University Students And Taxes: Who Pays?

Paying taxes is a responsibility that everyone has to navigate at some point in their lives. For university students, understanding their tax obligations can be particularly challenging, especially if they are filing their taxes independently for the first time. While tax requirements vary by country and individual circumstances, there are some general considerations that students can keep in mind as they approach tax season.

Do university students have to pay income tax?

Whether or not a university student has to pay income tax depends on several factors. These include the student's income, their dependency status, and the country/state in which they reside.

United States

In the United States, students must file a federal tax return if their income exceeds a certain amount. For single students under 65 in 2023, the threshold was a gross income of at least $12,950 in 2022. The threshold is different for married couples filing jointly or separately, and for those with dependents. Additionally, students who worked and had taxes withheld from their paychecks may want to file a tax return, as they could be eligible for a refund.

Students may also qualify for various tax credits and benefits, such as the American Opportunity Tax Credit (AOTC) and the Earned Income Tax Credit (EITC). These credits can help lower the amount of taxes owed and may even result in a refund. Therefore, it is generally recommended that students file taxes every year, even if they are not required to do so.

Canada

In Canada, most individuals, including university students, are required to file a tax return by April 30. The Canada Revenue Agency provides an income tax guide for students to help them navigate their tax obligations and benefits.

Other Countries

The tax situation for university students can vary significantly from country to country. It is important for students to research the specific tax laws and requirements of their country or seek professional advice to ensure they are complying with their tax obligations.

What are the tax benefits for university students?

University students can take advantage of various tax benefits to reduce their tax burden. These benefits vary depending on the country and specific circumstances, but here are some common tax advantages for university students:

Tax Credits and Deductions:

• Tuition Tax Credit: Students can often claim a tax credit for their tuition fees, reducing their taxable income. In some countries, this credit can be transferred to a spouse, parent, or grandparent.
• Student Loan Interest Deduction: Interest paid on student loans is usually tax-deductible, lowering the overall cost of borrowing.
• Education and Textbook Tax Credits: Students can claim tax credits for expenses related to their education, such as textbooks and course materials.
• Moving Expenses: If a student needs to relocate to attend university, they may be able to deduct moving expenses, including airfare, hiring movers, and connection charges.
• Public Transit Tax Credit: Costs associated with using public transportation, such as transit passes, may be eligible for a tax credit.
• Child Care Tax Credit: Student parents who need to pay for child care while attending school may qualify for a tax credit to help cover these expenses.

Other Benefits:

• Non-Taxable Scholarships and Grants: In some cases, scholarships, fellowships, and grants may be exempt from taxation, providing a significant financial advantage to students.
• Tax-Free Withdrawals from Retirement Accounts: Certain countries allow students to make tax-free withdrawals from their retirement accounts, such as RRSPs in Canada, to fund their education.
• Lifetime Learning Credit: Similar to the American Opportunity Tax Credit, this credit provides a benefit for students enrolled in college, helping to cover tuition, food, housing, and other expenses.
• Earned Income Tax Credit (EITC): Students with low incomes, especially those working part-time or full-time jobs, may qualify for the EITC, providing a substantial subsidy to their earnings.

It is important to note that tax laws vary by country and may change over time. Students should consult official government sources or tax professionals for the most accurate and up-to-date information regarding their specific situation.

What tax forms do university students need?

University students may need to file a tax return depending on their gross income and whether their parents can claim them as a dependent. Students who are claimed as dependents on their parents' tax returns are generally not eligible to claim education credits. In this case, the student's parents may be eligible to claim these deductions.

If you are a university student filing taxes independently, you may need the following tax forms:

• Form W-2 or 1099-MISC: If you are filing an income tax return, this means you have income to report. If you are employed, you will receive a W-2 from your employer. If you are self-employed, you will need to look for a Form 1099-MISC from anyone who has paid you more than $600.
• Form 1098-T: This form is required to claim the tuition and fees deduction, American Opportunity Credit, or the Lifetime Learning Credit. The 1098-T shows how much you paid to your school for tuition and other qualified expenses, and it also reports information about scholarships. This form will come from your school.
• Form 1098-E: This form is for the student loan interest deduction.
• Form 8863: This form is for the American Opportunity and Lifetime Learning Credits.

It is important to note that scholarships and grants are typically tax-free, but there may be situations where you have to include them in your taxable income. If you are unsure, you can use the Interactive Tax Assistant to find out if your scholarship, fellowship, or education grant is tax-free.

Additionally, if you have student loans or pay education costs yourself, you may be eligible to claim education deductions and credits on your tax return, such as loan interest deductions, qualified tuition programs (529 plans), and Coverdell Education Savings Accounts.

Do university students have to pay taxes on scholarships?

Whether or not university students have to pay taxes on scholarships depends on several factors. Firstly, scholarships are generally considered tax-free if certain requirements set by the IRS are met. These requirements include the student being a degree-seeking candidate enrolled at a qualified educational institution, and the scholarship funds being used for qualified education expenses. Qualified education expenses typically include tuition fees, books, and supplies that are required for the student's program of study.

However, if the scholarship funds are used for non-qualified expenses, such as room and board, travel, or optional supplies, they are typically treated as taxable income. Additionally, if the scholarship amount exceeds the student's qualified education expenses, the excess amount may need to be reported as taxable income. It's important to note that the rules regarding the taxability of scholarships have changed over time, and there are ongoing discussions about restoring the tax-free status of scholarships.

To determine if a scholarship is taxable, students should carefully review the IRS guidelines and consult with a qualified tax professional. It's also important to keep track of the scholarship funds and how they are spent, as this information will be necessary for tax filings.

Do university students have to pay taxes on student loans?

University students do not need to pay taxes on student loans. Student loans are not considered taxable income because you are obligated to pay them back. However, student loans can impact your tax bill in other ways, such as through interest deductions and loan forgiveness programs.

Student Loan Interest Deduction

If you've paid interest on your student loans, you may be able to deduct a portion of that interest from your taxable income. The student loan interest deduction allows you to reduce your taxable income by up to $2,500 per year. This deduction is available for both federal and private loans. To qualify for the deduction, you must meet certain criteria, including having paid interest on a qualified student loan and having a modified adjusted gross income (MAGI) below the threshold set by the IRS each year.

Loan Forgiveness and Taxes

Depending on the loan forgiveness program, you may have to pay taxes on the amount forgiven. For example, if you participate in an income-driven repayment plan, any remaining student loan debt that is forgiven after 20 to 25 years of payments is typically considered taxable income. However, there are exceptions, such as Public Service Loan Forgiveness, where the forgiven amount is not taxable.

Employer Student Loan Repayment Assistance and Taxes

If you receive student loan repayment assistance from your employer, this amount is usually considered taxable income and will be added to your total income when determining your taxes. However, due to COVID-19 relief, taxes on these amounts have been suspended through 2025.

In summary, while university students do not pay taxes on student loans, there are tax implications to consider, such as interest deductions and loan forgiveness programs, which can impact your overall tax liability.

Frequently asked questions