Student Tax, Education Tax Credit

Even if you are a student you may have to file a tax return in 2010 for the 2009 tax year. For example, if you were self-employed for some portion of the tax year and earned more than $400.00 during that self-employment, you will have to file a federal tax return and pay the necessary self-employment tax (Social Security and Medicare). You may also be required to pay Medicare and Social Security tax on tips that you did not report to your employer or if you worked for a church or religious organization that was exempt from those taxes.

There are many forms of income that students often receive which qualify as taxable income. Some of those include:

• Payment for services performed,
• Income earned through self-employment,
• Income earned through investments, and
• Some scholarships and fellowships

Allowances received through the Reserve Officers’ Training Corps are tax-exempt, but payments made over the summer qualify as taxable income.

Foreign students who are resident aliens may be subject to some of the same taxes as U.S. citizens.

There are two major credits available for students to offset the cost of education.

The American Opportunity Credit (formerly The Hope Credit)

• This credit applies for the first four years of post-secondary school education, such as college or vocational school.
• You can claim up to $2,500 per eligible student, per year.
• The credit covers 100% of the first $2,000 of qualified tuition and related fees (books and other required course materials), plus 25% of the next $2,000.
• 40% of the credit is refundable, so you may receive $1,000 per eligible student as cash back even if you owe no taxes.
• Each student applying for the credit must have been enrolled at least half time for at least one academic period which began during the tax year.
• The credit is phased out for individuals making more than $80,000 and for married couples filing jointly who make over $160,000.

The Lifetime Learning Credit

• This credit applies to undergraduate, graduate, and professional degree courses, and even post-graduate courses that help improve your job skills.
• The credit is available for all years of post-secondary education, and also for adult and continuing education courses. There is no minimum enrollment.
• Your credit equals 20% of the first $10,000 of post-secondary tuition and fees you pay during the year, totaling no more than $2,000 (per tax return, not per student).
• The amount of the credit is gradually phased out if your income is between $48,000 and $58,000 ($96,000 and $116,000 if filing a joint return), and completely phased out for incomes of $58,000 or more ($116,000 or more if filing jointly).

You cannot apply for both credits for the same student in the same year. If you claim either credit, you cannot claim the tuition and fees tax deduction.

If you have graduated and started to pay back your student loan, you may be able to deduct some of the interest paid on your student loans (including the one time loan origination fee charged by your lender). Also, you may be able to claim a deduction for qualifying tuition and fees paid during the tax year for you, yourself, or a dependent.

There are certain scholarships and grants that fall under the category of taxable income. Generally, there is a 14%-30% withholding on taxable grants, fellowships, and scholarships.

Exception: The costs of obtaining a doctoral degree are not deductible.

More details on student tax credits and education deductions.