Tax Help for Students

If you’re a college student and you don’t have much experience filing your own taxes, the approach of April 15th probably fills you with some measure of dread. Luckily, if you’re a college student, the IRS probably owes you money this year. The income you made working while in school has already been taxed, and unless you sold real estate or won the lottery this year, you probably don’t have any taxable assets to speak of.

In this overview, we’ll cover the basics of filing and explain the best ways to maximize your tax refund as a student.

I. Filing for the First Time

When it comes time to complete your tax return (whether you opt to file on your own or pay a professional tax service), you’ll probably find yourself overwhelmed by the long list of tax terms thrown around. As a student, much of the more complex tax jargon won’t apply to you, but there are three terms every taxpayer should know: credit, deduction and exemption.

The Difference Between Credits, Deductions, and Exemptions

Each of these terms can be described as a “tax benefit” or “tax advantage” and many taxpayers mistakenly use them interchangeably. The distinctions between these terms are simple but important:

  • Exemptions – Exemptions reduce or eliminate your tax obligation. The personal exemption is $3,900 for 2013. So for example, this means if you are single with no children and earned $10,000, your total taxable income would be $6,100 at most because of the person exemption.
  • Deductions – Tax deductions reduce the amount of your income that is taxed. For example, if you are in the 15 percent tax bracket and had a deductible expense of $5,000 you would be able to reduce your taxable income by $750, thus lowering the amount of tax you would owe.
  • Credits – Tax credits reduce the amount of tax you pay, dollar for dollar. This is how credits are different from deductions. If you have a tax liability (amount you owe) of $3,000 and you are entitled to a credit of $1,000, your tax due would become $2,000.

Shorthand advice says that if you have a choice between a deduction and a credit – take the credit because it’s generally worth more. Credits reduce your taxes owed dollar for dollar, whereas deductions reduce your taxable income by the same percentage as your tax rate.

Which Form Do I Need to File?

All individual federal taxes must be filed on a 1040 form which comes in three formats: the 1040EZ, 1040A and the 1040. As a student, you will need to file either the 1040A or 1040 form:

1040A Form – This form is the most commonly used by students, because it allows filers to include the following on their returns:

  • Income from wages, taxable scholarships and fellowship grants, ordinary dividends and other sources of income
  • Student loan interest deduction
  • Tuition and fees deduction
  • Educator expenses deduction
  • Child and dependent care credit

NOTE: The 1040A cannot be used if you have income greater than $100,000, itemized deductions, or are subject to the alternative minimum tax.

1040 Form – Students will have to file the more comprehensive 1040 form (and also pay a higher tax rate) if they:

  • Have taxable income of $100,000 or more
  • Have unreported tips, certain non-taxable distributions, self-employment income or income received as a partner
  • Are shareholders in an “S” corporation
  • Are beneficiaries of an estate or trust
  • Owe household employment taxes

How Do I Submit?

There are two ways to file a federal income tax return:

  1. Complete the return on paper and mail it in
  2. Electronically file (e-filing) the return.

E-filing makes filing your return easier in a number of ways. For one, electronic submissions are automatically calculated and checked as you go. Obvious inaccuracies or omissions will be brought to your attention before you’re allowed to file. That means once you’re done, you don’t need to go back and double check your arithmetic. Beyond the reduction of human error, e-filing your tax return also comes with two other benefits:

  • Higher tax refunds: The majority of taxpayers aren’t aware of all of the tax advantages they’re entitled to. Today’s tax preparation software can help you maximize your return by suggesting deductions, exemptions and credits according to your financial profile.
  • Faster tax returns: The IRS says that the average tax refund arrives within 21 days, but e-filers usually receive refunds in half that time. Paper-filers, on the other hand, often wait 4-6 weeks before receiving refunds or return status notifications.

Whether you choose to file on paper or electronically, your federal tax return must be out of your hands and postmarked or electronically submitted to the IRS by 11:59 PM on April 15th or it will be considered late.

II. Student Tax Benefits

The IRS website can be a maze, but it’s highly worthwhile for both parents and students to take the time to research their educational tax benefit options. Remember, the government wants students like you to complete their degrees; tax credits are designed to lower your financial burdens while you do so. In order to qualify for any of the tax credits or deductions offered by the IRS, your educational expenses must go toward a student:

  • Attending an accredited post-secondary college or university
  • Attending a vocational or career training program offered by a legally authorized school

Some education credits are fully or partially refundable, which means you may be entitled to all or part of the credit, even if you paid no taxes this year. That means the credit can actually generate a refund.

In order to use education credits, you must complete form 8863 and submit it along with your federal income tax return. The form must be completed regardless of whether you are paper filing or e-filing your return. Tax preparation software will likely have this form available for completion. Here are the largest educational tax credits available to students and their parents:

American Opportunity Credit

The American Opportunity Credit is a $2,500 credit available for students or parents of students with individual incomes of up to $80,000 per year. (Married couples can receive the credit with a combined income of up to $160,000.) This is a partially refundable credit, allowing for up to 40% to be refunded in the event no tax has been paid. For instance, if you are eligible to receive a $2,500 credit but you owe no taxes, you can usually still receive up to 40% of the credit, or $1,000 on your refund check.

As with all education credits, the AOC may only be claimed by the parent or guardian that claims the student as a dependent. Students can only claim an educational credit if no one is claiming them as a dependent this tax year. Additionally, the full $2,500 credit will not be earned until $4,000 in qualifying education expenses has been spent. Qualifying expenses are limited to:

  • Tuition and required course materials
  • Course-related materials or equipment that you don’t need to buy from the school (this now includes computers required to complete coursework)

Educational expenses that do not qualify for the American Opportunity Tax Credit include:

  • Room and board
  • Transportation
  • Insurance
  • Medical Expenses
  • Student fees unless required as a condition of employment
  • Expenses paid with tax-free educational assistance
  • Expenses used for any other tax deduction, credit or educational benefit

NOTE: Formerly, the AOC was only redeemable for two years of college or vocational school. A 2012 revision to the credit expands it from two to four years of post-secondary education.

The AOC was started as part of the American Recovery and Reinvestment Act of 2009 (AARA). The credit was originally set to expire at the end of 2011, but was extended through the tax year of 2017 with the passage of the American Taxpayer Relief Act (ATRA).

Lifetime Learning Credit

The Lifetime Learning Credit is a $2,000 non-refundable credit, which means that it can only reduce your tax liability to zero – any amount beyond that will not be refunded to you. Unlike with the American Opportunity Tax Credit, there are no limits on the number of years that this credit may be taken, nor is it limited to undergraduate studies. In order to take advantage of this credit you have to meet the following requirements:

  • You must have qualified educational expenses
  • You, the filer, must be the person paying the expenses of an eligible student
  • You are either the student, the spouse of the student, or the student is your dependent

To get the full $2,000 value of this credit, your taxable income must be less than $54,000 if your filing status is single. And if the status of your return is married filing jointly, your income must be below $108,000 to claim the full credit. (You cannot claim the LLC if you are married filing separately.)

Whereas the American Opportunity Credit is only available to undergraduates, graduate students can claim the Lifetime Learning Credit as well as a tuition and fees deduction when preparing their tax returns. Qualifying educational expenses for the LLC are limited strictly to tuition and required course materials.

NOTE: This credit cannot be used in the same year as the American Opportunity Credit.

Tuition and Fees Deduction

Using form 8917, you can deduct up to $4,000 from your income for tuition and fees paid to a qualifying institution. Books, course materials and activities may only be included if they are required for enrollment and are paid directly to the school. In order to take this deduction you must:

  • Pay qualified education expenses of higher education.
  • Pay the expenses of a qualified student.
  • Be the student or student’s spouse; or the student must be a dependent on your tax return for which you claim an exemption.

Other Tax Benefits for Students

Scholarships – Scholarships that cover what the IRS defines as qualified education expenses are not taxed. Unfortunately, the scope of qualified expenses is limited to:

  • Tuition and fees required to enroll at or attend the school
  • Course-related expenses, such as fees, books, supplies, and equipment that are required for all students enrolled in your course

As with all educational tax credits, qualified scholarships are only considered tax free for students that:

  • Attend a primary or secondary school or are pursuing a degree at an accredited college or university, or
  • Attend a school that is legally authorized to provide a training program that prepares students for a specific vocation or career

Student Loan Interest Deduction – Generally speaking, interest payments other than mortgage interest are not deductible. There is an exception for interest paid on student loans for individuals who have a modified adjusted gross income of less than $75,000 or $150,000 for those filing jointly. This deduction may be used to reduce your taxable income by up to $2,500.

Student Loan Cancellations and Repayment Assistance – As a rule, when a lender forgives all or part of a loan, the total amount of debt cancelled must be included as part of your taxable income. There are a few exceptions to this rule. Your cancelled student debt will not be considered as part of your taxable income if it meets the following conditions:

  • The debt was cancelled because you’ve fulfilled an obligation included as a provision in the terms of the original loan (such as working in a certain profession or for a certain employer for a specified amount time)
  • The debt was forgiven by the federal government, or a state or local government subdivision
  • The debt was forgiven by a tax-exempt benefit corporation which controls a state, county or municipal hospital where the employees are considered public employees
  • The debt was forgiven by a school which has a program to encourage students to work in underserved occupations or areas, and has an agreement with the government or a tax-exempt organization to fund the program

III. Special Status Students

If you have income of any kind, chances are you will have to file an income tax return using the forms discussed above. For students, not all income comes in the form of a salary; stipends, fellowships, some types of scholarships are all considered income and must be included on a federal income tax return.

Graduate Students with Fellowships or Stipends

Fellowships – Graduate scholarships, fellowships and tuition reduction programs are generally not considered taxable income as long as they meet certain criteria:

  • The value does not exceed your expenses.
  • It is not being provided as payment for teaching, research or other services as a condition of receiving the fellowship.
  • The award is earmarked for qualified education expenses such as:
    • Tuition and fees required to enroll at or attend the school
    • Course-related expenses, such as fees, books, supplies, and equipment that are required for all students enrolled in your course

Stipends – The IRS defines a stipend as a fixed amount of money that is paid periodically for services to help defray expenses. As a rule the IRS considers stipends to be wages and taxable as such. In most cases stipends are reported as wages on a W-2 form.

ROTC and Service Academy Students

Educational and subsistence allowances that are paid to students enrolled in ROTC and participating in advanced training are not taxable as income. However, any pay the student receives as “active duty” like summer advanced camp is taxable. Payments received are reported in box 1 of a W-2 as income and must be reported as such.

International Students

International students, including those from Canada and Mexico, are subject to the same tax filing requirements and rules as U.S. citizens. However there are exceptions that vary from country to country and are discussed in detail in IRS Publication 901 which references U.S. Tax Treaties with other countries. Other helpful IRS publications for international students are Publication 515 and Publication 519.

Unlike resident aliens, non-resident aliens undergraduate and graduate students who receive financial aid in the form or scholarships, fellowships, and grants must report them on IRS form 1042 or 1042S regardless of the amount. There is an exception to this rule for funds which do not originate in the U.S.

Many schools contract with Glacier Tax Prep to provide tax preparation software for foreign students studying in the United States. If your school does offer the service, it will more often than not be available to you free of charge if you enter through your school’s website or use your school ID or email address. Availability and guidelines for using the software vary by school, and not all schools provide access. International students should check with their school’s international student resource pages to check to see if Glacier services are offered at their schools. Most schools that do offer Glacier will feature the service on pages that look like this.

Employer Provided Educational Assistance

Many students, particularly graduate students, receive some form of tuition or educational assistance from their employer. The IRS will not tax the first $5,250 of educational benefits from your employer, but amounts in excess of the limit will be included as part of your total taxable income.

IV. Additional Resources for Students

Filing income tax returns is a serious matter, and it is important to verify anything you are uncertain about with the IRS. Laws and regulations change with great frequency and even the most highly-trained professionals still double check with official sources on a regular basis.

Introductory Tax Guides

It is vital that your returns be filed on time even if you owe taxes and are unable to make a full payment. You can create a payment plan with the IRS which will prevent the assessment of late filing penalties which can become very costly very quickly. If you’re still unsure about how to get started on your first tax return, the government provides several income tax guides for students:

Forms Applicable to Students

Tax laws, regulations and rules are constantly being revised and updated and it is smart practice to check the IRS website for changes and updates. In addition to the standard personal income tax forms 1040EZ, 1040A and 1040 there are variety of forms and publications available from the IRS that may be needed to complete your student tax return or provide useful information regarding their completion.

Free Tax Preparation Assistance

  • The IRS VITA program offers the assistance of IRS-Certified volunteers to help individuals who earned less than $51,000. You can use the VITA Locator Tool to find volunteers in your area.
  • The IRS operates Taxpayer Assistance Centers that can be visited in person or contacted by phone and are available to answer questions and provide guidance.
  • Military One Source provides assistance to servicemembers including ROTC and Academy students.
  • The IRS Taxpayer Advocate Service is available in the event you feel you have been treated unfairly by the IRS.
  • Check your local listings for community tax services like this one provided by United Way of King County.

Free Filing Services

  • The IRS offers free e-filing of federal income tax returns through a variety of software companies. You can begin your research by visiting FreeFile.IRS.Gov.
  • The Free File Alliance is a collection of private companies that offer free filing.
  • The IRS has full set of fillable forms that can be completed electronically and mailed in to the IRS. A list of available forms can be found here.

Tax Preparation Classes

Tax preparation classes are available through many community colleges and universities.

The IRS offers Link & Learn Taxes e-learning to train potential volunteers in tax preparation. The course catalog offers a wide range of courses from basic to advanced including specialty courses such as foreign and military.

Paid Preparation Services

Numerous commercial tax preparation services are available including national chains and franchises.