- Everything Teens and College Students Need to Know About Filing Taxes This Year
- When are teens or college students required to file taxes?
- What tax filing status should students use?
- Educational tax credits: Which should you claim?
- 2020 taxes and stimulus checks: Can college students qualify?
- More from Money:
- Filing Taxes as a College Student
- First Things First: What Are Taxes?
- Three Things to Figure Out to Start
- 1. Do You Have to File?
- 2. What’s Your Dependency Status?
- 3. What Forms Do You Need to File?
- Form 1098-T
- Form 8863
- Form 1098-E
- Our Tax Tips for College Students
- When to file
- Tax filing help
- Deductions and credits
- Qualified tuition programs
- IRA withdrawals
- Getting a nice tax refund? Make sure to save some of it in an online savings account:
- Tax Guide for College Students
- Dependency Status
- Tax Forms
- American Opportunity Credit
- Lifetime Learning Credit
- Deducting Higher Education Expenses
- Deducting Your Student Loan Interest
- Scholarships and Your Taxes
- Income and Your Taxes
- Free Tax Return Filing for College Students and College Graduates
- Options for Filing Taxes for Free
- Free Filing for Federal But Charge an Additional Cost for State
- Do College Students Have to File Taxes?
- What Happens if You Don’t File Taxes?
- Student Loan Interest Deduction
- Tuition and Fees Deduction
Everything Teens and College Students Need to Know About Filing Taxes This Year
Taxes may be an inescapable bane of being a working adult. But teens and college students shouldn’t ignore their W-2 forms, either. While a full-time high school or college student who earns money via a part-time or summer job might not need to file a tax return, spending a few minutes filling out the forms can mean significant financial benefits.
When are teens or college students required to file taxes?
A person who has an income of less than $12,400 — the standard deduction for 2020 — doesn’t usually have to file a federal tax return.
The exception is for those who qualify for the so-called kiddie tax — a rule that requires some taxes on investments owned by individuals under 19.
“Once you have at least $1,100 in investment income, you must file, and after $2,200, you start having to pay taxes at your parents’ tax rate,” says Yves-Marc Courtines, a financial planner in Manhattan Beach, Calif.
But as long as the money is income from a job, reported on a W-2 form, the kiddie tax doesn’t apply, so that gig as a camp counselor or lifeguard is in the clear.
Even though filing isn’t required for the person who earned less than $12,200, it’s still a smart thing to do. For one thing, says Dan Herron, a financial planner and certified public accountant in Pismo Beach, Calif, filing makes the IRS less ly to mistakenly think you’ve failed to pay taxes owed.
“The IRS gets upset when it sees a W-2, but no tax return attached to it,” Herron says. “If you have earned income, you should file.”
But perhaps more importantly, five minutes with TurboTax (or ten with a pencil) can pay off in multiple ways. First, a person who earned less than $12,200 last year probably doesn’t owe any federal or state taxes.
That means filing gets you a refund of any taxes your employer withheld from your paychecks. It may also help you access some tax credits that will boost the amount of money you’ll get back from the federal government.
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What tax filing status should students use?
Once you’ve decided it makes sense to file a return, you have to figure out dependency status. For high schoolers, that’s easy: if they’re under 19 and live with a parent for at least half the year, they’re dependents on the parent’s tax return.
But for college students, it’s more complicated. The IRS lets parents claim children as dependents up to age 24 if they’re enrolled in school, and most parents do so. But claiming a student as a dependent isn’t required, Herron says.
“Parents take students as dependents because they can,” he says. “You don’t have to. It’s often advantageous for middle-income parents, but do the math and see.”
He means financially advantageous: in addition to the dependent credit, parents of college students can qualify for some valuable educational tax credits if they’ve spent money on higher education.
But if your income is too high to take those educational credits (more details on them below), consider whether your college or graduate student has an income that’s low enough to benefit.
You’ll lose a $500 dependent credit, but your child could take a credit worth much more.
Educational tax credits: Which should you claim?
There are two major credits that college students and their parents should know about: the American Opportunity Tax Credit and the Lifetime Learning Credit. In most cases, you should prioritize claiming the American Opportunity Tax Credit first.
The AOTC is worth a maximum of $2,500 per student for each of the first four years of higher education: 100% of the first $2,000 in tuition payments and 25% of the next $2,000.
Those tuition payments need to come from either parent or child, so it’s wise to adjust any amount that comes from a 529 college savings plan or a grandparent so that there’s at least $4,000 left for parent or child to pay.
If the credit brings the tax owed to zero, 40% of any remaining credit, up to $1,000, is refundable.
The Lifetime Learning Credit is worth $2,000 a year per student for an unlimited number of years, so it can help pay for undergraduate, graduate, and professional study.
It’s particular useful after you’ve exhausted your four years for the American Opportunity Credit.
Taxpayers can choose which credit they want to take in a given year, and they can take different credits for different dependents — but they can’t take both credits for one student in the same year.
Eligibility for both credits begins to phase out for individuals who earn $59,000 a year and ceases at $69,000 a year (or $118,000 and $138,000 for couples filing joint returns). That’s the cutoff where it can make sense for a student to file independently, so they can access the credits.
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2020 taxes and stimulus checks: Can college students qualify?
Shifting dependent status could also help your student get pandemic stimulus money. Both rounds of pandemic aid, totaling $1,800, have gone to adults and children ages newborn to 16. Other dependents — and their parents — lost out. Someone who was a dependent age 17 or older in 2019, however, could get both stimulus payments as a tax credit by filing independently for 2020.
Joanne Burke, a financial planner in Vienna, Va., points to her daughter as an example. Burke claimed her daughter as a dependent on her 2019 taxes. In 2020, however, her daughter will file independently, and expects to see an $1,800 tax credit on her return.
This story has been updated to correct the amount of the standard deduction for the 2020 tax year.
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Answers to All Your 2021 Tax Questions, From Stimulus Checks to New Deductions
Filing Taxes as a College Student
Attending college is one step towards adulthood.
Unfortunately, with adulthood comes many adult responsibilities; filing your taxes.
Filing taxes, in general, can be tricky and complicated, but as a college student, it can present even more challenges.
We've put together some tips college students and first-time tax filers should take when it comes to filing taxes.
First Things First: What Are Taxes?
The U.S. government provides numerous services for its citizens, from public education to Social Security, national defense, Medicare, Medicaid, and other programs.
Taxes are the primary way that the government pays its bills. The Internal Revenue Service, or IRS, is the federal agency authorized to collect taxes on behalf of the government.
For most U.S. workers, taxes are automatically withheld from paychecks.
Other taxpayers, especially the self-employed, may pay quarterly estimated taxes.
Still, others simply pay their taxes in a lump sum on tax filing day, although there may be penalties involved.
Your filing status helps determine how much you have to pay in taxes, or if you even have to file at all, as not every worker has to pay taxes.
Tax filing statuses are single, married filing jointly, married filing separately, and head of household.
The head-of-household status is for unmarried people who maintain a home for a qualifying person, as defined by the IRS.
One thing to note:
Your tax return is the actual form that you complete and send to the government when you file your taxes.
Your tax refund is the money you receive back, if any, if your tax return indicates that you overpaid your taxes during the year.
Three Things to Figure Out to Start
Depending on how you answer these following questions, you may be able to put off filing on your own for a little longer. Lucky you.
1. Do You Have to File?
If you’re a dependent and a single filer, you generally don’t need to file a tax return if your earned income is below $12,400. If you have unearned income of at least $1,100, however, you will still have to file.
Earned income is the salary or wage you’re paid for working. Unearned income is passive income from things investments or rental properties.
If you’re a married dependent, the same income thresholds apply. But if your spouse files separately and itemizes deductions, you’ll have to file if your gross income is $5 or more.
If you earned income and had taxes withheld from your paycheck, you may still want to file, even if you earned below the mandatory filing threshold.
You may be entitled to getting that money refunded to you.
2. What’s Your Dependency Status?
You can be claimed as a dependent by your parents until you reach age 19. If you’re a student, that can be extended until you are 24.
Traditionally, parents claimed their children as dependents because it granted them additional tax exemptions.
For tax year 2020, the dependent exemption at one point was expected to be $4,300.
Your parents are still ly to claim you as a dependent if they can, as they may still be entitled to other benefits, such as the earned income tax credit.
If you have been claimed as a dependent, it means you are not eligible for the deductions or credits that your parents claim for yourself, as those can only be taken by one filer per year.
As a dependent, your income tax filing threshold is different as well.
For example, for 2017, single tax filers didn’t have to file a return unless their income reached $10,400.
3. What Forms Do You Need to File?
Here’s a list of the most common forms that pertain to filing taxes as a student:
Your employer will send you a W-2 at the end of the year. It will document your income for the year, along with any taxes that were withheld from your paycheck.
Your W-2 is the first step in filing your taxes, as it helps determine your taxable income.
Educational institutions must send Form 1098-T to any students who paid qualifying educational expenses during the year. Qualifying expenses include things tuition, fees or course materials.
You can use Form 1098-T to prove that you paid these expenses so you can qualify for various tax credits.
For example, if you use a 529 plan or IRA money to pay for schooling, you’ll have to demonstrate that is where the money went.
You’ll use Form 8863 to figure out if you’re eligible for either of the two educational credits, The American Opportunity Credit or the Lifetime Learning Credit.
If you pay interest on student loans, you may receive Form 1098-E.
Each lender that receives at least $600 in interest from you on your loan is required to send you Form 1098-E, which specifies the amount of interest you paid.
If you have more than one loan, you may receive a separate Form 1098-E for each loan.
You can deduct the interest reported on Form 1098-E when you file your taxes, up to the limit of $2,500 annually.
If you receive at least $10 in interest payments during the year, you’ll receive Form 1099-INT. This includes banks that might pay you interest on your savings accounts.
You’ll have to include interest reported to you on Form 1099-INT when you file your taxes.
Our Tax Tips for College Students
Filing for your taxes at any age can be a confusing and tedious process.
Follow some of these tips to simplify your process:
When to file
Taxes are due every year on April 15. In some years, this date is adjusted a day or two later so that it falls on a non-holiday weekday.
The earlier you can file your taxes, the better.
If you’re due a refund, this means you’ll get your money faster.
Filing early also takes the commonly unpleasant task off your to-do list.
Tax filing help
To make tax filing easier for yourself, see if your college offers free tax aid, as many do.
You can also use tax-filing software to help you navigate through the maze of tax regulations.
One of the best-known options is TurboTax, which offers both mobile and web applications.
If your tax situation is simple enough, you can file for free using TurboTax.
The same is true with TurboTax competitor H&R Block.
Both options allow you to take a picture of your Form W-2 to get the tax process started. H&R Block offers additional accessibility via the Kindle Fire application.
Or, you can go the old school route, and have an accountant help you file your taxes. Now might be the time to befriend some accounting majors.
Deductions and credits
Deductions and credits lower your taxable income. With a lower taxable income, you’ll pay less in taxes.
Deductions and credit work in slightly different ways.
A deduction is something you subtract from your income.
For example, the government allows every tax filer a standard deduction.
For tax year 2020, the standard deduction for single filers is $12,400. This means you get to lower your taxable income by $12,400 right off the bat.
One of the most useful tax deductions for students is the student loan interest deduction.
This deduction phases out if you’re a single taxpayer with a modified adjusted gross income between $70,000 and $85,000.
The maximum amount of student loan interest you can deduct is $2,500 per year.
Credits are more valuable than deductions because they are a dollar-for-dollar reduction in the amount of actual tax you have to pay.
For example, if you owe $2,000 in taxes but have a $2,000 tax credit, your tax falls to zero.
There are two main tax credits for students:
- The American Opportunity Credit (formerly known as the Hope Credit), and
- The Lifetime Learning Credit
The American Opportunity Credit covers 100 percent of the first $2,000 of qualified educational expenses. The credit also covers 25 percent of the next $2,000, for a total available credit of $2,500.
The Lifetime Learning Credit covers 20 percent of your first $10,000 in eligible educational expenses. However, you cannot claim it if you are a dependent.
Whether you use tax software or file for yourself, be sure to keep all your receipts.
Receipts allow you to construct an accurate picture of your tax situation when you file. They can also remind you of deductions you should be taking.
Perhaps most important of all, receipts are necessary evidence in the unly case that you are audited by the IRS.
So, what are relevant receipts you should definitely keep? Any receipts that document your educational spending.
If you pay for books, courses, school supplies, tuition, or anything else that furthers your education, you should keep those receipts.
Most educational scholarships are tax-free. However, you must be eligible for a degree at a qualified educational institution.
The IRS also requires the following to qualify for tax-free treatment:
- It must not exceed your qualifying educational expenses
- It cannot be used for other expenses, including room and board
- It doesn’t require services in exchange, such as teaching or research
Qualified tuition programs
Qualified tuition programs are also known as 529 plans. Money in a 529 plan grows tax-free.
If the money is taken out and used for qualifying higher education expenses, it can be withdrawn tax-free as well.
In most cases, you can’t take money an individual retirement account before age 59 ½ without paying a 10 percent penalty, on top of ordinary income tax.
But, the IRS grants an exemption for withdrawals used to pay for higher education expenses. You’ll still pay income tax, but you can avoid the additional 10 percent penalty.
Bear in mind that any money you take an IRA for educational purposes may affect your financial aid, since it is considered to be income.
Filing taxes as a student involves reporting all of your income to the government, just a non-student filer.
Student filers have additional factors to consider.
You may be entitled to certain educational deductions or credits that can reduce your tax liability, or that of your parents if you are claimed as a dependent.
You may also be able to use scholarships or 529 college savings plans to pay for schooling without incurring additional taxes or penalties.
Since tax filing can be complicated, consider getting help. Many software programs are available. You may have access to free tax help at your college as well.
The goal of all tax planning is to pay the least amount of tax that is legally required of you. So, do your homework and learn about all the options available to you as a tax-filing student.
Getting a nice tax refund? Make sure to save some of it in an online savings account:
Tax Guide for College Students
If you’re a first-year college student, you may need to start thinking about how to file taxes for the first time and if college tuition is tax-deductible. It can be challenging to navigate the U.S. tax code while juggling your course load, a job, and your student loans.
While some colleges have an office or student center with professionals who can help you with your taxes, many do not.
If you have such a resource, you should take advantage of it — these types of services can cost hundreds of dollars once you’re school.
Working with a tax professional at your school or elsewhere will also ensure you take advantage of any deductions and tax credits you qualify for.
Overall, there are four steps you’ll need to take to file taxes as a college student:
- Learn your dependency status
- Compile your tax forms
- Claim tax credits
- Claim higher education tax deductions
- File your taxes
While college is an opportunity to exercise your independence as an adult, you may still be considered a “dependent” for tax purposes.
You’ll need to have a conversation with your parents or guardians to establish your dependency status. If you’re a student and your parents are claiming you as a dependent, you aren’t eligible to claim deductions or credits yourself.
Nonetheless, there could be advantages to remaining a dependent for as long as you can while you’re in college.
“Dependent students may want to have their parents claim them instead of claiming themselves.,” said Walt Minnick, Financial Aid Specialist at Orange Coast College. “The tax benefits are usually higher for the parents than for the student, which can better benefit the family as a whole.”
According to the IRS, your parents can claim you as a dependent until you are 19, but once you’re a student, that dependency status can be extended until you’re 24.
If this is the case, you can still file taxes, but you need to indicate that someone else can claim you as a dependent on your tax return.
Furthermore, you can’t claim any credits or deductions your parents are already claiming on their return.
At the beginning of the new year, and before the April 15 tax filing deadline, you’ll receive various tax documents and forms for filing a return. These forms may come from employers from the previous year, student loan lenders, your college and any financial institution you maintain a retirement account with if you have one.
It’s important to wait until all this paperwork arrives before you file taxes. If you file too early, there could be discrepancies in your taxes that you’ll need to fix later.
If you’re away at school, ask your parents to keep an eye out for any documents that get sent to your permanent address instead of to you at school.
If possible, write a list of everyone who would send you a document.
Contact these institutions to confirm your correct address, including spelling and apartment number, so they are sure to be sent to the correct place. Some of these forms and documents are available online.
W-2: You’ll receive this from your employer; it contains any taxes that were withheld from your paycheck. If you don’t receive one, contact your employer to confirm the address.
Form 1099: A 1099 tax form is a record that some entity or person other than your employer gave or paid you money. If you did any freelance or contract work to earn income but weren’t formally employed, whoever paid you should send you this form. You are only required to use this form if you receive miscellaneous funds over $600 in the year.
Form 1098-T: This is your tuition statement, which your college should provide.
It will include information you’ll need to report to claim education credits — such as tuition paid, related expenses, any scholarships or grants you received, and any adjustments from last year.
If you haven’t received this form, contact your school to request it. The IRS offers instructions for this form as well as an example.
Form 8863: You’ll need this to see if you qualify for education credits, including the American Opportunity Credit and the Lifetime Learning Credit. Here is an example of Form 8863 with directions on how to complete it.
Form 1098-E: You’ll need this to deduct any interest you paid on a qualified student loan during the tax year. If you paid more than $600 in interest, your lender should send you this form. IRS.gov provides an example of this form and directions on how to claim this deduction.
American Opportunity Credit
You can claim the American Opportunity Credit tax credit if you’re an undergraduate and have not completed the first four years of post-secondary education as of the beginning of the year.
You’ll need to be in a program at a recognized post-secondary educational institution working toward a degree or certificate. According to IRS.gov, you need to have at least half the full-time workload for at least one of your academic periods.
Also, you don’t qualify if you’ve been convicted of a felony drug offense.
This credit is a modified version of the Hope Credit. The updated version allows required course materials — books, supplies, and equipment) — as qualifying expenses, allows the credit to be claimed for four years instead of two, and broadens the range to include taxpayers with higher incomes.
This would allow a maximum annual credit of $2,500 of the cost of tuition, fees and course materials paid during the taxable year for each student. According to IRS.gov, the credit is 40% refundable up to $1,000, which means you’d get money back even if you don’t owe taxes.
You’re eligible to claim this credit if your modified adjusted gross income is $80,000 or less, or $160,000 or less if you’re filing jointly.
Lifetime Learning Credit
The Lifetime Learning Credit allows you to claim a credit of up to $2,000 on qualified education expenses. Un the American Opportunity Credit, this is nonrefundable. You won’t get money returned to you, but it can reduce what you owe.
Un American Opportunity, the Lifetime Learning Credit is good for postsecondary education and any courses to acquire or improve job skills. Plus, a felony drug conviction doesn’t make you ineligible.
You’re eligible for this credit if you’ve paid for qualified education expenses and if you’re considered an eligible student.
For this credit, the amount of your Lifetime Learning Credit is gradually reduced and eventually phased out if your modified adjusted gross income (MAGI) is between $58,000 and $68,000 if you’re single or between $116,000 and $136,000 if you’re filing jointly. You cannot claim this credit if your MAGI is $68,000 filing independently or $136,000 filing jointly.
You aren’t eligible for this credit if you’re a dependent or you’re married filing separately.
You can’t claim both the Lifetime Learning and American Opportunity credits. You also can’t claim one of these credits along with deducting your tuition and fees.
There’s no limit to the number of years you can claim this credit, un the American Opportunity Credit, which doesn’t allow you to take the credit on the same student for more than four years.
Deducting Higher Education Expenses
College tuition is now long tax-deductible. Up until 2017, you could deduct up to $4,000 of qualified college costs, including tuition and other qualified expenses. But according to the IRS, “The tuition and fees deduction is not available for tax years after 2017.”
Nonetheless, you can still claim applicable tax credits as listed above and you can deduct your student loan interest as you pay off your student loans after college.
Deducting Your Student Loan Interest
If you have a qualified student loan, you can deduct up to $2,500 in interest, and it’s claimed as an adjustment to your income. A qualified student loan is a “loan you took out solely to pay qualified higher-education expenses,” according to the IRS.
To qualify for this deduction:
- You must have paid interest on a qualified student loan in the tax year 2019
- You’re legally obligated to pay interest on your student loan
- You aren’t married but filing separately
- Your MAGI is less than the specified amount (in this case, $70,000 single or $140,000 jointly)
If you’re MAGI is over $70,000, the deduction will phase out until it is eliminated at an MAGI of $85,000 if filing alone or $170,000 if filing jointly.
Form 1098-E should be provided for you by your lender. They may mail you a paper copy of this form, but many lenders also allow you to access your form online by signing into your account. If you have trouble accessing your form, contact your loan lender.
Scholarships and Your Taxes
Looking for scholarships and grants should be on every current and prospective college student’s mind. But what happens at tax time? Here’s what you need to know:
Your scholarships, grants, and fellowships are considered tax-free only if you are using the entire amount to pay for tuition, fees for enrollment, books, supplies and equipment required by your college.
If you used a portion of that scholarship for “incidental” expenses room and board, you’ll need to claim that as part of your income. For example, say you received a $5,000 scholarship. You use $2,500 to pay tuition, and the other $2,500 to pay room and board. You’ll need to report that $2,500 you used for rent and food as taxable income on Form 1040.
The IRS offers more information on scholarships, grants, and fellowships and taxes.
Income and Your Taxes
You might not need to file a tax return if your income is not above a certain amount depending on your filing status. Use the IRS’ questionnaire on whether or not you are required to file a tax return.
If you worked during the past tax year, file a 1040 or 1040A tax form. Filing Form 1040EZ means you can’t claim any education credits. However, if you had any money withheld from your paycheck, you’ll be getting a refund. Plus, you may qualify for credits.
If you filled out the FAFSA for financial aid and worked a qualified job on campus as part of work-study, you’ll receive a W-2 and report this on your taxes.
Out-of-state students might have earned income in two states. If you are working at school but maintain a job at home during summer or holiday breaks, you’ll need to file a tax return in both states. According to Minnick, “ state students will ly have to file three returns — for the host state, the home state, and federal taxes.”
Free Tax Return Filing for College Students and College Graduates
For college students and recent graduates, filing taxes can feel overwhelming. But even though it may be difficult, filing taxes is important. There are many tax credits you may be able to take advantage of as a college student or recent college grad. This includes the Student Loan Interest Deduction, American Opportunity Tax Credit (AOTC) and Lifetime Learning Tax Credit.
Fortunately, most college students and recent college graduates have simple tax returns and can use free filing tools to file cheaply and easily. However, keep in mind that some free file tools offer free federal filing, but charge for state taxes. If you live in a state with income tax, that could affect the software you choose.
In some cases, it’s not clear if your filing is actually free. For example, some services don’t tell you whether you qualify for a free tax return until you reach the end of the tax return questionnaire.
Others may try to sell you on additional options, often pitched as a way to get a bigger refund. Before you start filling out your taxes, it’s important to check to make sure you’re eligible to file for free.
Options for Filing Taxes for Free
- You can use the IRS Free File tool, which allows you to file your taxes yourself at no cost if you earned less than a maximum amount.
- If you need a hand, the Volunteer Income Tax Assistance (VITA) program offers free tax help to people who make $56,000 per year or less.
Find a VITA site near you.
- Many colleges partner with VITA to offer students free tax assistance. Check with your college or nearby colleges to learn more.
- There are several services listed below that offer free tax return filing.
Each service has different requirements for free filing, so check those requirements before you start. For example, Jackson Hewitt offers free federal and state filing if you have no children or dependents, have a joint income below $100,000 and take the standard deduction.
Many programs limit free filing to people who use the online self-service version of their tax preparation tools.
Free Filing for Federal But Charge an Additional Cost for State
- Online Taxes
- Tax Hawk
Pro Tip: If you have student loan debt and receive a tax refund, put that money toward your debt. And check out 70 ways to pay off student loans faster.
Do College Students Have to File Taxes?
Filing taxes can be a time-consuming and annoying process. Yet while most people have to put in the effort to file, not everyone is required to do so. If you’re a student, there’s a chance that you aren’t required to submit a tax return.
For example, independent students who meet all of the following requirements do not have to file taxes.
- You’re under 65
- You don’t have any special circumstances that require that you file (such as running a small business)
- Your earnings are under the standard deduction for your filing status
2020 Standard Deduction
Married, Filing Separately
Married, Filing Jointly
Head of Household
If your parents claim you as a dependent, you must file a tax return if your total earned income is greater than the standard deduction. In 2020, the standard deduction for most dependent students is the greater of $1,100 or the sum of $350 plus the amount of their earned income (up to $12,400).
But even if you aren’t required to file taxes, filing is usually a good idea. Most employers will deduct income taxes from your paychecks. Even if you don’t make enough that you’re required to file, you may be eligible to claim a refund from the government.
Filing a tax return also means you may be able to claim the many tax benefits that the government provides to students, such as tax credits and deductions being in college.
There is no penalty for filing taxes when you aren’t required to, but there may be penalties if you fail to file when required. So, if you’re unsure, you should file just to be safe.
What Happens if You Don’t File Taxes?
It’s important that you file your taxes if you’re required to file. Failing to file can lead to hefty penalties.
If you don’t file your taxes by the April 15th deadline, the IRS will charge a penalty equal to 5% of the amount you owe for each month that the return is late, up to a maximum of five months. The minimum penalty for filing more than 60 days late for 2020 is $435.
If you file your taxes but fail to pay the amount owed, the IRS charges a penalty of 0.5% of the amount due each month, up to a maximum penalty of 25% of the amount due.
The good news is that these penalties only apply if you owe money to the IRS. If the IRS owes you a refund, there typically aren’t penalties for failing to file, you simply won’t get the money the IRS owes you.
There are a few ways to avoid these penalties. For example, you can file for an extension, which gives you more time to file your taxes. If you don’t file for an extension but still file late, you can plead your case to the IRS if there are extenuating circumstances explaining the missed deadline, such as a stay in the hospital that stopped you from preparing and filing.
Students who fail to file will miss out on tax incentives offered by the government to students. On top of the above penalties, failing to file could impact your financial aid in the next school year.
If you report different information on your tax return or your FAFSA, or don’t file a tax return when your FAFSA indicates that you should have, your school may notice the conflicting information.
If this happens, you won’t be eligible to receive financial aid until you resolve the conflicting information, which means filing a tax return and paying any penalties.
One of the many reasons students should file their taxes is that the government offers tax credits and deductions for qualifying students.
Some of these programs let you reduce your tax bill by reducing your taxable income. Keep in mind, however that the IRS does not allow double-dipping when it comes to education tax benefits.
Different expenses must be used to justify each deduction or credit.
Others are tax credits that you can use to pay your tax bill or receive as a tax refund.
Student Loan Interest Deduction
The student loan interest deduction is a tax benefit that applies to current college students and graduates who have student loan debt.
Requirements for the student loan interest deduction:
- You paid interest on a qualifying student loan
- You were enrolled in school on at least a half-time basis
- There is a legal obligation for you to make those interest payments
- Not filing as married, filing separately
- No other taxpayers claim you or your spouse as a dependent
- Your Modified Adjusted Gross Income (MAGI) falls below a threshold that changes yearly
If you qualify, you can deduct the lesser of $2,500 or the amount you paid in interest from your taxable income.
The student loan interest deduction reduces the adjusted gross income on your federal tax return. You don’t have to itemize your loan interest payments to claim the deduction.
The American Opportunity Tax Credit is available to independent students and parents of dependent students.
To qualify for the credit, students must meet these requirements:
- Be pursuing a degree or other recognized educational credential
- Enrolled in school on at least a half-time basis for one academic period (such as a semester)
- Not have completed four years of higher education at the start of the tax year
- The American Opportunity Tax Credit or the Hope Scholarship Credit is limited to four tax years per student
- No felony drug convictions by the end of the tax year
- Your Modified Adjusted Gross Income (MAGI) falls below a specified threshold
- You are not claiming the Lifetime Learning Credit for the same tax year
Taxpayers who meet these requirements may claim the credit, or a portion of the credit, their income.
In 2020, single taxpayers may claim the full credit if their Modified Adjusted Gross Income (MAGI) is $90,000 or less. The credit phases out completely at a MAGI of above $90,000. Married taxpayers may claim the full credit with a MAGI of $160,000 or less, with it phasing out completely at a MAGI of above $180,000.
The credit can cover up to $2,500 of your tax liability each year. You receive a credit for 100% of the first $2,000 paid toward education each year and 25% of the next $4,000 paid. If the credit reduces your tax liability to $0, you can receive 40% of the remaining amount as a tax refund.
The Lifetime Learning Tax Credit can reduce your tax bill by up to $2,000 and applies to people who pay for tuition or undergraduate, graduate, and professional education. You can claim the Lifetime Learning credit every year that you qualify.
A student must meet these requirements in 2020 to qualify:
- You or your dependent must pay qualified education expenses for higher education
- The eligible student must be enrolled at an eligible institution (college, university, trade school, or other forms of higher education)
- The eligible student is you, your spouse, or your dependent
- Single filers must have a MAGI of $58,000 or less for the full credit (fully phased out at incomes above $68,000)
- Married filers must have a MAGI of $116,000 or less for the full credit (fully phased out at incomes above $136,000)
- You are not claiming the American Opportunity Tax Credit for the same tax year
If you qualify, you can claim 20% of the amount paid toward qualifying expenses, up to a credit of $2,000. However, the Lifetime Learning Tax Credit is not refundable.
Note: For tax year 2021, the income limits for the Lifetime Learning Credit will increase to match the income limits for the American Opportunity Tax Credit.
Tuition and Fees Deduction
The tuition and fees deduction allows taxpayers to deduct up to $4,000 spent on education from their taxable income. the student loan interest deduction, this deduction is an above-the-line exclusion from income. wise, you can claim the Tuition and Fees Deduction even if you don’t itemize. Keep in mind that the Tuition and Fees Deduction has been repealed for tax years after 2020.
Qualified expenses for this deduction include:
- Tuition and fees
- Required textbooks and supplies
- Qualified expenses paid with student loan proceeds
Some non-qualifying expenses include:
- Room and board
- Medical expenses
- Expenses paid with tax-free scholarships
- Expenses paid for with tax-free earnings from 529 plan distributions
Eligibility requirements in 2020:
- Modified Adjusted Gross Income under $65,000 (the maximum deduction is halved for MAGIs between $65,001-$80,000)
- The education expenses were incurred at a qualifying institution
- The taxpayer isn’t listed as a dependent on someone else’s return
- Cannot file as married, filing separately
- The taxpayer isn’t claiming the American Opportunity Tax Credit or Lifetime Learning Tax Credit
- No other taxpayer claims the above credits for the same expenses
The Earned Income Tax Credit (EITC) is a refundable tax credit given to people who have small amounts of earned income in a tax year. For example, students who work part-time may qualify for the EITC if they meet certain requirements.
Who qualifies for the EITC:
- Cannot file as as married, filing separately
- Have investment income under $3,650
- Have earned income and Adjusted Gross Income (AGI) under limits filing status and number of qualifying children
Number of Qualifying Children
3 or more
Single, Head of Household or Qualifying Widow(er)
Married, Filing Jointly
The maximum credit amount will depend on the number of children you have.
Number of Qualifying Children
3 or more