This is a continuation of The OCM Blog’s “College and Your Credit Score” series - a way to make heads and tails of your finances while you’re in school, so you can avoid any financial headaches once you’re done school. While we do believe you should seek your own financial advice at the end of the day, take some time to read our pieces on why maintaining good credit is important and some tips on spending smart during your college years, and keep reading this post to learn about how to make tax time less of a headache, especially if you have student loans.
April 15: it’s a day that many of us dread. It’s Tax Day, and for millions of Americans, it’s the day we have to pay the piper. For those of us with a decent-sized outstanding college loan, this can cause great trepidation. After all, we have to pay our college loan monthly. If that payment is itself substantial, writing a check for another large sum at tax time can decimate a family’s savings.Luckily, the federal government does offer some programs to give you credit for your student loan payments. There is also plenty you can do to use your loans to lessen your overall tax burden.
Total up your student loan interest deduction
This is an easy one to do. Essentially, the money you pay in interest on an educational loan should be tax-free. As with most things, there is a limit to how much you can deduct and what types of loans qualify for deductions, but this is an essential first step to claiming as much as you can for your taxes.
Take advantage of tax credits
If you are a current student already making tuition payments, you likely qualify for the American Opportunity Tax Credit. If you are a nontraditional student or are taking work skill courses, you may qualify for the Lifetime Learning credit. Either way, these can help you save a bit more come tax time. If you’re looking for more information on which credit works for you, the IRS’ dedicated education credits page gives you the lowdown on how you can determine which credit fits your situation.
IRS Form 8863 allows you to take education credits to lower your total tax owed.[/caption]
Loans in default will get paid from other income
Imagine that you file your tax return and see that you’re supposed to be getting a hefty sum back. However, after weeks of waiting for your check to arrive, you still haven’t received a thing. As it turns out, your return may run the risk of getting garnished due to a student loan in default. The truth is, failing to pay your student loans will have consequences beyond just your credit report. Make sure your loan payments are up to date before you file your returns!
Pell Grants aren’t taxable income
While it may sound a little disheartening, it’s the truth - many grants and scholarships must be recognized as income by the recipient. However, the Pell Grant program is a notable exception to this rule. So long as you are a degree candidate at the college and only use the funds to pay for tuition, fees, books, supplies, and equipment, you should be fine. However, it’s important to note that funds used to pay for room, board, or school-related travel incur taxable benefits, so ensure your Pell Grant is used as it should be.
Work-Study earnings are taxable income
Part of your FAFSA award may include working at your college or university in order to earn a certain amount of money to go towards your tuition. These work-study programs are federally underwritten, but they are designed to put the money earned in student's’ hands. It effectively works like any other income, and is taxed as such.
Ask a professional for help
While it is absolutely possible to do taxes on your own (finance majors, we’re looking at you), doing them on your own opens the possibility of missing something. Think of it like writing a paper: you could edit it on your own, sure, but having someone else read over it may give you an outside perspective. Having a tax professional at least look over your numbers is a way of having an “editor” for your tax return. It’s a great way to ensure that you are fully covered and have received every deduction to which you are entitled.
Again, we stress that it's important to seek professional help when it comes to getting your tax time ducks in a row. However, take a look at some of these tips, and see if you're able to apply them to your situation. Who knows, you might just owe Uncle Sam a little less this time around!