Income Tax Information for Students
Both high school and college bring new opportunities for students and their parents. Many of those opportunities introduce new financial concerns to the student's family. Knowing the tax implications of each situation ahead of time will help you see the true cost of your options.
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Employment vs. Self-Employment
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Learn whether you are an employee or self-employed when you are offered a paid job. Pay attention to what papers you sign at the time you are hired, and compare that paperwork to your first pay stubs. If the student fills out and signs a Form W-4 on the date of hire, she should receive a regular employee's pay stub on payday that includes tax withholding for FICA, Medicare and federal taxes. If she doesn't fill out a W-4, she should receive a paycheck from which there were no taxes deducted. In this case, she is self-employed and will need to keep track of all expenses that can be deducted against this income at tax time. If she makes a total of $400 or more after all expenses are deducted on Schedule C, she will owe self-employment tax in addition to any federal tax that is assessed at tax time.
Self-Employment Tax Exception
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There is an exception to self-employment tax for children under age 18 who work as newspaper carriers or vendors. Although these children must file the usual Schedule C to report their self-employment earnings, they do not have to pay the 15.3 percent self-employment tax. Any federal tax computed on their tax returns still applies, however.
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Scholarships and Grants
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Record all forms of financial aid received, and all college-related expenses. Many students finance their university educations through a combination of scholarships, grants, loans and work-study arrangements. Payments received for work-study or campus employment will be taxable as regular W-2 wages. To determine if any scholarship or grant income is taxable, add up the total of scholarships and grants received and deduct the total amount paid for tuition, books and supplies. You may include the cost of a calculator, computer, printer and any software needed for school, as well as basic supplies such as paper, ink, pencils, sticky notes and other necessary office supplies. If there is a positive balance after deducting the expenses, that amount should be included on the "wages" line of the student's tax return, with the letters SCH and only the taxable scholarship amount written on the dotted line just to the left of the total amount. Room and board is not allowed as a deduction.
Loan Interest
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Use the appropriate line in the "adjustments to income" section of the 1040 form to deduct educational loan interest of up to $2,500 per year. You may not take this deduction if you use the Married Filing Separately tax status.
Education Tax Credits
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Take the Hope Credit on Form 8863 if you have any tuition, fees, books, supplies or equipment expenses that were not covered by the amounts you received as scholarships and grants during the first two years of undergraduate studies. You may also qualify to take the Lifetime Learning Credit in later years. A dependent student's Hope Credit must be claimed on the parent's tax return.
Other College Funding Options
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Using tuition credits from a pre-paid Qualified Tuition Program (QTP), such as the popular GET program, is generally tax-free. Consult your program contract for any program-specific exceptions. You can also use accumulated U.S. Savings Bond interest from mature Series EE and I bonds to fund qualified education expenses. Doing so will make the bond interest tax-exempt.
Work-Related Education
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File Form 2106 to claim education expenses that exceed the limits of the Lifetime Learning Credit. This is for education related to your current profession or occupation. The Lifetime Learning Credit is available on Form 8863.
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