Filling out tax forms is no fun, but your attitude may change once you learn the Internal Revenue Service (IRS) may owe you money. To receive that money, called a tax refund, you just have to fill out a few tax forms and file them with the IRS. Unfortunately, the tax code can be a bit tricky. In fact, it is more than two million words long according to the Tax Foundation. This page will help guide you through the tax maze to find the tools necessary to get any money the government may owe you.
Education Credits & Tax Deductions
Tax credits and deductions for education allow you to either pay less in taxes or, in some cases, get a refund for furthering the education of a student. Tax credits are the most powerful way to save, as they reduce the amount of tax you pay by one dollar for each dollar of credit for which you qualify. Tax deductions, however, reduce your taxable income by one dollar for each dollar of deduction for which you qualify. For instance, if you’re in the 25 percent tax bracket, each dollar in deductions would save you 25 cents in taxes owed.
You have many options for how you can apply your qualified education expenses to these credits and deductions. However, you normally cannot use the same expenses for multiple deductions or credits. It is important you pick the tax break that benefits you the most. Certain credits or deductions can only be used a limited number of times while others do not have a limit. If all of this sounds overwhelming, don’t worry. We explain common tax deductions and credits for education below and later resources are shared to help you prepare your return.
A student’s a parent or spouse may claim the American Opportunity Tax Credit (AOTC) if they claim an eligible student as a dependent. A student may claim the AOTC if no one else claims them as a dependent.
Who Is Eligible
The student must be pursuing a degree or credential, be enrolled at least half time for at least one academic period in the tax year, not have claimed the AOTC or the former Hope credit for more than four tax years and must not have a felony conviction as of the end of the tax year. To qualify for the full credit, modified adjusted gross income (MAGI) must be $80,000 or less for those filing single or $160,000 or less for those filing married filing jointly.
The AOTC allows you to claim 100 percent of the first $2,000 in qualified education expenses per eligible student each tax year. You can also claim 25 percent of the next $2,000 in qualified education expenses per student each tax year. Qualified education expenses are generally classified as tuition, fees and other related expenses. Additionally, the AOTC allows expenses for books, supplies and equipment necessary for a course of study. Room and board, insurance and other living expenses do not qualify. The tax credit will offset your tax liability until you reach zero tax due. Any leftover credit after your tax due reaches zero is 40 percent refundable.
How to Apply the Credit
To claim this tax credit, you’ll need to use IRS Form 8863 titled Education Credits (American Opportunity and Lifetime Learning Credits) to calculate the credit amount for your situation. First, you will need to complete Part III of the form separately for each eligible student for which you are claiming a tax credit. You will need your student’s form 1098-T available to answer certain questions on this form, as well as a complete total of all qualifying education expenses. Then fill out Part I for the AOTC and place the results on your form 1040 or form 1040A as instructed.
The Lifetime Learning Credit (LLC) can be claimed by a parent or spouse if they claim an eligible student as a dependent or the student can claim the LLC themselves if no one else claims them as a dependent.
Who Is Eligible
An eligible student has to be taking courses at an eligible educational institution, taking courses to improve job skills, obtain a degree or certification, and must be enrolled at least one academic period that began in the tax year. If you are claiming the AOTC, you cannot claim the LLC. To claim the full credit, your MAGI must be $52,000 or less for single filers or $104,000 or less for married filing jointly filers.
The LLC allows you to claim 20 percent of the first $10,000 of qualified education expenses as a tax credit per taxpayer. This credit is not refundable, so you must have a tax liability to claim this credit. For this credit, qualified education expenses include tuition, fees, student activity fees that all students must pay and other related expenses for eligible students. These expenses must be required for enrollment or attendance at an eligible educational institution to qualify. Living expenses such as room and board, insurance and transportation do not qualify for the LLC.
How to Apply the Credit
To claim the tax credit, you’ll need to use IRS Form 8863 titled Education Credits (American Opportunity and Lifetime Learning Credits) to calculate the credit amount for your situation. First, you will need to complete Part III of the form separately for each eligible student for which you are claiming a tax credit. You will need your student’s form 1098-T available to answer certain questions on this form, as well as a complete total of all qualifying education expenses. Then fill out Part II and place the results on your form 1040 or form 1040A as instructed.
The tuition and fees deduction allows a person to deduct qualified education expenses for a qualified student. The student could be your spouse, dependent or yourself as long as someone else cannot claim you as a dependent. Those filing returns as married filing separate do not qualify.
Who Is Eligible
You can claim this deduction even if you don’t use itemized deductions. You must have MAGI of $130,000 or less if filing as married filing jointly or $65,000 or less if filing as single to fully claim this deduction. To qualify, you or your spouse cannot be a nonresident alien for any part of the tax year unless you elected to be treated as a resident alien for tax purposes.
You can deduct up to $4,000 in qualified education expenses from your income. This deduction considers qualified education expenses to consist of tuition and particular related expenses required in order to attend a qualified educational institution. Related expenses must be required to be paid directly to the institution in order to attend and can include student activity fees and expenses for course-related books, supplies and equipment. Qualified institutions are determined by their eligibility to participate in a student aid program administered by the US Department of Education. You cannot use expenses to double benefit by using them for this deduction and another deduction or credit.
How to Apply the Deduction
You will need to complete IRS Form 8917 (Tuition and Fees Deduction) to claim this deduction. Once you complete this form, enter the amount determined on line 6 of Form 8917 on line 34 of Form 1040 or line 19 of Form 1040A.
Whether you are eligible for tax free status of employer-provided educational assistance will depend on how your employer structures their program.
Who Is Eligible
Your employer’s program has to be an educational assistance program as defined by the IRS. Your employer will have to tell you if their program is qualified or not. If you qualify through your employer’s program, you only have to ensure you spend the money according to the eligibility rules.
Educational assistance benefits are defined as payments made for tuition, fees and other similar expenses, supplies, equipment and books. A person qualifies for $5,250 of these benefits tax free. Any additional amounts will be taxable. These benefits qualify as tax free if your education or training furthers your capabilities. The education does not have to be work related or part of a program that results in a degree. Benefits paid for expenses for related meals, lodging, transportation or the cost of supplies you keep after the course is complete are considered taxable.
Benefits are not tax-free if used for classes involving sports, games or hobbies unless they are directly related to your employer’s business or they are required as part of a degree program. You cannot claim other tax credits or deductions with any expenses paid with money you received tax free from this benefit.
How This Applies to My Taxes
You do not apply this deduction from wages yourself. Instead, your employer will not report up to $5,250 in eligible expenses on your W-2 as wages. For instance, if you earned $50,000 in wages and had $5,000 in eligible education expenses paid by your employer, your W-2 would report not report $55,000 in wages even though the payments you received from your employer throughout the year totaled $55,000. Instead, your W-2 will only reflect $50,000 in wages. Any expenses above $5,250 will be reported as wage income on your W-2 unless it is considered a working condition fringe benefit.
Students may be eligible to exclude income from scholarships, fellowship grants, grants and tuition reductions if they meet certain eligibility requirements.
Who Is Eligible
The student must be a degree seeking candidate at an eligible educational institution. There are no income limits for these reductions of income and only the person receiving the benefit qualifies for the reduction in income.
Scholarships, fellowship grants and grants are only tax free if:
- The amount received is less than or equal to your qualified education expenses, and
- It is not designated for non-qualified expenses such as room and board, and
- It is not a form of payment for teaching, research or other services that must be performed to obtain a scholarship or grant
The following do not do not qualify for tax free treatment:
- Room and board
- Clerical help
- Equipment or other expenses not required to attend an eligible educational institution
Tuition reductions may be tax free. For education under the graduate level, including primary, secondary, high school and undergraduate students, you must meet one of the following relationships with the institution providing the benefit to qualify for tax free status. You must fit one of the following four classifications:
- Employee of the eligible educational institution providing the benefit
- Were an employee but retired or left on disability
- Are the widow or widower of a person that died while an employee or an employee who retired or left on disability
- Are the dependent or spouse of an individual in one of the other three situations
For graduate students, tuition reductions are tax free if it is provided by an eligible educational institution and you perform teaching or research activities for the institution for which you are a graduate student.
How This Applies to My Taxes
You be applying a credit or deduction. Instead, you will not report the income from qualifying scholarships, fellowship grants and grants on your tax return. To figure how much you should not include in your income for the tax year, use Worksheet 1-1 (Taxable Scholarship and Fellowship Grant Income). For tuition reductions, read the Qualified Tuition Reduction section in Chapter 1 of IRS Publication 970 to figure how much you should exclude in your income.
Tax-Free Tuition Savings Plans
Tax-free tuition savings plans offer ways to save money for future education expenses and usually result in tax-free distributions. Although contributions are normally not deductible, earnings grow tax-free if used for qualified education expenses in most cases.
Qualified Tuition Program (QTP)
You might know Qualified Tuition Programs (QTPs) as section 529 plans. QTPs allow contributors to prepay qualified education expenses or to contribute money to an account that will eventually be used to pay qualifying expenses. While money contributed to these accounts does not qualify for a tax credit or deduction, all future earnings will grow tax free as long as the money is in the account. Earnings can be taxable, but only if money is not used for qualified higher education expenses at an eligible educational institution. Contributions cannot exceed the amount necessary to pay for qualified higher education expenses.
Coverdell Education Savings Account (ESA)
Coverdell Education Savings Accounts (ESAs) are trust or custodial accounts. These accounts are set up for the sole purpose of paying for qualified education expenses of a specified person called a beneficiary. When established, the account must be designed as an ESA, the beneficiary must be under 18 years old or have special needs and there must be a document in writing to create and govern the account which must meet certain requirements. Contributions to ESAs are not deductible and total contributions for one beneficiary cannot exceed $2,000 each year. Distributions to the beneficiary used for qualified education expenses are completely tax free but earnings may be taxed on distributions used for other purposes.
Education Exception to Additional Tax on Early IRA Distributions
Distributions from an Individual Retirement Arrangement (IRA) account before age 59½ normally require the payment of a 10% additional tax as a penalty for early withdrawal. Although the 10% additional tax may be waived for distributions taken for qualified higher education expenses, you will still be required to pay typical income taxes on the distributions, if applicable. Qualified education expenses include tuition, fees, books, supplies, and equipment required for attendance at an eligible educational institution. Room and board may also be eligible if paid for a student that attends at least half-time. Expenses only qualify if you pay for yourself, your spouse, your child or their descendants.
Education Savings Bond Program
If you have Series EE and Series I bonds that were issued after 1989, you may be able to exclude any interest redeemed from those bonds if the money received is used to pay for qualified higher education expenses during the year. This benefit can only be fully claimed by those who have MAGI of $77,200 or less for those filing single or $115,750 or less for those filing married filing jointly. You can calculate the amount of non-taxable interest by filling out IRS Form 8815 titled Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989.
Other Tax Breaks For Education-Related Expenses
For tax free treatment, you must have a qualified loan made by a qualified lender and use those funds to attend an educational institution. The loan must have a provision that part or all of the debt will be cancelled if you meet certain conditions. See IRS Publication 970 chapter 5 to learn more.
Refinanced loans may qualify, too. A refinanced loan qualifies if it is made from an eligible educational institution or a tax-exempt organization and the loan entices students to work in a career or area that has unmet needs. Services must be provided for a governmental unit or tax-exempt 501(c)(3).
According to the IRS, repayment assistance is tax free if received from the National Health Service Corps Loan Repayment Program, a state education repayment program eligible for funds under the Public Health Service Act or a state run loan repayment or forgiveness program that provides increased availability of health services in underserved or health professional shortage areas.
IRS Forms Students & Their Families May Need
If you are a student yourself or a parent of a student, you’re probably wondering what forms you’ll need to file your taxes. Here are the forms you may need to start:
To fill out the tax forms listed above, you’ll need information others will send you. This information normally arrives on the official tax forms listed here:
Foreign Students Studying in U.S. May Need to File IRS Tax Forms
“International student” can mean a US resident studying outside of US soil, or a non-US resident studying in the US. Let’s look at the issues facing non-US residents first.
Non-U.S. residents studying or teaching in the U.S. must follow a tricky set of rules learn whether they must file tax forms with the IRS.
3 Situations Where Foreign Students Should File Tax Returns
You almost certainly should file a tax return if you, as an alien student or scholar, receive income from any of these sources:
Taxable Scholarship or Fellowship
A scholarship or fellowship is taxable if it exceeds your qualified education expenses, its terms don’t require you to use it for education purposes, or it isn’t payment for teaching, research or similar. See IRS Publication 970 Chapter 1 to learn more.
Other Taxable Income
If you worked at a non-school-related job such as in the retail or service industries, your income may be taxable and you almost certainly need to file a tax return. See IRS Publication 519 Chapter 2 to learn more.
Tax-Exempt Income By Treaty
Income exempt by treaty is unusual. You should receive a notice from the income source that the funds you receive are tax exempt. If you suspect the funds are, then contact the payer or an experienced tax professional to learn if the funds are exempt. See IRS Publication 901 to learn more.
Income that is not taxable because of a treaty must be reported on a U.S. income tax return even though no income tax is due on the U.S. income tax return.
6 Situations Where Foreign Students Don’t Need to File Tax Returns
Nonresident alien students may not need to file a tax return with the IRS if the only income came from five sources.
Read on to learn more about the income and tax filing rules for foreign students and scholars.
Which Tax Form Should Alien Students Use?
If you must file a tax return, you might wonder which form to use. The answer to that question is easy depending on whether the IRS considers you a Resident Alien or Nonresident Alien. People on U.S. soil who are not U.S. citizens are considered aliens.
Students who completed their visa applications properly are almost certainly resident aliens. For tax reasons, you are a resident alien if you meet one of two conditions. The first is if the U.S. Citizenship and Immigration Services (USCIS) issued you a Form I-551, also known as a “green card.” Alternatively, you are a resident alien if you have a “substantial presence” in the U.S. or are a student or teacher with an “F,” “J,” “M,” or “Q” visa.
Resident aliens must file either a Form 1040, 1040A, or 1040EZ.
The IRS considers people present who do not have a green card or an “F,” “J,” “M,” or “Q” visa as nonresident aliens. Nonresident aliens must file either a Form 1040NR or 1040NR-EZ.
Which Income Should Alien Students Report?
Which income alien students should report can be another tricky issue depending on their status as either a resident or nonresident.
Resident aliens report their entire worldwide income on their income tax forms (mentioned above). Student can claim income exclusions, as mentioned in the section “6 Situations Where Foreign Students Don’t Need to File Tax Returns” above.
The type of income a nonresident alien student earns while in the U.S. matters. The IRS divides nonresident alien income into two categories — FDAP or ECI. Which category your income falls into determines how much tax you may owe.
FDAP income is fixed when it is paid in amounts you can expect. Examples include interest, dividends, rents, royalties and similar types of passive investment income. You report FDAP income on page 4 of Form 1040NR.
ECI has some connection to U.S. trade or business. This applies if you earn income as an employee, or earn a profit as a business owner while you’re physically present in the U.S. You report ECI on page 1 of form 1040NR.
You probably don’t know what “capital gains income” are, and it is likely this paragraph will not apply to most nonresident alien students. However, you need to know if the U.S. capital gains rules apply to you or you risk a significant IRS penalty for misreporting your taxes.
A capital gain is the accounting term for the profit you pocket when you sell something for a price greater than your cost of purchase. A capital loss is the opposite of a capital gain. Capital gains and losses commonly apply to stocks, bonds, and property, although it could be almost anything. Each country taxes capital gains and losses differently.
Nonresident alien students in the U.S. might be subject to U.S. capital gains taxes, or their home country’s taxes. Which country gets to tax your capital gains will depend on several factors, including:
- How long you’re physically present in the U.S.
- Whether you received a U.S. scholarship
- If you were employed in the U.S.
- The amount of your capital gains and losses
Consult with a tax professional if you made or lost a lot of money selling something you owned while you studied in the U.S. to learn if U.S. tax laws apply to you.
How Many Exemptions Can a Foreign Student Claim?
Resident alien students can use the same exemptions as U.S. citizens using Schedule A of Form 1040. Or, you can claim the standard deduction if you don’t itemize.
Nonresident alien students claim only one personal exemption. However, if someone in the U.S. is claiming you as a dependent on their tax return, you may not claim a personal exemption. There are exceptions to the alien exemption rules for Canadians, Mexicans, South Koreans, and residents of India, and students who claim dual citizenship.
U.S. Citizens Studying Abroad Need to File Tax Returns
U.S. students studying abroad are still citizens of the U.S. As such, they still have to file tax returns. In fact, the rules remain exactly the same since all income earned by a U.S. citizen, regardless of where it is earned, is considered taxable. Your tax return will need to be filled out in U.S. dollars, so any income or expenses based in foreign currency will have to be converted back to U.S. dollars using the yearly average foreign exchange rate.
Tricky Tax Issues for Military Students & Veterans
Veterans and active military students face very specific tax situations that aren’t discussed commonly. Some of these situations are more complex than others, but they’re all important to understand if they affect you personally. Here’s what you need to know or where to go to learn more.
ROTC students may get paid education and subsistence allowances as part of their ROTC program. Payments for education and subsistence allowances are considered excluded items and are not taxable on your income tax return.
VA Education Benefits
Payments you receive from the VA for education, training, or subsistence are tax free. Don’t include these payments as income on your federal tax return. However, there may be limits to your tax benefits.
Service Academy Cadets
Generally, payment reported on Form W-2, box 1 to a cadet or midshipman at an armed services academy is pay for personal services, and is not tax-exempt. However, some payment for services is exempt under certain circumstances.
Where Students Can Find Free Preparation Tax Advice
Figuring out how to maximize your tax benefits for your education expenses can be a daunting task, even after understanding the basics covered here. Even if you think you have found the best combination of benefits, you may want to have a seasoned professional double check your work. After all, a tax refund could be on the line.
Luckily, there are many resources available that can either help you prepare your tax return or answer your tax questions for your specific situation. Don’t be afraid to ask for help. These professionals exist to help you figure out these complex issues.
If you can’t figure out what to do next on your taxes, consider calling your college’s career services office to see if they offer tax preparation assistance. Even if they don’t offer help directly, they can likely point you to an organization that can assist.
Colleges and universities know that international students face many challenges when filling out US tax returns. For that reason, many campus international offices will offer resources to help international students with their taxes. Call your local office to see how they can help you.
Believe it or not, some fraternities and sororities offer tax assistance help. For the best chance at finding a fraternity or sorority that can help you, check with your college or university to see what business or accounting related Greek organizations are on campus.
During the spring semester, make sure to read those school emails you normally immediately delete. Your college or university will normally send an email promoting a tax workshop or tax seminar that students can attend. Take advantage and ask questions at the end of the presentation.
Your school or local community may have a Volunteer Income Tax Assistance (VITA) program you can visit. They offer help to those who make $54,000 or less per year and are staffed by IRS-certified volunteers. These centers offer free basic tax preparation.
The IRS provides resources on its website about how you can file your taxes for free.
Glossary: 20 Tax Terms Students Need to Know
The act of putting money into a particular account, usually a tax advantaged account, for the purpose of paying future education expenses.
Reduces the amount of tax you owe by one dollar for each dollar of tax credit you receive and may be refundable.
Reduces your taxable income by one dollar for each dollar of qualified tax deductions claimed and reduces your tax liability based on your tax rate.
The act of putting something off. Often refers to temporarily postponing federal student loan payments until a later date.
According to the IRS, a qualifying child or a qualifying relative. Use the IRS “Who Can I Claim as a Dependent?” Interactive Tax Assistant to learn if you can claim someone as a dependent.
The act of taking money out of a particular account, usually a tax advantaged account, for the purpose of paying education expenses.
Not allowing expenses in relation to tax credits or tax deductions or excluding a person from qualifying from a credit or deduction.
A deduction for each dependent that lowers taxable income. For 2015, exemptions are $4,000 per qualified dependent except for those who reach the Personal Exemption Phaseout (PEP) threshold.
The amount of money spent to pay for something. For instance, the amount of money spent on tuition is often considered an education expense.
The act of submitting a tax return to the IRS or applicable state taxation authority either electronically or through the mail.
Generally money provided to aid someone in furthering education or research. May be tax free if certain criteria are met.
Nullifies debt owed on student loans after meeting certain requirements. May result in taxable income on your tax return.
The result of adding back certain deductions, such as student loan interest, to your Adjusted Gross Income (AGI) and is used in calculating certain tax items.
The amount of money withheld for taxes in excess of actual tax owed to the government after filing your tax return.
An amount of money paid to you for money you already spent. For instance, education expenses that your employer will pay after you pass a class.
Often refers to an individual retirement arrangement (IRA) account that has been funded from a previous workplace’s retirement account such as a 401(k).
A form the IRS provides that you must fill out with your tax return if you have certain tax situations such as a particular type of income, deduction or credit.
Definition varies depending on particular credit or deduction. For the Lifetime Learning Credit, an eligible student must be enrolled in one or more courses at an eligible educational institution.
Something that is subject to tax. For instance, taxable income is income on which tax must be paid.
A resource provided by the IRS to aid in calculating information in order to determine a situation or compute a number in relation to taxes.
This resource offers a high level overview of ways to save on taxes by using tax credits, tax deductions or other tax benefits for education expenses.
This resource states how the American Opportunity Tax Credit has changed based on legislation and how you can use the tax credit to save on taxes.
This resource shares how student and their parents can help reduce the cost of higher education through tax benefits. While the information is dated (2010), you can use this to further research ways to save.
This is a very detailed resource, 97 pages in total, that shares almost everything you need to know about tax benefits for education when preparing your 2015 tax return.
You will need to use this form is you are claiming the American Opportunity Tax Credit or the Lifetime Learning Credit.
Links to the answers of three common education expense tax questions. Read through the answers if this is your first year with education expenses.
This resource explains whether a scholarship or grant is taxable and how to report it if it is taxable.
Special income rules apply to non-U.S. students, trainees, scholars, teachers, researchers, exchange visitors, and cultural exchange.