Published: Monday, February 6, 2012
Updated: Tuesday, February 7, 2012 03:02
This is the time of year when taxpayers start receiving documents and information to be able to prepare and file their federal and state income tax returns. Being a student puts one in a position to look for additional information that needs to be reported. Students have tuition payments, as well as expenses for books, materials, fees and sometimes room and board. These can be very expensive out- of-pocket legal obligations for students but we have to be careful about which items the IRS will allow as a deduction.
As a student at a university trying to obtain a degree, the IRS has a special deduction called the American Opportunity Credit. It is a dollar for dollar credit against your taxes based on expenses for tuition, fees and materials. The maximum credit is $2,500 and 40 percent of the amount not used to offset a tax liability may be refunded to you.
For 2011, there are also allowances for interest paid on student loans. This is an adjustment to income and will lower the amount of income that you are being taxed on. There is also an adjustment to income based on tuition and fees paid. This is separate from the previously mentioned American Opportunity Credit. Also, you can take one or the other but NOT BOTH. These credits and income adjustments are subject to limitations based on income, filing status and citizenship, to name a few.
If you are a student and have to work, this can create a special tax situation. Being a student at least 19 and no older than 23, you may still be able to be claimed as a dependent on your parent’s tax return. Usually, they are in a much higher tax bracket than the student, so claiming the dependency is much more advantageous to them. If you do work and receive a W2, do not rush out to file your tax return and claim your own exemption. This could be a very expensive and time-consuming mistake. Talk to your parents and/or your tax advisor before you do. Usually, room and board expenses are NOT DEDUCTIBLE.
If you are a student going to school in a state other than your normal state of residency and are working, you may have questions as to the state in which you should have taxes withheld. Usually, going to an out-of-state college is considered a temporary absence and the tax laws of your normal state of residency apply. You can opt out of having state taxes withheld from the state the school is in, especially if your regular residence is one of the nine states that does not have a state income tax. Otherwise, you may have to file tax returns for multiple states.
You should be receiving your W2 forms by the end of January. Other forms you should be looking out for are the 1098-T Tuition Statement. This shows what the school reports was received or billed as tuition. As a student, I know how expensive going to school is but take your time and make sure you have all the necessary documentation. A few minutes of proper preparation can save you hundreds of dollars in the long run.
Best to you all, Tony the Taxman