Like many Americans, you probably have April 15 circled in red on your calendar. For graduate students, as they grapple with grants, loans and multiple sources of income, the process presents special challenges.
Here are answers to some of the tax questions graduate students have:
As a full-time student, do I really need to file taxes?
It's always a good idea to file, even if your income is below the threshold amount for filing, says Jackie Perlman, a tax analyst at H&R Block.
Single people who earn less than $9,350 per year and married couples who make less than $18,700 are not required to file their taxes. But they should, she says, because they could miss out on refunds, tax credits or other tax benefits (see below for some examples).
Also, students who think they are exempt from filing may not be: The IRS may tax grants, scholarships and stipends if you perform services or spend the money on room, board or food. The bottom line: If you receive funding of any kind, file a return, says Perlman.
How do I get started?
Collect all of your forms, which should include the W-2s you receive from employers and funding sources and the 8863 and 8917 forms used for claiming education credits or deductions. Gather receipts for such school expenses as textbooks and supplies and carve out a day as soon as possible to organize and file, says Mark Steber, the chief tax officer with Jackson Hewitt Tax Service. That way you'll have time to replace forms or seek professional help if needed, he adds.
Also, check out IRS Publication 970,Tax Benefits for Education. The publication details the tax rules that apply to students and lists the rules for such specific funding sources as Pell grants and Fulbright scholarships.
Planning to use tax preparation software? Steber warns users to take it slow: Software includes numerous options, and it can be easy to skip a section on deductions because you think it doesn't apply to your situation.
What's the difference between a credit and a deduction?
They both work toward getting you the most money back from the IRS. Deductions do this by reducing your total income. For example, if you earned $40,000 in 2009 and spent $4,000 on tuition and books, you could deduct the $4,000, reducing your taxable income to $36,000. If you already paid taxes on the $40,000 you earned, a deduction could help get you a refund check, says Steber.
Credits reduce the amount of money you owe to the IRS. For example, if you owe $2,000, you can apply a credit directly to that amount, possibly reducing it to zero, says Steber. Some credits are even refundable, which means that you can reduce your tax liability to zero and get money back.
But you can't claim a deduction and a credit for the same expense, so it's important to pick the option that gives the greatest return, says Steber. Student generally benefit most from credits, which allow you to wipe out tax owed and generate refunds, unless they don't owe the IRS any money, she says.
How do I find out more about tax credits?
The tax code offers several credits for students:
The $2,000 Lifetime Learning credit applies to both undergraduate and graduate students for an unlimited number of years. But this is a non-refundable credit, so graduate students with no tax liability won't see a benefit here and may be better off filing a deduction, says Steber. But if you owe the IRS money, this is an easy way to wipe out that debt.
The Hope credit is a non-refundable, $1,800 credit for undergraduate students in their first two years of college attending school in a Midwestern disaster area recognized by the IRS.
The American Opportunity credit is a refundable $2,500 credit for undergraduates. Students can select this credit for up to four years of their degree program, and even receive up to a $1,000 refund.
What are common expenses students can deduct?
There are a few deductions for students, including the Tuition and Fees Deduction, which reduces your taxable income by up to $4,000 to cover costs associated with tuition and certain required fees, such as registration fees. For example, if you paid $3,000 in tuition and $700 on registration and other enrollment fees, you could claim a $3,700 deduction on your taxable income. You can't, however, deduct the money you spent on housing, food or travel.
How do scholarships, grants and other funding sources affect my tax status?
In most cases, these funds are taxable, says Steber. The general rule: If such grants or scholarships are remuneration for research, teaching, housing or food, they are taxable.
Students who receive grants and scholarships do not qualify for education credits or the Tuition and Fees deduction, says Steber, since credits and deductions apply to earned income and grants and scholarships reduce the out-of-pocket cost of school. You may not receive a W-2 for grant or scholarship money, so you may need to keep check stubs and claim such income on your own.
Steber recommends students use their grant and scholarship money on tuition and books to avoid paying taxes twice. For example, if you receive a $5,000 American Psychological Foundation grant and a $10,000 research grant from your school, apply the APF grant toward your tuition first. Because you don't perform services or research for APF, the IRS won't tax that grant. If you used the school's grant for tuition and the APF grant for food, then both get taxed and you lose money. Also, remember that you don't have to pay taxes on tuition reductions for teaching or researching, you only pay taxes on the money you earn for these services.
Do I need to pay taxes on my student loans?
Student loans are not taxed, since loans are not treated as income. However, if your only source of income is loan money, you probably won't qualify for other tax breaks.
I'm already paying off my student loans. Can I deduct them?
You can deduct the payments you make on student loan interest, though not the principle of the loans, says Perlman. The government provides up to a $2,500 deduction on any interest you pay on your loans as long as you attended school at least part time when you secured the loan.
What should I do if I am audited?
Don't panic, advises Perlman. "Lots of people think an audit means an IRS agent will come to your home and pore through every last receipt in your possession, but that's rarely the case."
Most likely the IRS will simply send you a letter about a mistake you made on your return. Respond quickly with whatever information they want, says Steber. It's not uncommon for filers to make mistakes, and usually they get sorted out quickly, he says. If the problem is more severe than a math mistake or missing form, you may benefit from contacting a tax expert to help sort things out.
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