Tax credits and benefits: A student’s guide

Tax time.

Those two words have struck fear in the heart of humankind for centuries. As tax season looms, there are several things that students should be aware of that could save them from getting headaches and maybe even save them a few dollars.

First, be aware that the tax code is a complicated system and the average student should not try to go it alone.

"Generally, I would recommend they have someone help them prepare their return." Linda Troyer, from Jackson Hewitt Tax Services, agreed.

Rhonda Richards, from H&R Block Tax Services, took it a step further and suggested that interaction with an individual is even more important than to simply have had your taxes done by someone else. She stated: "I always think it's important for this interview [with someone doing their taxes]."

Richards continued by adding that, "During the interview—when I'm interviewing someone—I can hear things [clues about the persons' financial situation], and I know that has a tax consequence and they don't."

It is important for students to be aware, however, of where they stand when they are filing their taxes.

"They need to make sure they're coordinating with their parents, before they do their tax return." Troyer said.

Students need to discern whether they could be claimed as a dependent or if they would be filed as an independent. This distinction is what is used to decide which tax credits they may receive.

Being aware of tax issues and credits is simply not enough to be prepared to do your taxes.

"Having a little bit of tax knowledge can be real dangerous. Because you don't know [for sure] and you either miss out on things or you overextend and think something's eligible for you, that you don't know the fine print—that it's really not." Richards explained.

That doesn't mean a student shouldn't learn about how taxes affect them, on the contrary. They should be aware of what credits and deductions are available and come prepared to speak with a qualified professional about credits they think they may qualify for.

For students, that means being aware of the Hope Credit (HC)—in conjunction with the American Opportunity Credit—and the Lifetime Learning Credit (LLC).

The HC acts as a refundable credit—where a student may actually receive additional funds back from the IRS, up to $1000, of money they have spent on tuition. Among other requirements the HC requires that a student be degree seeking and can only receive the credit for up to four years.

The HC is filed per person; a student with dependents also in college (for example middle-aged mother and her children) would be able to add those dependents as deductions on her form. It cannot be taken if you, yourself, are considered a dependent. That is to say, if a student can be claimed by their parents as a dependent (if a student is 18 and lives with their parents as a possible example), that student could not claim the HC; those students' parents would be the ones eligible to receive the credit.

The LLC, on the other hand, simply acts as a deduction of tax debt. A student would not receive additional funds from the LLC if it reduced their debt to below zero. It does not require a student to be degree seeking—a person could be taking courses for personal enrichment and receive this credit as a deduction.

Additionally the LLC has a maximum limit of $2000 toward tax deduction per tax return; not per person (dependents). However, unlike the HC it does not have a maximum number of years that it may be claimed, as the name suggests.

The way in which student loans affect independent students is also important.

"Student loans count as money that you've paid for tuition this year because, you have to pay that back." Richards explained. She continued and said, "The student loan interest that you pay is deductible on your taxes also; after you start paying that."

That means that if an independent student has taken out a loan this year, they can apply that amount towards their Education Tax Credit (which is the Hope Credit/American Opportunities Credit or LLC); since it is guaranteed that the loan will need to be repaid, it is considered "money spent" on education.

Pell Grants that a student receives (or additional money they do not have to pay back) can't be claimed as deductions and must be subtracted from the total tuition.

Students who have supported young children this school year may be eligible to receive a deduction from the Child Care Credit.

"If I have children and I'm putting them into daycare or in a preschool or something like that, then I get a deduction for that expense." Richards explained.

In order to receive this deduction, however, a tax payer needs to know the Employee Identification Number (EIN) or Social Security Number (SSN) of their daycare provider. In other words, the childcare provider must have declared the income of their childcare business on their taxes; the EIN and SSN proves to the IRS that payment for those services was made.

There is also a Child Tax Credit which works in a similar manner to the LLC, wherein it can only reduce your deduction to zero and will not provide a tax payer with additional funds.

 It is important to note that this year the usual deadline for taxes—April 15^th—has been pushed back until April 17^th.  As the IRS states on their website, "April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia."

 There are far more in-depth stipulations on who may or may not receive the tax credits that have been provided here. For a more comprehensive list, students should spend some time exploring the IRS website at www.irs.govand are urged to speak with a qualified tax preparer.