These days, it’s common for students to have a job while away at college to sustain themselves throughout the year. Make sure to add this to your color-coded to-do list! Here’s a useful college hack to sneak in between prioritizing sleep and sitting in the front row.
As a working student, the first thing you will need to consider is if you are going to file a tax return or not. If you have over $12,000 of income that you earned in 2019, you will need to file a tax return. If your income is less than that but you worked at a job that withheld taxes, you will want to file a tax return. You can not claim a refund for those taxes that were withheld unless you file.
After you have determined if you need to file a tax return, you need to determine your filing status. If you are under the age of 24, your parents will likely still qualify to claim you as a dependent. If your parents claim you as a dependent, you may still file a tax return to request a refund of your taxes. However, all your school-related expenses will be reported on your parent’s tax return instead of your own. If you are not claimed as a dependent on anyone else’s tax return, the school-related expenses can all be reported on yours.
When it comes to reporting school-related expenses there are a couple of options. You can either qualify for a tax credit or you can claim a deduction. The eligibility for these depends on how long you have been in school and the adjusted gross income reported on the tax return in which the expenses are being claimed. You can only claim one of them per year.
Here is a summary of the two available tax credits and the deduction option:
American Opportunity Tax Credit (AOTC)
AOTC is a credit for qualified education expenses paid for the first four years of higher education. Qualified expenses include the cost of tuition, fees and course materials per eligible student, per year. You must be enrolled at least half-time to qualify and can get a maximum annual credit of $2,500 per eligible student. The credit reaches its max benefit with just $4,000 of qualifying expenses and eligibility starts to phase out around $80,000 of income (or $160,000 if filing jointly). The AOTC can be partially refundable (up to $1,000), which means if the credit is larger than your tax bill, you can receive a refund for the remaining amount.
Lifetime Learning Tax Credit (LLC)
LLC is for qualified tuition and related expenses paid for students enrolled in an eligible educational institution. This credit can be used for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills. There is no limit on the number of years you can claim the credit and it reaches its max benefit at $10,000 of expenses. It is worth up to $2,000 per tax return and is not refundable, which means if it is more than your tax bill you do not see a benefit. The LLC starts to phase out around $58,000 of income (or $116,000 if filing jointly).
Tuition and Fees Deduction
The tuition and fees deduction previously expired and was unavailable for 2018 tax returns. However, recent legislation brought it back for 2019 and 2020. With this deduction, you can deduct up to $4,000 of education expenses from your gross income. You do not have to itemize in order to be eligible and there is no limit on the number of years you can take the deduction. Eligibility starts to phase out around $65,000 of income (or $130,000 if filing jointly).
Student Loan Deduction
In addition to the credits and the tuition deduction mentioned above, you can deduct any student loan interest you have paid during the year. When you are in school you are not typically required to make student loan payments, but if you do, or if you elect to make interest-only payments in an effort to reduce your total loan balance before you are done with school, the amount you paid in interest throughout the year will be deductible. The great news about this deduction is that you do not have to itemize to receive it if you are under the income limit ($65,000 for a single tax filer for 2019 or $135,000 for joint filers). You can deduct up to your $2,500 worth of student loan interest on your tax return.
Note that if you receive any tax-free financial assistance like grants and scholarships, those amounts must be deducted from your expenses before calculating the above credits or deductions. Also, room and board, insurance, transportation, medical expenses, and student fees that are not required as a condition of enrollment or attendance are all excluded expenses and are not eligible for the credits or deduction.
If this information was beneficial to you, share it with your fellow college friends.
Schedule an appointment with our licensed tax professionals to discuss your credits and deductions. Verdant offers FREE tax consultations. Contact us to set up your appointment.