Don't freak out, but April 15 is Tax Day, and it's less than a week away! If you worked in 2014, you're going to have to make sure you're in Uncle Sam's good graces. The bad news is, filing all that paperwork isn't all that fun. But the good news is, there's a good chance you'll get a refund! Read on for some advice on surviving and thriving through tax season.
Greetings, and welcome to the “real world,” where you earn income and owe taxes to both your state and country! This is a very important subject—just ask Donald Duck.
And as you may have heard, students are poor, and recent graduates are not much better. Something about $1.2 trillion dollars of student debt? Whatever. Uncle Sam doesn’t want to hear your excuses; he wants his money come Tax Day, which is April 15, every year.
Luckily for you, this post is going to give you some tools to: a) pay less out of pocket for college; b) help minimize your annual tax liability; and c) impress your friends, family, and future spouse with how financially sophisticated you’ve become. So step off, Uncle Sam! It’s very likely you don’t owe that guy anything anyway. In fact, he’ll probably be cutting you a check, but more on that in a minute.
"First things first: what is going on with FAFSA these days?!"
For goodness’ sake, everyone needs to make sure they have filled out a FAFSA! I spit out my coffee—and I wasn’t even drinking any—when I read that students left unused a whopping $3 billion of federal student aid in 2014.
You can’t get federal student aid if you don’t fill out the FAFSA. You also must fill out a “renewal FAFSA” every year you attend school. Filling out this document not only provides access to cheap loans but also to grants, which are free government money you never have to pay back. Don’t succumb to what the linked article above refers to as “the widespread financial illiteracy plaguing the nation.” Fill out your FAFSA.
“Like you said, I’m poor. Do I really need to file my taxes?”
Here’s the thing: if you’re working at any sort of legitimate business, you’re already in this too deep. Uncle Sam knows you’re out there, and it’s very likely he’s been collecting taxes from you throughout the year, little by little, from every paycheck. This is called “withholding” (+5 Sophistication Points) and it’s the reason your employer probably made you fill out one of these. But if you, like many young workers, earned below a certain threshold, there is a good chance that you don’t owe any taxes at all. Actually, you probably owe less than what that top-hatted goon has been siphoning off your meager salary over the last calendar year. Tax Day (April 15 is the filing deadline, but you can file as early as January 1 if you have all the necessary documents) is your chance to take back what is yours. It’s called a “tax refund.” Don’t miss out on it by not filing your taxes.
There is one other good reason to file your taxes: not filing is considered a crime. And Uncle Sam knows you have to file because your employer already sold you out when they filed their business taxes. How’s that for “real world?”
Two tax breaks every student should know about
So now that you're filing your taxes, here are a couple of student-specific concepts that you should discuss with your parents and/or tax preparer:
American Opportunity Credit
The American Opportunity Credit allows a tax credit of up to $2,500 per year for “qualified education expenses.” That includes tuition you paid for with loans. Unlike a tax deduction, which reduces the amount of your income subject to a given tax rate, a “credit” directly reduces the tax itself dollar for dollar (+10 Sophistication Points). This specific credit is “partially refundable,” which means you can get money back even if you don’t owe any taxes (+25 Sophistication Points).
- Notice 1: the American Opportunity Credit can only be used during your undergraduate years.
- Notice 2: if your parents plan to claim you as an exemption, you cannot claim this credit, but they still can, so talk to them first. Maybe they’ll appreciate your financial acumen so much that they’ll let send you to Cancun for Spring Break.
Lifetime Learning Credit
To all my graduate students in the house: this one’s open to you as well as undergrads! The Lifetime Learning Credit offers up to $2,000 for qualified educational expenses. Although this credit is non-refundable, it is not limited to undergraduates and can be used in as many years as it is applicable. It can also be used to offset costs incurred in the pursuit of new or improved job skills (like this totally rad programmer bootcamp). As with the American Opportunity Credit, you should talk to your parents about how you’ll be treated on their tax return, because it may limit your ability to claim this credit.
- Notice 3: only one of either the American Opportunity or Lifetime Learning Credits can be claimed per student in a given tax year. For the overachievers among you, dense details regarding both credits can be found in IRS Publication 970—Chapters 2,3.
Perhaps you just got hired for your first post-grad job? Congratulations! I have two good pieces of news for you.
First, you may be eligible to deduct moving expenses from your taxable income if your new job location forced you to move. This is considered an “above the line” deduction since you can take it even if you choose the standard deduction (+1,000 Sophistication Points). See IRS Form 3903 and IRS Tax Topic 455 for more details.
Second, you may deduct up to $2,500 paid on student loan interest during the tax year. This information should come from your loan servicer on a Form 1098-E. Don’t throw it out. Like the moving expenses, this is considered an “above the line” deduction, and as such, should be enjoyed by all. The deduction is only available to the taxpayer who legally owes the money and not necessarily the person who is writing the checks every month. #Sorrynotsorry, Mom. See IRS Publication 970—Chapter 4 for more details.
Thanks for reading—but don’t get it twisted
By no means should the above be taken as legal or professional tax advice. It should, however, make you a little more comfortable about “tax season” and get you started with a few questions to ask your parents and/or tax preparer. If you’ve gotten this far, give yourself another 5,000 Sophistication Points. Well done, and happy tax planning!