Ibrahim Gardner
Students have unique tax circumstances and advantages. Depending on your gross income and whether your parents claim you as a dependent, you may need to file a tax return. Students who are dependents on their parents' tax returns are generally not eligible to claim education credits. However, there are tax benefits for higher education, such as loan interest deductions, credits, and tuition programs that can help lower the tax you owe. Scholarships and grants are typically tax-free, but there may be situations where you need to include them in your taxable income, such as when they are used for room and board, travel, or other non-tuition expenses. Additionally, college textbooks are exempt from sales and use tax, and students can take advantage of tax-free savings plans for higher education costs. Understanding your tax situation as a student is essential for effective financial planning and maximizing the benefits available to you.
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What You'll Learn
Education tax credits
There are two education credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). These credits can help with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may even get a refund.
The American Opportunity Tax Credit is worth up to $2,500 per student and is generally available to undergraduate students attending school on at least a half-time basis who haven't completed the first four years of post-secondary education. It is the more valuable credit of the two, but it is available to fewer people. You can claim it for your own education expenses, or for those of your spouse or a dependent. However, it is only available for undergraduate school and can only be claimed for a maximum of four years per student.
The Lifetime Learning Credit offers up to $2,000 in tax savings and is generally more accessible than the AOTC. It doesn't have a limit on the number of years it can be claimed, and it's available for courses taken to acquire or improve job skills without pursuing a degree. It is non-refundable, meaning it can reduce your tax bill to $0 but won't result in a refund.
If you qualify for both credits for a single student, you must claim the American Opportunity Tax Credit instead of the Lifetime Learning Credit (you cannot claim both for the same student in the same year).
Students who are dependents on their parents' tax returns aren't generally eligible to claim these education credits. In this case, the student's parents may be eligible to claim the education deductions and credits.
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Student loan interest deductions
If you're a student facing debt after college, the student loan interest tax deduction can help ease the burden as you're repaying your loans. Essentially, student loan interest is the cost of borrowing money to pay for your education. When you take out a student loan, you agree to repay the loan amount (the principal) plus interest, which is calculated as a percentage of the unpaid principal balance.
If you’re currently making or will be making student loan interest payments to pay back what you borrowed to finance your higher education, the student loan interest deduction is for you. You can claim the deduction if you paid interest on a qualified student loan within a specific tax year. The maximum deduction you can take is based on an income limit for each filing status. If you’re a higher-income taxpayer, the student loan interest tax deduction is reduced or eliminated. In other words, you can’t claim the deduction at all if your modified adjusted gross income (MAGI) is above the income limit.
For example, if you're filing as Single, Head of Household, or Qualified Surviving Spouse (for tax year 2024): You can deduct up to $2,500 of paid student loan interest if your modified AGI is $80,000 or less. Your deduction is gradually reduced if your modified AGI is $80,000 but less than $95,000. You can’t claim a deduction if your modified AGI is $95,000 or more.
If you paid $600 or more of interest on a qualified student loan during the year, you should receive a Form 1098-E, Student Loan Interest Statement from the entity to which you paid the student loan interest. You can use Form 1098-E to calculate your student loan interest deduction. Schedule 1 Form 1040 to report the amount on your federal tax return.
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Self-employment income
If you are a student earning self-employment income, you may be liable to pay self-employment tax and income tax. Self-employment tax is a Social Security and Medicare tax for individuals who work for themselves.
In the US, you are considered self-employed if you own a business or are an independent contractor and receive a 1099 form. If your net earnings from self-employment equal $400 or more, you need to file an income tax return. You can use Form 1040-ES to estimate your self-employment and income tax liabilities. Estimated payments are generally due on April 15, June 15, September 15, and January 15 of the following year. To file your annual income tax return, you will need to use Schedule C (Form 1040) to report any income or loss from your business. You will compute your self-employment tax on Schedule SE.
In the UK, if you work for yourself, you will need to fill in a Self Assessment tax return each tax year, detailing your income and expenses. HM Revenue and Customs (HMRC) will then work out how much tax you need to pay. You must register as self-employed within three months of starting work. If you normally live and study in the UK but work abroad during the holidays, you will still count as a UK resident for tax purposes and will be liable for UK tax on any income earned above your personal allowance.
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Scholarships and grants
It is important to note that scholarships and grants are only tax-free if the student is a degree-seeking candidate at an eligible educational institution. Additionally, the funds must be used for expenses that are required of all students in the course, rather than optional expenses. If scholarship or grant funds are used for incidental expenses such as room and board, travel, or optional equipment, these amounts are generally considered taxable income.
There are certain exceptions to the taxability of scholarships and grants. For example, amounts received for services required by specific scholarship programs, such as the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program, are not included in gross income. Similarly, grants received as a result of a federally declared state of emergency, such as COVID-19 relief payments, are typically not considered taxable income.
To determine the taxability of a scholarship or grant, it is recommended to refer to the guidelines provided by the Internal Revenue Service (IRS). These guidelines outline the specific conditions under which scholarships, fellowship grants, and other grants may be considered tax-free. Additionally, the IRS offers an online assistant to help individuals decide how much of their scholarships or grants may be taxable.
In summary, scholarships and grants are generally not taxable if they are used for qualified education expenses at an eligible educational institution by a degree-seeking student. However, any amounts exceeding these expenses or used for incidental costs are typically subject to taxation. It is important for students to understand the tax implications of their scholarships and grants to ensure they comply with tax requirements.
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Tax-filing requirements
The Internal Revenue Service (IRS) bases filing requirements on your filing status, total income, and whether that income is considered earned or unearned. If you are a student with income from a part-time job or summer internship, you should check your pay stubs to see if your employer has withheld taxes from your paycheck. If your withholdings are less than your tax bill, you might owe money when you file your taxes. On the other hand, if your withholdings exceed your tax bill, you could be entitled to a tax refund.
To file your taxes, you will need to gather all the necessary tax documents. These may include W-2 forms from employers, which show how much money you earned and the taxes withheld from your paycheck, and a 1098-T form from your college for tuition payments. You may also need documentation for scholarships or grants, as the portion of grants and scholarships spent on non-tuition expenses like food, housing, and childcare is sometimes treated as "income" for tax purposes.
If you are an undocumented student without a Social Security Number (SSN), you will need to apply for an Individual Taxpayer Identification Number (ITIN) to file your taxes.
Many colleges offer a program called Volunteer Income Tax Assistance (VITA), where business students volunteer to help with taxes for free. This can be especially helpful if your tax situation is more complicated, such as if you are paying for college on your own or have self-employment income.
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Frequently asked questions
Generally, if you made more than $14,600, you need to file your own tax return. However, this number differs for married students, those who are the head of a household, or those over 65.
Student workers may be exempt from FICA taxes if they are only working during school breaks of five weeks or less, and if they are eligible to enrol in classes following the break. However, if a student worker has multiple appointments, at least one of which confers professional, career, or full-time employee status, FICA taxes will be withheld from all earnings.
Scholarships and grants that cover tuition and fees are usually tax-free. However, if you use the funds for room and board, travel, or other expenses, you must include these amounts as taxable income.
Yes, there are several tax benefits for students, including deductions for student loan interest, tax credits, and savings plans. Textbooks and other course-related expenses are also tax-free.
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