College is a confusing time for many. It is a period in their lives where students learn the ropes of adulthood, which means becoming more aware of their responsibilities once they become working professionals. Some students may even already be earning their own money while still in school.
College students are now at a period where they are learning the ropes about managing personal finances. It is important to have adults guiding them so that they are aware of their tax responsibilities and exemptions. This makes the transition to adulthood a more straightforward process for students as they begin paying for student loans and making their own money.
Are You a Dependent of Your Parent/Guardian?
There are specific requirements for claiming college students as dependents. The child must meet the IRS qualifications to qualify:
- The college student must be younger than 24 years old on the last day of the tax year. They should also be younger than the adult or their partner unless the student has a permanent and total disability.
- The student must also have lived in the same residence as the guardian for more than half of the year. This rule exempts temporary absences due to schooling.
- The dependent should be the child, stepchild, foster child, sibling, half-sibling, step-sibling of the guardian. The student may also be a descendant of the previously mentioned.
- The parent or guardian should have provided more than 50% of their support. These include necessities such as food, clothing, shelter, education, medical expenses, and even transportation costs.
- The student must also be a U.S. citizen, U.S. resident, U.S. national, and those from Canada or Mexico. For adopted children, there may be some exceptions to accommodate them.
One benefit of going independent is the ability to claim your tax credits and other benefits yourself. Note that independents have more responsibility on their plates, including consulting with tax relief services to resolve penalties and other concerns. Additionally, parents are more likely to have better tax benefits, so this may be better for you while you are still a student.
Do College Students Need to File Tax Returns?
College students who are not dependents of their parents or guardians and earn income from their own jobs usually need to file a tax return. If you make more than the standard deduction for single individuals in that year (which was $12,400 in 2020 for both job earnings and investments), filing is a requirement. Not filing incurs penalties on your tax bill, which you will have to pay on top of the taxes you owe.
Even if you are not required to, it is a good idea to still file a tax return. If your employer withholds taxes from your salary, you may get a tax refund from it that you could miss out on otherwise. It is good practice to check state laws regarding taxes, too, as guidelines may differ from state to state.
What Tax Benefits Do College Students Get?
There are two education tax credits that the government offers. You are only allowed to claim one of each of these.
Lifetime Learning Credit
LLC offers a maximum of $2,000 for the qualified expenses of eligible students. Note that this is a non-refundable tax credit, which means that you cannot claim the money. You can only have it subtracted from what you owe.
The upside to this credit is that you are not limited to a certain number of years to claim it. Even if you are not currently an undergraduate student, are a part-time student, or are taking postgraduate courses, you can still claim it.
Note that you still must be enrolled for an academic period at the start of the tax year to be eligible. However, individuals whose modified adjusted gross income is $69,000 or higher are not qualified for LLC.
American Opportunity Tax Credit
On the other hand, the American opportunity tax credit, or AOTC, offers up to $2,500 in credits for undergraduate students in their first four years in college. Students from recognized schools are qualified for this credit. It covers tuition, learning materials, and similar fees but excludes nonrequired fees such as housing and medicines.
Your MAGI must also be $80,000 or lower to get full credit. Take note that those with felony drug convictions are not qualified for AOTC.
Understanding your tax responsibilities and benefits as a college student gives you an easier and quicker time to become an independent and responsible taxpayer. This knowledge helps you stay on top of your taxes and keep an accurate record of them.