College students that don’t work probably don’t need to file taxes, especially since most student loans are considered to be non-taxable (provided they are used for qualified education expenses) rather than income. And yet, there are a few reasons why college students may want to file an income tax return, mainly as a way to see some money back thanks to deductions. Of course, students that have a job (part- or full-time) will certainly want to file. But either way it’s important that they know which deductions may be used without raising red flags. And as a parent you can not only help to ensure that your students receive all the money they’re due, but you may also want to look into deductions that you can take in relation to college expenses for your kids. Both students and parents can save when college is a household expense. And here are a few helpful tips to help parents determine tax deductions for college students.
The first deduction that students should know about is the American Opportunity Tax Credit. It is available only to students that have less than four years of school under their belt, that enroll in one or more semesters of school within a tax year, and that maintain half-time status or better in a degree or credential program. It is available to eligible students for each year that they meet the criteria of the credit, and students may claim up to the first $2,000 of applicable expenses (tuition, books, equipment, etc.), as well as 25% of additional expenses (up to a total claim of $2,500 for a tax year). Similar to this is the Lifetime Learning Tax Credit, which allows students to claim 20% of qualified college expenses, up to $10,000, leading to a credit of $2,000. However, these two credits may not be claimed in the same year, so any students eligible for the American Opportunity Tax Credit should use it since the deductible amount is higher.
Students that find they are not eligible for the credits listed above (due to the number of years in school, the amount of money they or their parents earn, or felony convictions, just for example) may instead choose to deduct any tuition and fees they pay out of pocket, up to $4,000. Since this tax break is slated for termination at the end of 2013, now is the time to use it. In addition, any students that have started to pay back their college loans may deduct up to $2,500 in interest payments. Again, these types of deductions cannot be combined with others of the same type, so students need to consider each carefully before deciding which will be most beneficial.
As for parents, they may also claim any of the deductions listed above provided they are making applicable payments on behalf of dependent students. This, of course, can get a little complicated when it comes to the interest payments on student loans. In general, parents should expect that they will not be able to claim this last one for loans that are in the student’s name, even if they’re paying off the debt. It’s no surprise that federal income tax forms are complicated, and any time finances are co-mingled, as with parents paying for student expenses, claiming deductions can be tricky. You need only call the IRS or contact your tax prep specialist to ensure that you and your student get all the deductions you’re due.