Ibrahim Gardner
Students often have part-time or summer jobs, and may be unsure of their tax obligations. In the US, students are not exempt from federal income taxes, and may need to file a tax return if their income is above a certain threshold. This threshold varies by year, but in 2020, students who earned less than $12,400 did not need to file a federal tax return. Students may also need to pay taxes on investments, scholarships, fellowships, and stipends. International students in the US on certain visas may have taxes withheld from their income, and may need to file additional forms.
| Characteristics | Values |
|---|---|
| Student status | Does not exempt from federal income taxes |
| Income | If below the filing requirement for age, status, and dependency, no federal taxes are owed |
| Employment status | If treated as an independent contractor, responsible for income tax and self-employment tax |
| Student workers | Not automatically exempt from paying taxes; some may be exempt from FICA taxes |
| Tax credits | American Opportunity Tax Credit (AOTC), Earned Income Tax Credit (EITC), Child Tax Credit (CTC) |
| Tax forms | 1040, 1098-T, 1098-E, W-2, W-4 |
| Student loans | Interest may be deductible up to a certain amount |
| Scholarships and grants | Generally tax-free, but amounts used for expenses may be taxable |
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What You'll Learn
Student workers and taxes
Students who are employed by a school, college, or university where they are pursuing a course of study are exempt from FICA (Social Security and Medicare) taxes. However, this exemption does not apply to full-time employees or "professional employees" whose work requires advanced knowledge and is predominantly intellectual in nature. Additionally, postdoctoral students, postdoctoral fellows, medical residents, and medical interns are disqualified from the student FICA exemption.
On the other hand, being a full-time student does not exempt you from federal income taxes. If you are a US citizen or resident, your income, age, filing status, and dependency status will determine whether you need to file a federal income tax return. Even if you are not required to file a tax return, you may choose to do so if you are eligible for a refund or a refundable credit.
Students can unlock educational credits and benefits by filing their taxes. For instance, the American Opportunity Tax Credit (AOTC) offers up to $2,500 per year to US citizens or residents enrolled in college. Students who work part-time or full-time and earn less than $63,400 per year may qualify for the Earned Income Tax Credit (EITC). Additionally, students with dependents may be eligible for the Child Tax Credit (CTC). To access these benefits, it is recommended that students file their taxes every year, even if they are not required to.
Students can also explore tax benefits related to their education costs. They may be able to claim deductions for loan interest, qualified tuition programs (529 plans), and Coverdell Education Savings Accounts. However, students who are claimed as dependents on their parents' tax returns are generally not eligible to claim these education credits themselves. Instead, their parents may be able to claim the education deductions and credits.
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Student loan interest deductions
Students can claim a tax deduction on their student loan interest payments. This deduction can help students facing debt after college by reducing their taxable income, and in some cases, their tax bracket. The deduction is $2,500 for those filing as Single, Head of Household, or Qualified Surviving Spouse with a modified AGI of $80,000 or less. For those filing as Married Filing Jointly, the same deduction of $2,500 is allowed if the modified AGI is $165,000 or less. The deduction is reduced if the modified AGI is above these thresholds but below $95,000 for Single filers and $195,000 for Married filers. No deduction can be claimed if the modified AGI exceeds these upper limits.
It is important to note that the student loan interest deduction is different from the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit, which are education credits that can also help students financially. The AOTC, for example, can provide up to $2,500 per year to help with tuition, food, housing, and other expenses. Students can claim these credits even if they have paid for their education with student loans.
To claim the student loan interest deduction, one must have paid interest on a qualified student loan within the specific tax year they are claiming. If an individual paid $600 or more in interest on a qualified student loan during the year, they should receive a Form 1098-E, Student Loan Interest Statement, from the entity to which they paid the interest. This form is used to calculate the student loan interest deduction, which is then reported on Schedule 1 of Form 1040 for federal tax returns.
It is recommended that students file taxes every year, even if they are not required to, as this can unlock potentially thousands of dollars in tax credits and benefits that can be refunded. Students should also be cautious of scams when filing their taxes and should avoid putting any refunds on gift or prepaid cards. Instead, they should use direct deposit to their bank account.
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Education credits
Students can get money back when they file taxes through educational credits. These include the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC can give a U.S. citizen or resident enrolled in college up to $2,500 each year to help pay for tuition, food, housing, health care, and more. The total of all qualified tuition and related expenses for calculating AOTC cannot exceed $4,000. The maximum allowable credit is $2,500.
The AOTC is allowed for expenses for course-related books, supplies, and equipment that aren’t necessarily paid to the educational institution but are needed for attendance. The amount paid for a computer can qualify for AOTC if it is necessary for attendance at the educational institution. To claim AOTC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). The law requires you to include the school’s Employer Identification Number (EIN) on this form.
The Lifetime Learning Credit (LLC) works similarly to the AOTC. You cannot claim both the AOTC and LLC for the same student. Both credits are phased out as your income climbs. If you’re filing as single or head of household, the credit starts phasing out at $55,000 and is eliminated at $65,000. If married filing jointly, the credit starts phasing out at $110,000 and is eliminated at $130,000.
Students who are dependents on their parents' tax returns aren’t generally eligible to claim education credits. In this case, the student’s parents may be eligible to claim the education credits.
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State taxes
In general, if you are a student and your income is below a certain threshold, you do not owe federal taxes and do not need to file a federal income tax return. However, you may still need to file a state tax return in addition to federal taxes, depending on the state you live in. For example, in New York State, you must file an income tax return if you have a federal adjusted gross income of more than $4,000, or $3,100 if you are single and can be claimed as a dependent on another taxpayer's federal tax return. In Illinois, students must file Form IL-1040 if they were required to file a federal income tax return or if their Illinois base income is greater than their exemption allowance.
If you have worked in multiple states, you may need to file multiple state tax returns. Additionally, some cities, like New York City, charge city taxes on top of state taxes.
It is important to note that even if you are claimed as a dependent on your parents' tax returns, you may still need to file your own tax return. Your parents will need to contact the Internal Revenue Service (IRS) to determine if they can claim you as a dependent.
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Tax refunds
Students can get tax refunds even if they aren't required to file. For example, you may qualify for a refund if you worked a part-time or full-time job during the year, and your Form W-2 shows federal and state withholding. If you have student loans or pay education costs for 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.
There are two education tax credits that eligible taxpayers who paid higher education costs for themselves, their spouse, or dependents in 2021 may be able to take advantage of: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit. The AOTC could give a U.S. citizen or resident enrolled in college up to $2,500 each year, which they can use to help pay for tuition, food, housing, healthcare, and more. If the AOTC reduces the tax to zero, the taxpayer could receive a refund of up to $1,000. The Lifetime Learning Credit works similarly to the AOTC.
A student who works part-time or full-time but earns less than about $63,400 per year could qualify for the Earned Income Tax Credit (EITC) of nearly $4,000 to help subsidize their income. A parenting student with dependents might get another $2,000 from the Child Tax Credit (CTC). These benefits can quickly add up.
It's important to note that you have to file taxes to get these benefits. Filing taxes rarely has any downside, and you are not likely to owe any more money to the federal government. Additionally, most employers already withhold taxes from your paycheck. If your parent claims you as a dependent on their tax return, they can receive the education credit like the AOTC.
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Frequently asked questions
Students are not exempt from federal income taxes. If a student's income is greater than the Standard Deduction for the year, they will likely need to file a tax return. However, if their income is below the amount of the filing requirement for their age, filing status, and dependency status, they do not owe federal taxes and do not need to file a federal income tax return.
International students on certain visas (F1, J1, M1, or Q) are subject to tax withholding of up to 14%. If a student does not have one of these visas, 30% taxes will be applied to their account.
Scholarships and fellowships are not taxable as long as they do not exceed the cost of tuition, fees, and course-required expenses. Non-qualified scholarships and fellowships that are used for expenses beyond tuition and required fees may be subject to income tax withholding.
Students who pay for education costs may be eligible for education deductions and credits on their tax returns, such as loan interest deductions, qualified tuition programs (529 plans), and Coverdell Education Savings Accounts. The Lifetime Learning Credit is another benefit worth $2,000 per student per year for undergraduate, graduate, and professional study.
