Attending college comes with various responsibilities. One of them is filing taxes. While fulfilling this task can be stressful and tricky, however, with proper planning strategies, it can be a positive experience. Some colleges will offer guidance on tax preparation. Some will even have professionals help students with tax filing. In this article, we provide 10 College Tax Planning Strategies for parents and students especially those that wish to consider scholarships.
1. Confirm your dependency status
Just because you are in college doesn’t mean you are independent. Your parents may still consider you a dependent. In fact, you can dependent until 24 years. So, you need to know whether you are dependent or independent. If you are dependent, your parents will pay tax for all expenses on your education. If you are independent, your income will be taxed.
Now, if you are dependent on your parents, they can rely on the tax credits. But, if they earn more than 440 thousands dollar annually, they won’t be qualified for the tax credit. In this case, there is no need to be considered dependent. But, there is a better alternative. You should claim to be independent. This will give you some tax advantages.
If your parents earn less, you should be dependent. This will give them an opportunity to save on taxes.
2. Ensure you get all required tax forms
You will be receiving several tax documents as well as forms. Ensure you get access to these forms. Whether they are from your college, former employer, or loan lenders have them arrive safely. Ensure these people or institutions have the correct address. You can also get some of these forms online. Furthermore, they can of much importance in writing scholarship essay especially if you need third parties to supplement your education fee.
3. Claim American Opportunity Credit
If you are an undergraduate and in your first fours since admission, you are eligible for this claim. You don’t qualify for this tax credit if you have been imprisoned for a drug crime.
4. Check lifetime learning credit for saving opportunities
With this tax credit, you can claim up to $2000 on education expenses that are qualified. But, you must be considered eligible. The qualified expenses include fees and tuition. There is no limit to claiming this credit.
5. Deduct education expenses
Education expenses such as fees and tuition allow deduction of up to $4,000 on the tax return. This reduces the taxable income. However, if your tax liability is zero, you get no money back.
A student, parents, or a spouse of a student can take this deduction. But, the deducted expenses must involve higher education. You can’t deduct living expenses.
6. Deduct student loan interest
This is another tax benefit you should explore. If you paid a qualified student loan, you are eligible to deduct up to $2,500 of the paid interest over the year. To qualify, the loans must be qualified, that is why you need an experienced writer near you to help you in scholarship essays. To include all this in writing. Loans from friends, employers, or family members do not qualify. Your income should be less than $80,000 when single. If you are married, it should be less than $160,000.
7. Consider scholarships
Managing scholarship funds is important to reduce taxes. Scholarships are considered tax-free. But, this applies only when the entire money is used on education expenses. These include fees, tuition, books, and other relevant equipment.
If you use any scholarship money on other expenses such as living, this money becomes your income. For example, if you received $10,000 scholarship, used $5,000 on fees and $5,000 on living expenses, then $5,000 is taxable income. So, using an entire scholarship on educational expenses will help reduce tax.
8. Carry health insurance
If you don’t carry health insurance, you will be penalized. You may be penalized 1% of the annual income if not 95% per person. If you are a member of special institutions, you are safe from such penalties. Also, if your income is too low, you are exempted from this law.
9. Consider tax requirements in different states
Tax requirements are different from one state to another. If you study in one state and work in another, be careful not to violate any law. There are also some tax benefits provided in every state as a result of technology on education. Take advantage of them. Some states may even exempt you from paying taxes. Just ensure you understand the tax system of every state.
10. Income and taxes
Your filing status will determine if filing a tax return is a necessity or not. If eligible, make sure you file a tax return.
You can make college less expensive. All you need is to have effective Tax Planning Strategies. We have provided 10 strategies. If you put them in mind while filing your taxes, you may reduce your tax bill. Just make sure you know of any available opportunity and utilize it to save more. However, start by understanding state laws on tax filing. This way, you will be acting in accordance with tax laws. Then, look for saving opportunities and get tax benefits. If you can compare the tax billing before taking advantage of available benefits and after, you will notice a big difference.