Since students, generally, do not have full-time jobs or earn lots of money, they mostly stay away from filing taxes and its intricacies. Many do not see the need to keep up with the many tax laws that seem to contradict themselves; it’s just too much work. This approach is wrong and as a student, if you are not well-informed on your tax situation, it is likely that you are losing thousands of dollars to the IRS.
When/why you need to file a tax return
Students are not expected to file tax returns if they earn less than $12,000 per year. However, if as a student, you do part-time work and get paid, there’s a very good chance that income taxes are being withheld on your paychecks. You can confirm this by looking at your stub; if there is an entry for withholdings, then taxes are being withheld on your income.
Since taxes are already being deducted, it would be smart to file your tax returns—even if you earn less than $12,000, the standard deduction. That way, if the government is withholding too much of your pay, you can get a refund.
Know your dependency status and the benefits it offers your parents
If you are a full-time student under the age of 24, chances are good that your parents can claim you as a dependent on their tax returns. Claiming you as a dependent qualifies them for some tax benefits, e.g., Head of Household status, the Earned Income Tax Credit, Education Tax Credit, amongst many others. Glenn Sandler, CPA, is quoted as saying, “in previous years, claiming a dependent came with a personal exemption of $4,050 on taxable income. Some changes took effect from January 2018 to stop this, but as long as you have dependents, there are still benefits to be had.”
Once your parent(s) claim you as a dependent, however, you are ineligible to claim some tax benefits yourself, so you may want to reach out to a tax expert to figure out which arrangement works best for you and your family. For example, Sandler points out that, “while the 2018 Tax Cuts and Job Acts is somewhat complicated, it is clear that parents with incomes exceeding certain amounts will be better off not claiming dependents.” By remaining unclaimed, the students get to enjoy some educational tax credits; the parents do not qualify for these credits because of their income level.
Take advantage of education credits and deductions
There are some tax credits available to students that pay tuition to qualified educational institutions from their own pockets. The most notable ones are the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC). Note, however, that students that benefit from nontaxable scholarships are ineligible, and every student can only claim one of the credits per year. The AOC, for example, gives out a tax credit of up to $2,500.
Get tax assistance and stay informed on new developments
Stay informed on new policies and find out how they affect your expenses and your tax returns. Schools around the country have Volunteer Income Tax Assistance (VITA) programs. Through these programs, qualified students get free tax assistance from volunteers either on campus or in their communities.
If you feel like your case is a bit more complex and you need a professional touch, please reach out to tax experts and book a consultation session.
About G.I. Tax Service
Founded in 2013 by Glenn Sandler, CPA, G. I. Tax Service is America’s premier provider of year-round tax preparation and financial services including tax planning and small business formation assistance.