Did you know that students have their own set of tax laws? In college, there are different tax rules that apply. Take a look at some of these unique tax laws for students:
If you are a US resident, you will have a base tax of 14 percent on everything you make while in college. Scholarship money is often subject to this tax as well. Most students are still on their parent’s taxes, so it is important to discuss the potential tax with your parents to avoid shock during tax time.
Fellowship funds used for books, school fees, and tuition are exempt from the tax. Any salary earned from the school, including financial aid, will be taxed using a standard W-2 income tax form.
International students must also pay taxes on the salaries that they earn. You may also be eligible for US tax exemptions on fellowship stipends or assistantship salaries, but only if your home country has an existing tax treaty with the United States. If you meet the residency requirement, you will be taxed as a US citizen. You must stay in the country for 31 days each year or over 183 days over a three-year period.
Tax Deductions and Education Credits
Whether you are a native resident or not, you could be eligible for the following tax deductions and credits:
American Opportunity Credit:
This credit gives up to $2,500 per year for each student enrolled in higher education for 4 years. Whoever is filing taxes can receive this credit- but students and parents cannot claim the credit for the same student.
Coverdell Education Savings Accounts:
This account is a custodial account set up to pay for college expenses. The point of the account is to allow a student to get tax free distributions to pay for qualified education expenses. Owners of the account can pay up to $2,000 per year into the accounts.
You can also deduct certain education expenses from your taxes each year. These deductions can include the cost of transportation to school, any equipment purchased for school, accrued fees, and a variety of others.
Forms to File
As a US citizen, you must file federal Form 1040 for your taxes and any required forms by your state. As a non-US resident, you must file federal Form 1040-NR and any required state forms. Some states may consider non-native students residents for tax purposes and others may not. California, for example, taxes non-natives as residents.
Preparing for Employment Taxes
After you leave college, you will be taxed at a different rate. If you are currently still enrolled in school while working, you will be taxed at the student rate. If you have left school, however, you will be taxed at the standard personal income tax rate, which is between 15 and 39 percent.
Tax laws can be confusing, but if you are a student, you will receive many tax benefits that you cannot get at any other time. Discuss the changes with your parents and a qualified tax accountant to ensure you are reporting your education expenses correctly and filing the correct forms.
The article was written by Audrey, who is working for Wallace & Associates CPA, a Beverly Hills CPA serving the Los Angeles area.