College is an exciting time in life when teens are making the transition to adulthood. You might be living away from home but aren’t entirely independent of your parents yet financially. When you start working a job at college, taxes can be a little tricky because you have to figure out whether or not you can be claimed as a dependent on their taxes or file your own.
Taxes can be confusing but knowing how to speak with a tax professional and what questions to ask to understand what you are paying for is critical. I don’t pay for any service unless I know what I am paying them to do, at least generally. Reading and educating yourself on how to function well as an adult is how to become successful as an adult.
Let’s talk about taxes to better understand how it works!
How Taxes Work As An Adult
Taxes can be filed individually using online tax software like H&R Block or TurboTax by a taxpayer if you are comfortable taking on the risk of filing taxes for yourself. For filers with uncomplicated and straightforward returns, this is a cost-saving method and can be an efficient method. However, filers that have dependents, mortgages, tax credits, or deductions, and are planning on itemizing deductions should consider hiring a tax professional because you don’t want to miss potential tax savings or misfile and get hit with a large tax bill later on or face an audit.
The annual tax filing date is April 18th, so you have to file before then or face a penalty. File your taxes on time even if you can’t pay the tax bill right now out of pocket. The IRS allows you to make a payment plan with them. The penalty for filing late is 5% per month up to 25% of the amount of your unpaid taxes. The form used to file the federal return is Form 1040. Tax forms usually are issued at the beginning of the year, and it’s important to wait to file until you have all of your documents together. Update your address with all of your employers, banks, lenders, and college before the beginning of the year to ensure you receive copies of the forms you need.
Claiming allowances and deductions as exemptions mean that less money is withheld from your paychecks to cover the amount of taxes you owe. The more you claim, the less is withheld from your checks. Most students can claim themselves as an exemption but don’t have other exemptions. Speak with your parents about exemptions and how many they claim for themselves and their household.
When you start your first job with an employer, they will have you fill out a W-4 statement that asks questions about your individual tax filing status to determine how many exemptions you should be claiming. This needs to be updated annually, when you change jobs, or when your life situation changes like marriage, divorce, or birth of a child. If you claim too many exemptions on your W-4, you will owe money to the IRS at the end of the tax year rather than getting a refund. If you don’t claim enough exemptions, you are giving the government an interest-free loan on your money, but you’ll get it back via a refund after you file your taxes.
Don’t compare your tax refund to someone else’s, even if they are in a similar financial or familial situation because you don’t know how they have structured their taxes on their W-4 or Form 1040.
Tax Breaks for College Students
College is a significant investment and can be made easier by taking advantage of tax credits and deductions. Tax credits are applied directly to the amount of taxes owed instead of reducing the income subject to taxes.
The two major tax credits for college students are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC), but you can only choose one to claim, so be mindful and find the best option for your needs. Both require Form 8863 and 1098-T (from your school).
The AOTC is a maximum credit of up to $2,500 for the first 4 years of school and can cover tuition, fees, and course materials. A huge thing to note here is that transportation, parking, room and board, medical, and insurance are not eligible for this credit.
This first $2,000 of qualified expenses are 100% covered by this credit, and 25% of the next $2,000 paid. What’s interesting is that this is refundable up to 40% even if your tax liability is zero for the year!
There’s an income limit to claim the full credit, less than $80,000 modified adjusted gross income for singles, and $160,000 for married filing jointly.
The Lifetime Learning Credit (LLC) is less restrictive but can only be used for tuition and expenses. There is no limit to how many years of schooling you can claim this credit. Students must be enrolled for at least one term each tax year but don’t have to be enrolled at least half time, like the AOTC. This tax break isn’t eligible for a refund if you have zero income that year and the income restriction is $69,000 for singles and $138,000 for married filing jointly filers.
How to Get Started Filing Your Taxes
Start by seeing if your campus has free tax filing services or someone you can ask questions of, and then set an appointment to ask questions or get help filing if you aren’t being claimed as a dependent by your parents. Students can be claimed as a dependent until 24 and non-students until 19.
When I was in the military, we were allowed to use the on-base tax preparers for free and discounted rates, which saved us a lot of money on preparation fees. I learned so much from the tax preparers about choosing a great tax professional and questions to ask before hiring someone. Learning how to file taxes at a young age can help form great habits into adulthood.
Have a conversation with your parents about what your tax situation looks like and if they plan on claiming you as a dependent because how you file your taxes or if you file your taxes relies on what they plan on doing most times. Developing an open relationship with your parents about personal finance can help you learn a lot about life as you get older and provide you with valuable insights.
The tax forms you may need before speaking with a tax professional are:
- W-2: This comes from any employers you worked for during the tax year and shows how much tax was withheld from your paychecks. If you worked more than one job, you’ll need to have multiple W-2’s.
- Form 1099: This is a form that shows income earned from freelance, side gigs, or contract work and is sent to you if you made more than $600 for the tax year.
- Form 1098-T: This is a statement from your college that shows how much tuition and expenses, scholarships and grants you received, and previous years adjustments have been recorded for that tax year.
- Form 8863: This helps filers determine if you are eligible for education tax credits.
- Form 1098-E: This form is used for students that have had to pay over $600 interest on student loans during that tax year.
Other Tax Tips for College Students
- Scholarships, grants, fellowships, and other monies received from outside sources for the purposes of paying for college expenses are tax-free only if used for tuition/fees, books, school supplies, and education-based equipment. Any money used towards things like room and board should be reported as taxable income using Form 1040.
- If you are attending school out of state, you may have income to report in two states if you have a job at school and one at home while on breaks. This means filing three returns: federal, home state, and school state.
- Students need to file taxes if not claimed as a dependent on someone else’s taxes AND making more than $12,000 per year in taxable income OR $18,000 if you are eligible to file head of household status.
- If you are claimed as a dependent, you still must file if you make more than $1,050 in unearned income from interest or dividends or you have worked a job where taxes were withheld from your paychecks.
- If you file your own taxes but are claimed as a dependent, indicate that you are a dependent on your tax forms and don’t take the tax breaks we discussed in this article. Your parents are eligible to claim those tax breaks on your behalf.
- Electronic filing is the preferred method for most filers because it gets processed quicker and funds can be deposited directly into your bank account without needing to wait for a paper check to be mailed that you deposit yourself.
- Simple tax returns can be filed for free by a professional at tax preparation services like H&R Block and TurboTax.
- Taxes: Money paid to the state or federal government from an employee’s paycheck, freelance efforts, or contract work that is used for the betterment of the society or money collected on goods, services, and some transactions used for the same purpose.
- Tax credits: Monies that can be subtracted from the taxes owed by a taxpayer.
- Scholarships: Payments made to an educational institution on behalf of a student that is meant to pay for part of their school expenses .
- Grants: These are usually need-based awards for students pursuing higher education that are based on the reported taxable income from previous years tax returns. This money is usually not repaid.
- Fellowships: Merit-based scholarships that pay part of educational expenses for students that are in an advanced study of an academic program.
- Tax exemptions: Reduces or completely removes the need to pay taxes. Some organizations like churches or charities pay no taxes on money earned or donated to them because they can aggressively use exemptions.
Books and Resources for College Students to Learn More About Taxes
Here are some of our favorite books to help you understand taxes. Check out our personal finance books for college students guide for more reading recommendations!
The Short Cheap Tax Book for Students: 50 Plus Things to Get Young People’s Tax and Financial Life Started Off Right. Aimed at high schoolers, college students, and young adults entering the workforce, this book teaches tax, financial, and life advice in a practical (possibly snarky) manner that is easy to relate to.
No One Ever Told Us That: Money and Life Lessons for Young Adults. Practical, witty life advice written by a grandfather for his grandchildren that has been shared as a guide for college students and young adults entering the workforce as a way to become a thriving and professional adult while developing financial security for your family.
Why Didn’t They Teach Me This in School?: 99 Personal Money Management Principles to Live By. Eight important life lessons are broken down into 99 pieces of advice that are given to readers in a way that anyone can understand and take action to implement in their own lives. Unlike most personal finance books, this is not a text book that focuses on numbers. This book focuses on the actionable steps to take.
How to Adult: Personal Finance for the Real World. Learn the basics about taxes and insurance, saving, budgeting, investing, and avoiding costly missteps that most young adults make from engaging storytelling and real-life examples. Learn what schools don’t teach about personal finance but should!
The Graduate Survival Guide: 5 Mistakes You Can’t Afford To Make In College. Identify big money mistakes that most graduates make and make different choices so you can avoid them using advice from an experienced author and wildly popular YouTube personality that works to educate young adults about personal finances and major life decisions.