College Students and Taxes: Six Questions Every First-Time Filer Needs to Know

Attending college is a good indicator you’ve grown up. Filing taxes is another real-world wake-up call. If you don’t have a paid job and your parents are claiming you as a dependent, there’s no need to file an income tax return. However, if you have a paying gig regardless if your parents claim you or not, get to know Uncle Sam.

Do you know when to file a tax return, and where? Do you know what deductions and credits you’re eligible to claim? Take our collegiate pop quiz to test your tax filing know-how.

Question #1: If you attend school outside your home state, where do you file your state tax return?
Answer: This is a bit of a trick question. Your federal return should be filed with the IRS based on your permanent address. State returns are a different story. Since Texas has no state income tax, Texas residents don’t file tax returns with the state. Out-of-state working students attending Texas colleges and universities must file state income tax returns in their home state. Texas residents who attend school and work in a state with a state income tax, like Oklahoma, must file a return in their school’s state.

Question #2: Do I have to pay taxes on my scholarships?
Answer: You don’t have to pay taxes if your scholarships are used to cover the cost of tuition and required fees. However, any scholarship money used to pay for room and board, travel, research, and equipment is taxable and should be included with wages even if scholarships aren’t reflected on the W-2 form.

Question #3: Going to college is expensive. Are there any tax breaks to ease the financial burden?
Answer: Besides a diploma, higher education can pay off – in the form of tax credits.

THE AMERICAN OPPORTUNITY CREDIT: The American Opportunity Credit can be claimed for four postsecondary education years and required course material costs are included as qualified expenses.

This credit of a maximum if $2,500 per student is available to individuals with income of $80,000 or less or $160,000 for married couples who file a joint return. The credit is phased out for higher incomes.

THE LIFETIME LEARNING CREDIT: The Lifetime Learning Credit is another popular tax break.  It’s possible to qualify for the Lifetime Learning Credit while taking one or more courses to improve or gain new job skills. The Lifetime Credit can amount to as much as 20% of the first $10,000 of qualified educational expenses. So, those who qualify can receive as much as $2,000 per year for the total qualified expenses paid for yourself, your spouse or your dependents.

The Lifetime Credit applies for all the years of postsecondary education or for courses taken to enhance job skills, while the Hope Credit is only available for the first two years of postsecondary education.  Phaseout limits are as follows: $51,000 to $61,000 if you are filing as a Single, Head of Household, or Qualifying Widow and $102,000 to $122,000  if you are Married Filing Jointly.

Question #4: It’s hard enough keeping up with all my class notes and syllabi, what records do I need to keep for tax purposes?
Answer: Keep all your receipts for tuition and books, complete information on scholarships and other financial aid, as well as transcripts for proof of enrollment. Having organized financial records can help cut the time needed for tax preparation.

Question #5: When is my tax return due?
Answer: Federal returns are due April 15. State filing deadlines vary by state. Unlike your English class, extensions can be granted by the IRS. Check www.irs.gov for extension details.

Question: #6: How much does it cost to file your taxes?
Answer: Millions of eligible taxpayers can use the IRS Free File for no-charge online tax preparation and electronic filing. If you plan to complete and file your own return, visit the IRS Web site for free preparation and electronic filing options.

Need a crash course on income taxes before the April 15 filing deadline? If so, visit www.irs.gov for official tax filing information.