Ten Things College Student Should Remember at Tax Time

Ten Things College Student Should Remember at Tax Time

·  Don’t wait until the last minute - Getting an early start is the best way to avoid problems and get the advice you need. If you determine that you need help with your tax return, you may be able to get help for free. On some college campuses, free help might be available from the business and/ or accounting department. Another free service is provided by the Internal Revenue Service, which in many communities has set up Voluntary Income Tax Assistance sites. Free income tax advice will be much easier to obtain in February than in April.

·  Write it out in pencil first - Until you get the hang of it, prepare a “draft” return first. Go over the draft carefully until you are sure there are no errors and then file your “official” return.

·  Be Aware of Gifts from Uncle Sam - College students filing tax returns should be sure to take advantage of credits and deductions available to undergraduates or their parents (whoever claims the student as a dependent is the one who the government allows to use the credit). Only one of these credits or deductions may be used per family.

o  High education expenses deduction - This deduction is available to families with adjusted gross incomes up to $130,000. Deductions save you less on your tax bill than do tax credits (see below) because, deductions only reduce the amount of income that is taxed, while a credit reduces the actual tax.

o  Lifetime Learning Credit - This credit allows the filer to take a credit equal to 20% of the student’s tuition, room, and other related expenses. At present, $2,000 is the maximum credit a taxpayer may claim. The amount a taxpayer may claim as a Lifetime Learning Credit is gradually reduced for taxpayers who have modified adjusted gross income between $40,000 ($80,000 for married taxpayers filing jointly) and $50,000 ($100,000 for married taxpayers filing jointly). Taxpayers with modified adjusted gross income over $50,000 ($100,000 for married taxpayers filing jointly) may not claim a Lifetime Learning Credit.

o  Hope Scholarship Credit - The maximum credit allowed under this plan is $1,500 or up to 100% of the first $1,000 of tuition and fees and up to 50% of the second $1,000. Only undergraduates in their first two years of college are eligible. The amount of the Hope credit for 2004 is gradually reduced (phased out) if a taxpayer’s modified adjusted gross income (MAGI) is between $42,000 and $52,000 ($85,000 and $105,000 if you file a joint return). A taxpayer cannot claim a credit if one’s MAGI is $52,000 or more ($105,000 or more if you file a joint return).

·  Depending on the state where you spend summers and where you go to college, you may be considered residents of either state or both states and required to pay taxes in one or both states.

·  You may only use the 1040 EZ if you claim yourself as dependent. Before filing the 1040 EZ, make certain that no other family member is claiming you as a dependent.

·  Be aware that you must pay taxes even if your college reduces your tuition by the amount you earn at a job on campus. If your college or university is not withholding taxes for a work-study arrangement, consider putting some money aside to pay taxes.

·  Look into taking out a 529 account as a means of saving for college, while reducing your taxes. All of a 529 account's earnings are exempt from federal tax when they are withdrawn if they are used for qualified education expenses. This means that, unlike the taxes you have to pay on earnings from regular stock investments, you won't pay any tax on the 529 account earnings unless you end up using the money for something other than higher education. Earnings are currently tax-deferred in most states, as well.

·  For tax purposes it’s important to know all sources paying your college tuition. Grant and loan money is generally tax-free, but not in every case. Tuition paid by 529 accounts doesn’t count as college expenses because the government has already given you a tax break on them. With regard to other loans, you may or may not be able to deduct interest costs.

·  Tax preparers warn students that they should carefully monitor their earnings to make sure that they qualify for every possible tax advantage, but not go so far that they might lose the tuition money provided by the university. It’s always best to speak with the financial aid specialists before doing anything that might effect your scholarship standing.

·  After completing your tax return, DON’T mail it right away. Give it until the next day, when you should recheck the math, make sure you included all the forms, signed them in proper places, and made a copy for your records.

·  File a return even if you don’t have to - You may have earned a small amount of money over the last year, so little that you don’t have to file a return. However, you should because if you’ve had money withheld, you’re entitled to a refund.