As we come to the end of January, I thought we could finish the month with some short Qs and As about financial aid tax-related questions. If you have some I didn’t cover, feel free to post them in the comments section. Keep in mind as I begin that I am not an accountant so please understand this is general advice (and not tax advice). You always want to check with an accountant if you have specific questions about your own situation.
- Is my scholarship taxable?
- I am so glad you asked that question! Generally scholarships are not taxable as long as you are using the proceeds to pay for recognized educational expenses (like tuition, fees, books and supplies). Any amounts above those expenses that are provided by your scholarship (like amounts for room and board, travel, and other expenses) may be taxable income in the year you receive them. If you have questions or want to know more, take a look at the IRS guidance on scholarships.
- Do I have to pay taxes on my Work Study earnings?
- Work study earnings are just like any other earnings from work. If you earn more than the minimum amount required to file a tax return (including your work study earnings), then you must file a Federal Tax Return. A benefit of work study earnings, however, is that they will be subtracted from the income you earn when you file the FAFSA and you use as your base income the year in which you earned this income; this way you are not doubly penalized for this income.
- Can I claim a tax credit for the tuition I’ve paid this year?
- Maybe. There are two tax credits which you might qualify for if you paid any expenses for education: the American Opportunity Credit and the Lifetime Learning Credit. The rules and specifics for these credits vary based on your income (and there are income levels where these benefits phase out), but for many families, these credits can either reduce the amount you owe the IRS by lowering your AGI or might increase the amount of your refund. In order to receive one of these credits, you will need to collect the Form 1098-T issued by your college or university (which you will use to complete the required Form 8863). The American Opportunity Credit can give you as much as a $2500 credit per student, while the Lifetime Learning Credit can give a $2000 credit per household. Lots more information at the IRS page for these programs.
- Can I claim the interest I paid on my student loans as a deduction against my income?
- Again, depends. There are income cut-offs but generally students can claim up to $2500 (or the actual amount of interest paid, whichever is lower) as a deduction against their taxable income. This deduction means you can possibly reduce the amount of taxes you owe if you already paid student (or parent) loan interest in 2019. Again, much more information on the IRS page.
- Is there one place I can get all of the information on tax issues pertaining to higher education?
- I am so glad you asked. The IRS has a publication for you! Called IRS Publication 970 (Tax Benefits for Education), this 93 page document has all of the information you would ever want about the topic (and more than I have room to cover here).
So there are some key Questions and Answers. And this closes out our tax review for January 2020! Next month our topic is maximizing your scholarship opportunities and exploring the benefits of the Florida prepaid program! Talk more then!