Tax legislation is a huge dark forest, which only experienced lawyers can reveal all the secrets of. However, what to do if you are not a lawyer, but a young student who is forced to pay for his studies completely independently or with the help of his parents? In any case, you need a certain strategy that will help to cope with all tax requirements according to the timing and forms of their implementation, as well as receive statutory tax bonuses and privileges.
What You Need to Know About College Tax Strategies
Tax Strategy is not like a business one. In the first case, you are basically free to do everything that seems reasonable and effective from a business point of view, but in the second you are strictly limited by the law.
“You will not be able to get or save more than the state, and the conditions of the loan that you or your parents asked for your education will allow you.” – explains Marie Fincher, academic advisor, writer for TrustMyPaper and PickTheWriter.
This means that your range of potential tax opportunities has been narrowed to statutory limits. And then we will talk about possible tax strategies within these opportunities.
Clarify Your Dependency/Independency Status
So, your status is the main starting point in the formation of your tax strategy. You can either be dependent on your parents and then all expenses for your education will be taxed, which will be paid by your working parents. Or, you can declare yourself as an independent student, and then all your income, including a student loan, will be taxed according to other rules.
What is the essence of the method? When a student has a dependent status, parents can rely on a certain tax credit.
So, which step is most appropriate? If your parents earn over 440 thousand dollars a year, then it makes no sense to talk about your dependence, since your parents, in this case, cannot be qualified for a tax credit. Therefore, in this case, you should be considered independent, as this will give you other tax advantages.
In case your parents earn less, it makes more sense. And there will be certain mechanisms for calculating the tax credit for parents. In this case, it makes sense to get the status of a dependent, to give parents the opportunity to save on taxes.
Save with the American Opportunity Tax Credit
After you spent the first $ 2,000 to cover your educational needs, such as textbooks, you get the opportunity to get $500 back by spending the next two thousand dollars on tuition.
Check the Saving Opportunities of the Lifetime Learning Credit
This opportunity has more loyal conditions to receive it and covers 20% of qualifying educational expenses.
Important about these two approaches! You do not have the right to claim each of the privileges at the same time. In order to take advantage of the American Opportunity Tax Credit, you must be a student in the first four years of study, and be enrolled at least for part-time study. The second option is more flexible and applies to everyone who decides to continue their studies after college or university, as well as is suitable for students of the undergraduate and graduate courses.
Consider Scholarships When Planning Your Taxes
It’s not enough just to get a scholarship. It is still important to correctly manage this money. And the best opportunity is to invest the result of your education in your further education. In this case, the amount of your scholarship will not be taxed, and investments in your development, as you know, always pay off with the maximum percentage in your favor.
Try to Reduce Interest on Loans Received for Education
If you received a specialized loan for education, you also have the opportunity to reduce the interest in paying for it in the amount of up to $ 2,500. However, in this case, the amount saved will be treated as your net income, and will already be taxed in a different form.
In order to take this opportunity, you need to have an agreement with your borrower confirming that you received a loan for education, as well as fill out a specialized tax form.
In addition, in order to meet the requirements of the law for obtaining this privilege, you must not have the status of a dependent, you do not have the right to be married and file tax forms separately, and you must pay interest for using a loan in the current year, that is, in that year, in where you file your tax documents to reduce interest payments.
Be Careful If You Are Studying and Working in the Different States
As you know, tax rates vary from state to state. Therefore, if you study and work in one state, and during the summer holidays you found a job in another state, then you need to be very careful not to miss anything important. Estelle Leotard a writer at GrabMyEssay and Studicus claims that “You are not only obligated to include your summer income in your standard tax forms but also take into account the requirements of two different states for the procedure for filing documents and paying taxes.” In a number of states, you can get very attractive tax benefits, or even be exempted from paying taxes in this case, but there is also a high probability that you will have to fill out and send tax documents twice – for each of the states.
Regardless of which strategy you follow when paying your taxes, you always need to be well aware of your opportunities and changes in legislation. As we said at the beginning of the article, this is a difficult topic to understand it to the last point and do everything right, and most importantly, beneficially for yourself. Therefore, before taking any steps, start with the primary sources – legislative norms, to be sure that you are precisely acting within the framework of tax laws, and you do not have to pay twice in an attempt to save and get tax benefits.
Bridgette Hernandez is a Master in Anthropology who is interested in writing and is planning to publish her own book in the near future. Now she is a content editor at BestEssayEducation. She works with professional writing companies such as WoWGrade and SupremeDissertations as a writer. The texts she writes are always informative, based on a qualitative research but nevertheless pleasant to read.