Dana Dratch, writer for bankrate.com, wrote this great article for preparing taxes for college students. In college? Tell us what you think.
If you’re in college, doing your taxes feels like one more final exam. But there’s one big difference. This grade is measured in cash.
With a little research and time, you can ace this test and maybe even earn a nice check in the process. Here are 12 tips to help you over the rough spots and make this tax exam a little easier.
Sure, you might make too little money to file, but if you’ve had money withheld from paychecks, you’ve got a refund coming. “The most common error is that people don’t realize ‘it could make a lot of sense for me to file even if I don’t have to,'” says Mark Oleson, director of the Financial Counseling Clinic at Iowa State University.
2. Start early
Even if you haven’t received your W-2s, your final pay stub will have the pertinent tax information, such as your income and how much was withheld. You also can go online and download state and federal forms you’ll need. Taking an advance look at your tax situation will help you know which issues might apply to your return.
Think you might need a little help? It’s probably closer than you think and possibly free. Most college accounting departments have students offering free tax help so they can get some practice with real-life returns. If you haven’t seen ads around campus, contact the accounting or business department and find out how you can get some advice. The Internal Revenue Service also offers in many communities Volunteer Income Tax Assistance sites where you can go to get help from IRS volunteers, says Oleson.
Remember, though, the closer you get to April 15, the longer the wait for help. Jace Sanders, a financial adviser for Albuquerque-based Essential Financial Planning Inc., still regrets waiting until the last minute the first time he sought on-campus help in college. He stood in line for two hours. But it was worth the time, he says. “They advised me of the Hope Credit.”
“The sooner you start, the better off you’ll be,” advises Oleson. “If you have a tight spring schedule and can’t talk to someone for three weeks, saying that on Feb. 1 is a lot different than saying that in April.”
3. Give yourself a weekend
No, filling out your forms won’t take that long. But if you allow a weekend, you’ll have time to take a few breaks when you get tired and still be able to double check the numbers before you mail that return.
Sanders says his first college return took the better part of a weekend. “I got off work Friday, and Monday I was still finishing it up,” he says. Even so, he neglected his earned income credit. “And the IRS isn’t going to say, ‘Here’s some extra money you want to take.'”
Oleson recommends you take a leisurely weekend to do your returns. Then take the next week to seek any outside help and ask more questions. Next weekend, check your numbers again and send it.
4. Practice on paper
Even if you’re filing electronically, many students find it’s more efficient to fill out the paper forms and work out the bugs before they go online to file, says Oleson.
5. Take extra credit
These days, college students (or parents paying college tuition) are getting a little help from the government in the form of credits and deductions. While there are three major ones, students (or their parents) get to select only one per student. And whoever claims the student as a dependent is the one who is eligible for the credit. Pick the one that best suits your family and situation:
· Hope Scholarship Credit – Gives you a tax credit for up to 100 percent of your first $1,000 in tuition and fees and up to 50 percent for the second $1,000. The maximum credit is $1,500 and it applies to the first two years of college only.
· Lifetime Learning Credit – Gives you a tax credit equal to 20 percent of your tuition and certain related expenses up to $10,000. The credit maximum is $2,000.
· Higher education expenses deduction — This deduction could be as much as $4,000 for families that meet earning guidelines. If you make too much (in the IRS’s eyes), you’ll get a reduced deduction. The downside: Deductions usually give you less bang for your buck than credits. You get to subtract a credit amount from the actual tax you owe, whereas a deduction reduces the income you pay tax on. So in this case, even if you have $4,000 in expenses you can claim on your tax return (at the bottom of page 1 of your Form 1040), in reality this deduction would at most produce a $1,000 reduction in your tax bill if you’re in the 25 percent tax bracket.
6. Understand your family’s financial situation
Talking to mom and dad about money is almost as difficult as talking to them about sex (and just about as much fun). But you need to know a little about their financial picture to plan who should claim you as a dependent and possibly use your education credit or deduction.
If your parents are paying more than 50 percent of your expenses, they are entitled to list you as a dependent on their taxes.
Also keep in mind that the available education tax credits will wipe out taxes that you owe, but they won’t generate a refund. If you’re not making a lot of money and don’t owe any taxes, these credits can’t help you. And the value of a deduction (for example, the higher education expenses deduction) increases with your tax load, making it much more valuable to someone in the 35 percent bracket (your folks) than someone in the 15 percent bracket (you). So unless you expect to owe a bundle, chances are your parents will get more out of a credit or deduction than you will.
Sanders recalls one family’s innovative solution. The parents wanted to claim their daughter as a dependent and were fully qualified to do so, but she was dead set against it. She had her eye on a $200 refund, while the parents were looking at saving thousands through a dependent exemption and education tax credit. It all worked out when the parents took the dependency claim and tax credit and agreed to make a couple of car payments for the daughter.
“It’s not huge dollars, but it’s very complicated,” says Doug Stives, CPA and partner in The Curchin Group. “Do what you’re going to do, but understand you want to coordinate with Mom and Dad.”
7. Don’t automatically take the EZ route
File a 1040EZ and the form automatically assumes you will claim yourself as a dependent, says Stives. But if your parents make the same claim, both of you will get letters from the IRS. If you’ve already filed when you learn your parents plan to claim both you and your education credits, file a corrected return.
8. Determine where you live
Sounds obvious, right? Not when it comes to taxes. If you’re going to college in one state and spending summers at home in another, you could have two states vying for your tax dollars.
The qualifications for residency “depend on the state,” says CPA Barry Picker, author of “Barry Picker’s Guide to Retirement Distribution Planning.” But in some situations, you could be considered a full-time resident in two places and be required to pay both, he says.
9. Nail down your tuition money’s origin
It could make a difference in your taxes. For instance, if any of your tuition bill was paid with money from a 529 account or Coverdell education savings account, you can’t count those expenses in your total education debt when you try to recoup an education credit or deduction. Since Coverdell and 529 money accumulates tax-free, the government has already given you a tax break on those funds.
“Usually, people don’t have enough in a Coverdell or 529 to pay the whole thing, so that’s not an issue,” says Picker.
If your tuition is coming from unsubsidized loans, you can deduct up to $2,500 in interest, says Oleson.
And while most financial planners will tell you that grant and loan money is tax-free, there are always exceptions. “A grant that includes room and board is technically taxable,” says Stives. Read the fine print carefully for any money you take so you’re prepared come tax time.
10. Watch your income
If you rely on need-based grants or loans, keep an eye on your income throughout the year. It’s smart to leverage your funds so that you can qualify for every tax advantage. But you don’t want to outfox yourself and lose tuition money, either. Best bet: Check with your financial aid office before you do anything, such as taking a summer job or putting stocks in your name, that might affect your scholarship standing, says Oleson.
Also be wary of claiming yourself as a dependent if you want to stay on your parents’ insurance, says Stives. While the two things seem unrelated, an insurance company could use your independent status as justification to deny your health claims, he says.
11. Be careful with work-study arrangements
These programs are taxable. Many colleges and universities issue students checks and take the proper withholdings. If you’re not getting a check, make sure that you’re putting some money aside for April 15. And if your school simply gives you a break on tuition in exchange for your work, your “income” is taxable. Talk to the director of the program for details.
12. Don’t mail your return the moment you finish it
Come back the next day to double check your math, make sure you’ve included, and signed, all the forms and made a copy for your records. Says Stives, “You always let it cool off overnight, at least, before you lick that envelope.”