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| Financial Literacy in Action |
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| Ten Things College Student Should Remember
at Tax Time |
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- Don’t wait until the last minute
- Getting an early start is the best way to avoid
problems and get the advice you need. If you determine
that you need help with your tax return, you may be
able to get help for free. On some college campuses,
free help might be available from the business and/
or accounting department. Another free service is
provided by the Internal Revenue Service, which in
many communities has set up Voluntary Income Tax Assistance
sites. Free income tax advice will be much easier
to obtain in February than in April.
- Write it out in pencil first - Until you
get the hang of it, prepare a “draft”
return first. Go over the draft carefully until you
are sure there are no errors and then file your “official”
return.
- Be Aware of Gifts from Uncle Sam -
College students filing tax returns should be
sure to take advantage of credits and deductions available
to undergraduates or their parents (whoever claims
the student as a dependent is the one who the government
allows to use the credit). Only one of these credits
or deductions may be used per family.
- High education expenses deduction -
This deduction is available to families with adjusted
gross incomes up to $130,000. Deductions save
you less on your tax bill than do tax credits
(see below) because, deductions only reduce the
amount of income that is taxed, while a credit
reduces the actual tax.
- Lifetime Learning Credit - This credit
allows the filer to take a credit equal to 20%
of the student’s tuition, room, and other
related expenses. At present, $2,000 is the maximum
credit a taxpayer may claim. The amount a taxpayer
may claim as a Lifetime Learning Credit is gradually
reduced for taxpayers who have modified adjusted
gross income between $40,000 ($80,000 for married
taxpayers filing jointly) and $50,000 ($100,000
for married taxpayers filing jointly). Taxpayers
with modified adjusted gross income over $50,000
($100,000 for married taxpayers filing jointly)
may not claim a Lifetime Learning Credit.
- Hope Scholarship Credit - The maximum
credit allowed under this plan is $1,500 or up
to 100% of the first $1,000 of tuition and fees
and up to 50% of the second $1,000. Only undergraduates
in their first two years of college are eligible.
The amount of the Hope credit for 2004 is gradually
reduced (phased out) if a taxpayer’s modified
adjusted gross income (MAGI) is between $42,000
and $52,000 ($85,000 and $105,000 if you file
a joint return). A taxpayer cannot claim a credit
if one’s MAGI is $52,000 or more ($105,000
or more if you file a joint return).
- Depending on the state where you spend summers and
where you go to college, you may be considered residents
of either state or both states and required to pay
taxes in one or both states.
- You may only use the 1040 EZ if you claim yourself
as dependent. Before filing the 1040 EZ, make certain
that no other family member is claiming you as a dependent.
- Be aware that you must pay taxes even if your college
reduces your tuition by the amount you earn at a job
on campus. If your college or university is not withholding
taxes for a work-study arrangement, consider putting
some money aside to pay taxes.
- Look into taking out a 529 account as a means of
saving for college, while reducing your taxes. All
of a 529 account's earnings are exempt from federal
tax when they are withdrawn if they are used for qualified
education expenses. This means that, unlike the taxes
you have to pay on earnings from regular stock investments,
you won't pay any tax on the 529 account earnings
unless you end up using the money for something other
than higher education. Earnings are currently tax-deferred
in most states, as well.
- For tax purposes it’s important to know all
sources paying your college tuition. Grant and loan
money is generally tax-free, but not in every case.
Tuition paid by 529 accounts doesn’t count as
college expenses because the government has already
given you a tax break on them. With regard to other
loans, you may or may not be able to deduct interest
costs.
- Tax preparers warn students that they should carefully
monitor their earnings to make sure that they qualify
for every possible tax advantage, but not go so far
that they might lose the tuition money provided by
the university. It’s always best to speak with
the financial aid specialists before doing anything
that might effect your scholarship standing.
- After completing your tax return, DON’T mail
it right away. Give it until the next day, when you
should recheck the math, make sure you included all
the forms, signed them in proper places, and made
a copy for your records.
- File a return even if you don’t have to
- You may have earned a small amount of money
over the last year, so little that you don’t
have to file a return. However, you should because
if you’ve had money withheld, you’re entitled
to a refund.
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