Tax season is officially here! Our TVs are filled with H&R Block commercials promising us HUGE refunds if you take your taxes to them. They even have the “Double Your Refund” scratch-card game to lure you in the door. The sad thing is these companies prey on students who are on their own for the first time and do not have daddy handy to do their taxes for them. They charge fees as high as a couple hundred bucks to help you file a return that takes them probably all of 20 minutes to complete. Most student returns are not very complex and with a little time and research, a college student can figure it out on their own and save big money.
The filing service I use, called CompleteTax, is available through the IRS Web site. It completes your federal return for free if you make less than $29,000. The site charges $9.95 to prepare your state return, which is not bad considering the money some students spend on professional prep service. The Web site works similar to TurboTax by asking you a series of questions and you fill in your information. The software then compiles your return and you can choose to print it out and mail it in or submit it electronically. Filing electronically not only saves a tree, but you also get your refund in half the time.
To encourage people to attend college, the tax code provides certain tax incentives for students, both full time and part time. The bad news is that many students are still claimed as dependants on their parent’s return and are disqualified from claiming any of these tax benefits. You can use only one of the three benefits each year so choose the one that will save you the most money. If you use CompleteTax, it will automatically calculate this for you. The three education benefits are the tuition and fees deduction, the Hope Credit and the Lifetime Learning Credit.
The TFD allows you to deduct your tuition and any fees paid as a condition of your enrollment. These amounts are reported to you on Form 1098-T, which the University mails. You can claim this deduction even if you paid tuition with loan money. However, for most students, a tax deduction does not save much money because most students are in lower income brackets. Most students should use an education credit instead.
The Hope Credit is a tax credit of up to $1,500 for tuition and required fees. You are not allowed to claim room and board charges for the TFD or for either tax credit. The Hope Credit is available to students in their first two years of college pursuing an undergraduate degree and must be enrolled at least part-time for one semester during the year. You are disqualified from claiming the Hope Credit if you have a felony drug conviction.
The Lifetime Learning credit is a tax credit of up to $2,000 for tuition and fees for anyone taking college classes to acquire (students) or improve job skills. It can be used every year and the student does not need to be pursuing a degree to claim it. An added bonus for some — the felony drug rule does not apply. This is the granddaddy of all education credits. Complete Form 8863 or use a software service to calculate your education credit.
Here is the story of a student trying to save money on his taxes. Biggy earns $25,000 and pays $5,000 in qualified tuition and fees. Assume that Biggy cannot take any other deductions/credits and pays a 10 percent flat tax rate on his income. If Biggy takes the TFD, his taxable income will be lowered to $20,000 and at a 10 percent tax rate, he will owe Uncle Sam $2,000. As an alternative, Biggy could take the Hope Credit. He does not get to deduct any money from his income, so he owes $2,500 in taxes, but he gets a credit of $1,500 so he only has to pay $1,000. Or Biggy could take the Lifetime Learning credit. Like the Hope credit, he owes Uncle Sam $2,500 in income taxes, but the credit of $2,000 means he only has to pay $500. Biggy loves the Lifetime Learning credit.
Todd loves to hear tax stories, send him one at [email protected]
