College and Taxes

The first time filing taxes as a college freshman can cause a lot of questions for the student and the parents and those questions can become very expensive if answered wrong causing you to file your taxes improperly.  Here are 5 common questions of 1st year college freshman.

  Attending a college outside your home state?  Where do you file state taxes?  The federal return is easy.  It needs to be filed with the IRS based on your permanent address.  State returns are a different animal.  Generally, a student files state returns with their home state.  If the student works in the same state as the college, and that state has income taxes which are taken out of the students pay then it is necessary to file what is generally known as a “Non Resident” state return in that state to receive a refund of the taxes taken out of the students pay.

  For students lucky enough to have been awarded scholarships.  Do you pay taxes on those scholarships?  Generally, you do not pay taxes on those scholarships if they are used to cover the cost of tuition and required fees.  Scholarship money in excess of required fees which is used for room and board, travel, research and equipment is taxable.  This amount should be included with wages even if the additional funds are not accounted for in a W2 form. 

  For those paying for college are there any credits or deductions available to you to reduce the cost of attending college?  There are two main credits.  The first is the American Opportunity Tax Credit.  This credit is good for the first 4 years of a student’s post-secondary education.  Post-secondary is a fancy way of saying after high school. This credit allows up to a $2,500 credit for filers with an adjusted gross income of less than $80,000 if filing singly or $160,000 filing jointly.  The second credit is the life time learning credit.  The credit 20% of the first $10,000 of college expenses up to $2,000.  It is used after the American Opportunity tax credit is used up.  You cannot take both credits in the same year for the same student.  Generally, you must have a modified adjusted gross income of less than $65,000 if filing single or $130,000 filing jointly. 

  Now that I know all about the taxes, when is my tax return due?  This one is easy.  Your tax return is due on the 15th of April.  If you are running short on time you can file for an extension.  The IRS provides an immediate 6-month extension.  Filing this extension is easy and can be done online. 

Finally, how do you file your taxes?  It is best not to use one of the big box, tax firms.  They pop-up every tax season in grocery stores, strip malls and temporary offices.  They charge a small fee to file and will try to “sell” you a product to get your return faster.  The IRS provides free tax filing that is available to most tax payers via the IRS website.  This method of filing is free and is generally more correct than the returns filed by the big box tax firms.  If you no longer qualify for free tax filing with the IRS or your tax situation begins to get complicated.  It is recommended that you employ a tax professional such as a CPA or Enrolled Agent.  Both have education and training in preparing taxes and will ensure your return is correct and filed timely.