Start your tax planning early!
As a busy college student, it’s easy to put off thinking about taxes until it’s time to file. That could cost you, however. You can only do so much about lowering your tax bill when you’re preparing your return.
To make sure you’re not paying more tax than you should, be sure to plan ahead.
Some tax areas that may affect you while you’re in college are: dependency issues, education credits, exclusions, and deductions, multiple state tax obligations, and the new health insurance mandates.
Here are 4 tax planning strategies for college students:
1. Understand your dependency exemption
If your parents pay more than 50% of your expenses, and you are under age 24 at the end of the year, they can generally claim you as a dependent on their taxes. This means that even if you file your own taxes, you cannot claim your own exemption (up to $3,900).
If you’re close to the 50% line, you may want to spend more of your own money on your own expenses so you can take your own exemption amount.
On the other hand, if your parents are in a much higher tax bracket, it might be smart to let them cross the 50% mark so they can take the exemption. They’ll get more benefit from it.
Note that you can make as much money as you want and still have your parents pay more than 50% of your support – food, lodging, clothing, education, medical and dental care, recreation, transportation, and other necessities.
Money you earn and put into savings does not count as support.
2. Education tax breaks
The IRS offers several tax breaks for education. These are the most common:
American Opportunity Credit, formerly the Hope Credit
Try this credit first. 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% of the next $2,000 back as a credit, for a total credit of up to $2,500.
Unlike the Hope Credit, the American Opportunity Credit is good for all four years of undergraduate studies.
Lifetime Learning Credit
If you don’t qualify for the American Opportunity Credit, the Lifetime Learning Credit is the next best thing. It gives you a tax credit equal to 20% of your tuition and certain related expenses up to $10,000. The credit maximum is $2,000.
Tuition and fees deduction
The next choice is a deduction of as much as $4,000. It’s taken as an adjustment to income, which means that you can take this deduction even if you don’t itemize your deductions.
Try to time your tuition payments to get the maximum benefit from these breaks. You can take the credits or deduction for tuition you paid for academic periods that begin during the tax year or during the first three months of the following year.
3. Plan for taxes in multiple states
If you work in more than one state – for example if you live in one state and go to school in another – you may have to file more than one state tax return.
You don’t have to worry about states with no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
You also don’t have to worry about paying income tax twice on the same income. State tax laws vary considerably, but you generally only pay state tax on the same income once.
4. Avoid the penalty for not carrying health insurance
If you don’t have health insurance in 2014, you may have to pay a $95 per person penalty or 1% of your annual income, whichever is higher.
You don’t have to worry about the penalty if you are not without health insurance for more than three months, or if your income is low enough that you don’t have to file a tax return.
You are exempt from this law if you are a member of certain religious groups or a recognized health care sharing ministry, members of a federally recognized tribe, and people in other special situations.
You also won’t be penalized if your premiums would cost more than 8% of your family income.
You can get insurance through the health insurance marketplaces, also known as exchanges. Your state may have its own marketplace, use the federal government’s Health Insurance Marketplace, or offer a hybrid of the two.
If you’re lucky enough to have parents with health insurance, you may be able to stay on their insurance plan until you turn 26. Your parents’ insurance company will generally charge your parents for this coverage.
Be sure to compare this cost to the amount you would pay after any credit and subsidies on the exchange before you decide where to get insurance.
Do you expect to stay on your parents’ health insurance policy as long as possible?