College students might be facing a deadline not imposed by their professors, but by Uncle Sam: April 15, tax day.
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Students risk losing money if they choose not to file an income tax return and could be leaving money on the table in the form of deductions and write offs. Filling out and filing tax forms can be complicated and mistakes can be costly to a student’s bank account.
Many students will be filing for the first time and it can be difficult to know exactly what to include on a return, particularly if students earn only a small amount of income through a summer or part time job while in school, warns Margaret Munro, author and tax consultant.
“If you are required to file, you absolutely must. If you’re not required to file because your income was low, you may want to file because you may have had taxes withheld that you can’t get back without a tax return,” she says.
The first step to successfully submit a return is collecting all the required documents and staying organized, says Lindsey Buchholz, lead analyst at the Tax Institute at H&R Block.
“If you have documents that are being sent to your parents’ house and you’re at school, it may be easy to overlook stuff,” she says.
For first time filers unfamiliar with the tax process, here’s what experts say are three of the biggest mistakes college students make and how to avoid them.
Mistake No. 1: Not Clearly Establishing Dependency Status
Not being clear on whether or not the student is considered a dependent before either parties file can create complications and possibly result in filing errors.
When a child is claimed as a dependent by the parents, the student does not get to take a personal exemption on their return, explains Buchholz.
“Instead that amount is claimed by your parents as the dependency exemption. That’s important because generally if you’re not a dependent, you get to claim your exemption plus a standard deduction amount which increases what’s known as the filing threshold.”
In most cases, it makes sense for parents to claim their child as a dependent, especially if the student does not have the means to support themselves, according to Munro.
“If you are not providing more than 50% of your support then you are not entitled to take your personal exemption if you’re a college student.”
Mistake No. 2: Missing Out on Education Tax Benefits
Eligible tax payers with a modified adjusted gross income of $80,000 or less or $160,000 or less for married couples filing a joint return can reap the benefits of the American Opportunity Credit of $2500 per student for 2012, which covers the first four years of undergraduate education, according to the IRS.
“However if you’re a dependent, that credit is only claimable by your parents, not by you--you have to know the rules for all of these credits and who paid the expenses and if you’re a dependent…to make sure that the correct credit is placed by the correct person,” says Buchholz.
The Lifetime Learning Credit also allows students and parents to pay for college by claiming a credit of up to $2000 for qualified education expenses for students in eligible institutions with no limit on the number of years the credit can be claimed for each student.
The IRS denotes that parents or students can claim either credit for 2012, but not both for the same student.
If students do not claim themselves as a dependent, they can also receive deductibles for tuition, fees, textbooks and other expenses, says Nick Rizzi, CEO of SmartTax.
“If they pay a tax preparer, if they buy software or do it online with tax preparation [programs], they can deduct that,” he says. “If they’re hunting for a job, the cost of job hunting is a deductible; money they paid for travel, for resume software…and anything over 7% of their income can be deducted for medical expenses.”
Mistake No. 3: Not Filing Dual State Taxes
Students with a part-time job while at school in a different state in addition to a job in their home state are responsible for filing taxes separately in both states, say the experts.
“Say you are a Massachusetts resident and you go down to North Carolina for school--you have to claim 100% of your income on your Massachusetts income tax return because you are a resident, but you are going to get a credit on your Massachusetts return for taxes that you pay in North Carolina on the North Carolina sourced income,” says Munro.
It’s essential for students to research and thoroughly understand the tax rules in both states, as state rules can vary drastically, says Buchholz.
“Talk to your parents and see if they have a tax professional that they work with or some tax preparation software has questions in the interview process that will ask you questions about residing in one state and earning money in another state that will help to guide you through that