Being a student involves many consequences including financial and tax ramifications. I will touch on some points that the student status affects. Being a student usually means you are in a position that you have taken out student loans, received scholarships, grants or other forms of monetary assistance or you may being paying the bill yourself or with the help of family members.
As a student the IRS does not allow any special treatment for just being a student, other than a nice education credit. If you are a student, going to a college for at least 5 months a year and carrying what the school considers a full time load, usually 12-13 hours, your parents can still claim you on their income tax return as a dependent. This applies to students from the age of 18 through 23. Even if you are working, they can still claim your deduction and usually, since they are in a higher tax bracket, it would mean a larger refund for your family.
The American Opportunity Creditis a credit that allows up to $2500 of tuition, fees and course material costs. This is given to the person claiming the dependency, so if your parents claim you, they get the credit. This credit is allowed to be taken for the first 4 years of post high school education. If you are in a Master’s or higher education program, then there is the Lifetime Learning Creditto help you. Remember that if you are taking continuing education classes that assist you in your work, then the expense of taking the classes can also be a tax deduction. This would include the cost of traveling from you place of employment to your school, including parking fees and tolls, if they apply.
If you are claimed as dependent on someone else’s federal tax return, you may still be able to claim yourself on the Illinois income tax return, if your gross income for the tax year is$2000or less.
Many of our students are also parents, so do not forget that expenses paid for child care while you attend school, may be tax deductible also. Even if you have no earned income, the IRS gives a $250 permonth allowance for each month you are a full time student. The total child care amount allowed for the child care credit is $3,000for one child and $6,000for two or more. Check out IRS publication 503, Child and Dependent Care Expenses, for more details.
The State of Illinois also has a deduction for education expenses for dependent children. This is for children in grades K thru high school. The credit is for amount paid for tuition, book fees and lab fees. The first $250 paid is not counted but after that, the credit is25% of the amount paid up to a maximum credit of $500.
When if comes time to pay back those student loans, the interest is an adjustment against your income. The IRS allows the person who is legally obligated to pay back the loan to take the adjustment against their income. If you are obligated to pay it back, you can take the credit. If your parents paid the loan that is in YOUR NAME, you can deduct the interest but if they claimed you on their tax return, no one can claim the interest.
That is why once you become a student, before you do your own tax return, you should speak to your parents and seek out some additional tax advice. It just might save you and others, money and aggravation in the long run.
If there are any particular questions you have in reference to you as a student and tax or financial situations, drop a line to the paper and we will try to help you.
Until that time…