Tax season is upon us. While most students don’t really pay a lot of taxes, you need to know that tax season is just as important to students as it is to parents. Let’s examine some important tax preparations that could benefit both students and families, and give you some Student Tax 411.
Student Tax 411: Gather Financial information
The First part of every tax preparation season is gathering your financial information. There are certain things that both students and families will need before they are ready to prepare their tax returns. There are the normal forms that disclose your incomes (W2’s, 1099’s, etc.) But for the college Student, they will also need their 1098-T. This identifies what you have paid for tuition over the last year. It also identifies the student as a full time student. This will be important as there are many tax advantages that are available once a full time student has been identified. You should have already received this document, but if you have not, you will need to notify your school(s) or log-in to your school financial portal to secure them.
Student Tax 411: File Your Taxes
The big question on students mind is, “Do I need to file a tax return?” This is a common question, and the simple answer is yes. There are some benefits to filling you tax return. One benefit is that you should receive a refund for any taxes you paid from your past years’ work. A resource worth investigating is the Student Income Tax Return Guide from Efile.com. They offer some valuable information on why you should file taxes every year.
For parents, filing taxes is a non-negotiable. It’s the law! And it is especially important during these college years. The information needed to file the FAFSA will be readily available on your tax returns. In fact, the FAFSA has a retrieval tool that will auto-populate much of your information directly from your federally filed tax return. So file your taxes by April 15th and you will be ready to fill out the FAFSA in October.
Student Tax 411: Understand Tax Advantages
Two of the largest tax advantages for college students and their families are the The American Opportunity Credit (formerly The Hope Credit) and the The Lifetime Learning Credit. These two tax credits can be very beneficial in your college financial planning. Not every one will receive the same benefit, but they are worth the time to investigate.
The American Opportunity Credit:
The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education.” (1) This tax credit offers a benefit of up to $2500.00. If you have no tax liability, up to $1000.00 can be refunded to you. This credit is only available for the first four years of undergraduate college expenses.
The Lifetime Learning Credit:
This tax credit offers a benefit up to $2000.00. Here is how the IRS website states the possible benefit. “For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students.” (2) The benefit of the Lifetime Learning Credit is that there is “no limit on the number of years the lifetime learning credit can be claimed for each student.” (3) There are various restrictions pertaining to who can and can not receive this credit, so you may want to speak with your tax professional or find more information online.
Student Tax 411: Update your FAFSA
Tax preparation is so important to updating your FAFSA. In fact, once your taxes are filed, you can use the “Data Retrieval Tool” to import vital financial information from your filed taxes right into the FAFSA application. This will save you vital time and correct some of the most common errors on the FAFSA.
While tax season may be a frustrating time, it is also a valuable time for college financial preparation. A little preparation now, will benefit you greatly later. So take time to prepare your taxes knowing you have the Student Tax 411 and that there is a benefit to your college planning needs.
(1) https://www.irs.gov/individuals/aotc (2) https://www.irs.gov/publications/p970/ch03.html (3) https://www.irs.gov/publications/p970/ch03.html