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For college students and their parents alike, there comes a different set of tax requirements. Without taking the proper steps and becoming educated on the right tax filings for students, many deductions and write offs may be missed. The process can become complicated, and mistakes can mean costly effects on a college kid’s bank account. For the students filing for the first time it can be a hairy process to determine exactly what to put within forms, and for parents navigating taxes during their child’s first year of college, the alterations might be more complicated than expected. Peruse these tax tips and make sure you file correctly come April.
Understand Dependency Status
Make sure you’re clear on your dependency status between student and parents. Should a student file for personal exemptions and parents categorize them as a dependent, the consequences can be costly. If a student is not a dependent, they can claim an exemption along with a standard deduction amount that would increase the filing threshold. As a general rule, it makes more sense for parents to claim the student as a dependent if the student doesn’t have the means to support themselves. If you’re a college student and you don’t handle more than 50 percent of your support then you cannot file for personal exemption—don’t get yourself in hot water with the IRS from the first go-around.
Education Tax Benefits
Students and their parents may be eligible for education tax benefits. The Lifetime Learning Credit allows students or their parents to claim a credit of up to $2,000 for education expenses, and there is no limit on the number of years the credit can be claimed. Eligible taxpayers that receive a modified adjusted gross income of less than $80,000 per year can also capitalize off of the American Opportunity Credit. This provides an exemption of $2,500 per student and is applicable for the first four years of undergraduate education. If a student is a dependent, this credit is only available to the parents claiming them under their filing. If students are not dependents, they can receive deductions for textbooks, fees, and even tuition.
Regarding Scholarship Taxes
If your scholarships are used for tuition and fees, you do not need to pay taxes on them. However, if you use scholarship money for transportation, room and board, research, or equipment, it is taxable and must be reported with wages, even if the scholarship money is not included on the W2.
Dual State Taxes
Your federal taxes must be filed from your home state, or at least your permanent address. If students go to school in a different state, different tax requirements apply. If the student has a part time job, they are also responsible for filing their taxes separately in both states. You’ll need to understand the tax rules that apply to each state, so it may be in your best interest to ask a professional to avoid any costly mistakes.
The Importance of Receipts
You’ll need to be diligent with collecting receipts, whether they be for individual textbooks, tuition, scholarship money, or other financial aid. You will also need to provide a transcript to prove that you are actually in school. Keep all of these items in an organized folder that you can bring out when it comes time to file. It will save you (and your parents) a load of trouble and ensure you are getting the most from your tax return—college students need all the help they can get with the rising costs of education.
If you’re doing your taxes sans the help of parents who have been through the process before, hiring professional help, at least for the first go-around, may be tremendously beneficial. They can get you started with paying taxes on the right foot, help you determine the necessary documents, and save you tons on deductions and tax breaks designed for students. Use a website like www.communitytax.com to find all the information that can make the process as easy as possible. Some students may even be able to claim the services of a tax preparer as a deduction, so it’s definitely in a young person’s best interest to do the process right on the first filing process.