College Students and Taxes: Student Tax 411

Tax season is upon us.  While most students don’t really pay a lot of taxes, you need to know that tax season is just as important to students as it is to parents.  Let’s examine some important tax preparations that could benefit both students and families, and give you some Student Tax 411.

Student Tax 411: Gather Financial information

The First part of every tax preparation season is gathering your financial information.  There are certain things that both students and families will need before they are ready to prepare their tax returns.  There are the normal forms that disclose your incomes (W2’s, 1099’s, etc.)  But for the college Student, they will also need their 1098-T.  This identifies what you have paid for tuition over the last year.  It also identifies the student as a full time student.  This will be important as there are many tax advantages that are available once a full time student has been identified.  You should have already received this document, but if you have not, you will need to notify your school(s) or log-in to your school financial portal to secure them.

Student Tax 411: File Your Taxes

The big question on students mind is, “Do I need to file a tax return?”  This is a common question, and the simple answer is yes.  There are some benefits to filling you tax return.  One benefit is that you should receive a refund for any taxes you paid from your past years’ work.  A resource worth investigating is the Student Income Tax Return Guide from Efile.com.  They offer some valuable information on why you should file taxes every year.

For parents, filing taxes is a non-negotiable.  It’s the law!  And it is especially important during these college years.  The information needed to file the FAFSA will be readily available on your tax returns.  In fact, the FAFSA has a retrieval tool that will auto-populate much of your information directly from your federally filed tax return.  So file your taxes by April 15th and you will be ready to fill out the FAFSA in October.

Student Tax 411: Understand Tax Advantages

Two of the largest tax advantages for college students and their families are the The American Opportunity Credit (formerly The Hope Credit) and the The Lifetime Learning Credit.  These two tax credits can be very beneficial in your college financial planning.  Not every one will receive the same benefit, but they are worth the time to investigate.

The American Opportunity Credit: 

The American Opportunity Tax Credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education.” (1)  This tax credit offers a benefit of up to $2500.00.  If you have no tax liability, up to $1000.00 can be refunded to you.  This credit is only available for the first four years of undergraduate college expenses.

The Lifetime Learning Credit:

This tax credit offers a benefit up to $2000.00.  Here is how the IRS website states the possible benefit.  “For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students.” (2)  The benefit of the Lifetime Learning Credit is that there is “no limit on the number of years the lifetime learning credit can be claimed for each student.” (3)  There are various restrictions pertaining to who can and can not receive this credit, so you may want to speak with your tax professional or find more information online.

Student Tax 411: Update your FAFSA

Tax preparation is so important to updating your FAFSA.  In fact, once your taxes are filed, you can use the “Data Retrieval Tool” to import vital financial information from your filed taxes right into the FAFSA application.  This will save you vital time and correct some of the most common errors on the FAFSA.

While tax season may be a frustrating time, it is also a valuable time for college financial preparation.  A little preparation now, will benefit you greatly later.  So take time to prepare your taxes knowing you have the Student Tax 411 and that there is a benefit to your college planning needs.

 

(1) https://www.irs.gov/individuals/aotc 
(2) https://www.irs.gov/publications/p970/ch03.html
(3) https://www.irs.gov/publications/p970/ch03.html

 

Get Ready for Early FAFSA Filing

The new early FAFSA filing deadline is approaching fast.  This year the deadline to file your FAFSA (Free Application for Federal Student Aid) is October 1st.  Do not be surprised by this early date…be prepared.  While the early deadline may catch some by surprise, it was fashioned for the student’s benefit.

The Intent of the Early FAFSA Filing

There are many benefits to the new early FAFSA filing deadline, but the most beneficial intent was to give the student and family more time between receiving their award letters and having to make their college selection.  When the FAFSA deadline was January 1, the student and family would receive award letters around March and then would have only a month or two to decide which college to choose.  Theoretically, with the deadline pushed three months earlier, the student and family should receive that important award letter earlier.

However, this idea may not materialize for many colleges.  The college will need to adjust their internal time lines to match the new early FAFSA deadline.  According to a recent Time Magazine article, colleges may not be ready to give these early award letters.  “So this year, there will be a variety of responses to early FAFSA: Some colleges will move their deadlines up and release their aid offers months earlier. But most will not. And the burden largely falls on students to keep track of where the colleges they’re applying to stand.”

Other Benefits of the Early FAFSA

Our college financial planning advisor sees great benefits even if the colleges are slow to respond.  First, there is the benefit of using “known” numbers.  The old FAFSA deadline had the student and family use projected numbers in its calculations.  The student and family would fill out the FAFSA in January using projected numbers from the previous year’s income.  These numbers would then be verified by the student and family’s tax returns filed after the FAFSA was already filed.  As you can see, this method has a few drawbacks.  Now, the student and family simple use the past two year’s tax return for filling out the FAFSA.  This information is not a projection, but the actual numbers found on the previous two years’ tax returns.

Second, there is the benefit of having a greater time to appeal any specific financial information.  There may be special circumstances regarding a previous year’s income that may not be an accurate reflection of one’s continuing annual income or expenses.  Having known numbers allows the student and family to craft an appropriate appeal letter to make these special circumstances known.

Third, the earlier FAFSA deadline demonstrates the need for early planning.  The greatest deficiency that we see in college financial planning is that people start planning way too late.  The early FAFSA forces the student and family to start thinking about college at least one year earlier.  Even that is not early enough to start thinking about your financial plan for college.  How early should one start financially planning for college?  The earlier you start financially planning for college, the better plan you will have.

If you do not have a plan or are running behind in developing a plan, you can call our office today and schedule a free appointment with our College Financial Planning Advisor.

 

New FAFSA rules for college planning

If you are preparing for college,  you have probably heard about the Free Application for Federal Student Aid, or FAFSA for short.  This is the form that all High School Seniors are required to fill out for federal aid.  Even if you are not using federal aid, the FAFSA may be required in the college application process.  The FAFSA can be a daunting task, but it is necessary. In past years this process required one to enter estimated financial information in January and enter updated information once taxes were filed.  However under the New FAFSA rules there is a small downside.

Here are the new FAFSA rules as noted by studentaid.ed.gov.

“On Sept. 14, 2015, President Obama announced significant changes to the Free Application for Federal Student Aid (FAFSA®) process that will impact millions of students. Starting next year, students will be able to do the following:

Submit a FAFSA® Earlier:  Students will be able to file a 2017–18 FAFSA as early as Oct. 1, 2016, rather than beginning on Jan. 1, 2017. The earlier submission date will be a permanent change, enabling students to complete and submit a FAFSA as early as October 1 every year. (There is NO CHANGE to the 2016–17 schedule, when the FAFSA will become available January 1 as in previous years.)

Use Earlier Income Information: Beginning with the 2017–18 FAFSA, students will report income information from an earlier tax year. For example, on the 2017–18 FAFSA, students (and parents, as appropriate) will report their 2015 income information, rather than their 2016 income information.”

So now instead of estimating financial information in January and then updating that information after taxes are filed, the FAFSA can be filled out in October using the previous year’s income listed on your tax return.  This carries little impact upon those who already have children in college.  It is FAFSA as usual.

However, for those who are new to the FAFSA process, it gives one less year to make any financial adjustments before those finances appear on the FAFSA.  Under the old FAFSA, the student and parents financial information from the student’s senior year is used for the FAFSA.  Under the new FAFSA rules the student and parents financial information from the student’s junior year are used for the FAFSA.

What does this mean for the student and parent?  It means the college planning needs to start a little bit earlier.  Financial planning needs to start as early as the freshman year in high school.  The academic and community service plans can be started as early as the middle school years.  In either case, waiting until the senior year to start planning for college is a mistake.  If you would like more information about early planning for your college years, please contact us.