7 Tax Tips For College Students (and Their Parents)
College is already expensive enough. The last thing you want to do is get hit with a tax bill or miss out on tax refunds while in school. The tax code related to education can be confusing for students and parents alike. With proper planning, however, there are several opportunities to mitigate taxes and take advantage of tax credits. Here are some of the most important tax concepts and strategies every college student should understand.
1. Who Claims the Student?
Before discussing credits or deductions, it’s critical to determine who claims the student on their tax return. In many cases, a college student is still claimed as a dependent by their parents if:
The student is under age 24,
Is a full-time student for at least five months of the year,
Does not provide more than half of their own support.
However, if that criteria isn’t met, it is likely that the student will not be claimed as a dependent on their parents return. If a parent claims the student as a dependent, the parent is generally the one eligible for education credits. The student typically cannot claim these credits on their own return if they are a dependent. This is a common area where mistakes are made, especially when students file first and unintentionally block the parent from claiming valuable credits.
2. Common Education Credits: American Opportunity Tax Credit (AOTC) & Lifetime Learning Credit (LLC)
Education credits are often the largest tax benefit available to families paying for college. Below are the two most common credits that students take advantage of:
American Opportunity Tax Credit (AOTC)
The AOTC is available for the first four years of post-secondary education and can be worth up to $2,500 per year per student. The key aspects to this one are:
The credit is equal to 100% of the first $2,000 of qualified educational expenses and 25% of the next $2,000 (max of $2,500). Up to 40% is refundable ($1,000).
There is an income phaseout based on AGI (usually applies to parents claiming the deduction for their dependents).
Limited to four tax years per student (first four years of post-secondary education).
Must be enrolled at least half-time.
Student cannot have any felony drug convictions.
Lifetime Learning Credit (LLC)
The LLC is available for undergraduate, graduate, and continuing education. This is usually claimed if the AOTC is not available to be claimed for any reason. The key points to this one are:
Worth up to $2,000 per return (not per student). It is a flat rate of 20% of qualified educational expenses (up to $10,000).
This is a nonrefundable credit.
There is no limit on the number of years it can be claimed.
Only one education credit can be claimed per student per year. So this cannot be combined with the AOTC.
3. Qualified Educational Expenses (and What Doesn’t Count)
Not all college costs qualify for tax benefits. When discussing things like the tax credits, it is very important to understand what is considered a “qualified educational expense”. Qualified expenses generally include:
Tuition
Required enrollment fees
Required course materials (books, supplies, equipment)
Nonqualified expenses include:
Room and board
Meal plans
Transportation
Insurance
Parking and student health fees (unless required)
Understanding this distinction is essential for both education credits and scholarship planning. Most colleges issue Form 1098-T that reports your expenses, but it should not be relied on by itself. Box 1 of the 1098-T reports total expenses incurred, but not always all expenses (like required books and supplies). If you have additional expenses they should be tracked and recorded.
4. Scholarships and Grants: Tax-Free Doesn’t Always Mean Tax-Free
Scholarships and grants are only tax-free to the extent they are used for qualified educational expenses. This means that the amounts used for tuition and required fees are generally tax-free. However, amounts used for room and board are considered taxable income and should be reported on your tax return.
In some cases, it may actually make sense to intentionally report part of a scholarship as taxable income in order to free up qualified expenses for the American Opportunity Tax Credit. This strategy can result in a net tax benefit, even though your income increases.
5. Student Jobs and the FICA Tax Exemption
A nice benefit of being a college student is that campus employment is often exempt from FICA taxes (Social Security and Medicare). This generally applies when (1) the student is enrolled at least half-time and (2) the job is with the school they attend. This exemption does not apply to off-campus jobs and may not apply during school breaks, depending on enrollment status. This would save you 7.65% that would’ve been paid in FICA taxes.
6. Employer-Provided Education Assistance (Section 127 Plans)
Some employers offer tax-free educational assistance under Section 127 of the Internal Revenue Code, and this benefit is often overlooked by students. Under a Section 127 plan:
Employers can provide up to $5,250 per year in educational assistance
The benefit is tax-free to the employee
It can be used for tuition, fees, books, and supplies
The education does not have to be job-related
This makes Section 127 plans especially valuable for students working part-time or full-time while attending school. Unlike education credits, these benefits are excluded from income entirely and do not require complex calculations.
7. Filing Requirements for College Students
Even if a student is claimed as a dependent, they may still need to file a tax return. Common reasons a student may need (or want) to file include:
Earned income is above the filing threshold (standard deduction amount)
Taxable scholarship income (or want to make a portion taxable to take advantage of the AOTC)
Withholding from wages that will be refunded
Conclusion
Getting an understanding of taxes while in college can save you money now and help you be more confident as you move out into the world. If you want to discuss these tax strategies or topics with a professional or have any other questions answered, please reach out to us for a free consultation call.
Disclaimer:
The information provided is for educational purposes only and should not be relied upon as tax or legal advice. Always consult a qualified professional before making tax or financial decisions.