholarship.
Education credits can save you money
The first credit you should look into is the American Opportunity Credit. It’s an annual credit worth up to $2,500 that eligible students (or their parents) can claim during the first four years of undergraduate studies. The credit’s intent is to provide help in covering the cost of qualified education expenses. That includes tuition, fees, books, supplies, and equipment. If the credit reduces the amount of tax you owe to $0, 40 percent of the remaining amount is refunded to you (up to $1,000).
Another helpful tax benefit is the Lifetime Learning Credit. Students enrolled in an eligible educational institution can claim it. That includes undergraduate, graduate and professional degree courses. The tax credit is equal to 20 percent of your tuition costs 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 considered a dependent on your parent’s tax return, they can still claim the credits.
Keep in mind, you can’t use the same expenses for more than one tax benefit. You also cannot claim both credits for the same student in the same year.
The tuition and fees deduction reduces your taxable income
If you don’t qualify for education tax credits, you may be eligible to claim the tuition and fees deduction. Claiming that deduction can reduce your taxable income by up to $4,000. However, you must still have records of your qualified expenses, like tuition, books, supplies, to claim it.
There are eligibility restrictions. You can’t claim the deduction if:
- another person, like your parents, can claim you as a dependent on their tax return
- you’re single or head of household with an AGI over $80,000.
- you’re married filing jointly with an AGI over $160,000.
- you’re married filing separately.
The IRS also set guidelines around the expenses you can’t use to claim the credit. The deduction does not cover:
- room and board
- extracurricular activities
- fees for courses not required to earn the degree
- student health fees
- living expenses, such as food, housing or transportation
How to know if you need to file a tax return
As a full-time student, you may not make enough money to need to file a tax return. However, if you work during the summer, enter a work/study program at school, or are only enrolled in classes part-time, that may not be the case.
In 2018, if you are not a dependent on anyone else’s return, you must file your own return if your gross income is $12,000 or more ($24,000 if filing jointly). If you file as Head of Household (usually because you have a child), you must file if your gross income is $18,000 or more.
And that’s not all. If your gross income is lower than those amounts and someone else can claim you as a dependent, you may still have to file your own return. If your filing status is Single, you must file a return if any of the following are true in 2018:
- your unearned income, such as interest and dividends, was more than $1,050
- your earned income, such as wages, was more than $12,000
- your earned and unearned income together total more than the larger of $1,050 or your total earned income (up to $12,000) plus $350
You should always file a return if you had federal or state income tax withheld from any payment. It’s worth the few minutes it takes to file a return to find out if you’re due a tax refund.