Is my scholarship taxable (and other financial aid tax questions)?

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.

Answers to your questions
  1. Is my scholarship taxable?
    1. 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.
  2. Do I have to pay taxes on my Work Study earnings?
    1. 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.
  3. Can I claim a tax credit for the tuition I’ve paid this year?
    1. 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.
  4. Can I claim the interest I paid on my student loans as a deduction against my income?
    1. 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.
  5. Is there one place I can get all of the information on tax issues pertaining to higher education?
    1. 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!

What should I do with my refund?

Tax filing season is upon on shortly. The IRS is almost prepared to receive your Federal Income Tax return for 2019, and by the end of February you can expect to receive a refund check from the IRS if you indeed are owed one. Before you make plans to spend it on the latest must-have item (be that video game, cell phone, or clothes), let’s talk…

Your best option for your tax refund….

First of all, let me be clear. In this post I am going to talk about both what do you do if you owe money to the IRS, and what to do with your refund if you are lucky enough to get one. You might want to think about it this way: the best solution would be to owe nothing and to have no refund owed you.

If you carefully plan your withholding from your pay check, you would not be overpaying the Federal government every time you get paid (and therefore be owed a refund), and you would not be underpaying the Federal government (therefore owing money to the IRS). The amount you withhold from your paycheck is based on your W-4, and now is the time to check for 2020 (before too many paychecks go by) to see if your withholding is right for this year. You can do this at the IRS withholding estimator.

If you do owe money after filing your Federal Tax Return for 2019, it is time to review your W-4 form and perhaps choose to withhold a little more money. This way you are not hit with a bill at the end of the cycle for money which you should have withheld anyway.

If you are receiving a large refund, you might also want to review your withholding. You should look to see if you can adjust your W-4 so that you actually receive your money earlier in the year. If you get a refund, it is kind of like giving the government a loan for free since you should have had this money earlier; the Feds have been able to hold on to your money all year, and they paid you no interest on that money.

Regardless of the size of your refund I would suggest one particular choice for you for your refund check — don’t spend it frivolously! This is the time to take a look at your emergency spending and perhaps make a plan to start a savings account.

Most financial advisors will suggest that you should have an emergency fund which would allow you to cover 3 to 6 months of expenses if for some reason you lost all of your income. Now I know that it is unlikely that you will have enough to cover all of this as a current college student, and frankly most adults don’t have this kind of savings available, setting ANYTHING aside for emergency savings is a great idea.

Why do you need emergency savings? Remember that the best financial plan can be derailed by a simple urgent matter — a flat tire, an illness, a car breakdown, an unexpected reduction in hours, a parent who needs help. You may be asked to spend money you simply don’t have and the worst solution is to borrow money (like with a credit card or a payday lender) in an urgent situation. By having some savings, whatever you can afford, you guarantee that you can get through that urgent situation.

What a perfect way to start your emergency savings — with your IRS tax refund. Don’t spend it on luxuries. It’s not a lucky break, or a gift, or money you shouldn’t have already had in your budget. Make sure to save it! That’s the best plan!

Questions? Suggestions? Type away! Comments welcome.

“…Nothing can said to be certain except FAFSA and taxes…”

So maybe this isn’t the actual quote, but I think it applies. Benjamin Franklin may not have known about the FAFSA, but if he did, I bet he would have written it my way.

You just can’t escape it… Death and Taxes.

Well while you may not be able to avoid taxes, you can certainly find a free way to file them. Filing a tax return for most of us can be a (relatively) simple, cost-free, and pain free process and as I explained in my last post, it is an important part of your application for financial aid.

If you are required to file a tax return, and your file is selected in a process called “verification”, you will be required to either link your FAFSA to your tax information or provide a copy of your tax return to the Financial Aid Office. Unfortunately, the excuse of “I didn’t know I had to file” won’t work!

So if you do have to file, what are your options? Like many tasks these days, you can do this in a paper format or online (and the online form is easier).

First, the paper version. For those of you who want to see the actual form in paper (with the appropriate instructions), you can visit the IRS (Internal Revenue Service) form page. Keep in mind that before 2018, there were several versions of the tax form (1040, 1040 A, 1040 EZ). Starting with 2018, there is only one tax form (1040) but lots of schedules which you may need to complete depending on your personal circumstances.

You could print out the paper forms, read the 108 page instruction booklet, and do all the math yourself, but I know a much faster and easier way to do it. There are several online services which will allow you to safely and securely complete your 1040, and for most of you the cost will be $0.

You can find a list of these companies and services on the IRS webpage. Most of these products will provide you a free service with optional add-on packages for more complicated situations (like those with self-employment or with complicated capital gains). Also some of these companies will prepare your state tax return for free as well (remember that Florida doesn’t require an individual tax return). There are income limits for the free services but most students will qualify.

What is especially helpful about these services is that they will ask you a series of questions designed to make sure that you have thought of all of your possible exemptions and deductions. This way they make sure that you have maximized your possible refund (or reduced what you may owe).

Of course there is also a third option: use an accountant. If you have a complicated situation or think you might need someone with professional experience to help you complete your forms, you can hire a CPA to assist you. In Orlando, there is even a free service (sponsored by the United Way) called VITA (Volunteer Income Tax Assistance) where volunteer professionals can assist in preparation of your return. Check with the United Way in your area to see if they have a similar service.

Now, when do you have to have the return filed? The deadline for filing your taxes is April 15th for the calendar year just past. You can get an automatic six-month extension for filing your tax return, but you will need to pay what you owe by April 15th in any event. Of course, if you are expecting a refund you will want to file as soon as possible so that you can have your money in hand as soon as possible.

Keep in mind companies have until January 31 to send out W-2 forms to you which report your income to you for filing purposes, and some companies send other forms into mid-February. You want to make sure you have all of your forms before you file your return; otherwise you may need to file an amendment which can take more time.

So in summary, look for your forms from your employers, school, and other sources, find your free online partner, and get ready to file. Let me know if you have any questions.

And remember, Benjamin Franklin had it right. No one can escape taxes (and the FAFSA)!

First Draft: W-2s and 1040s

Hello all, and welcome again to 2020. I am sure many of you are heading into the Spring semester with new classes, new beginnings, and new opportunities for learning.

One of the new questions that has been circling around given the current world environment has to do with filling out the FAFSA and the military draft. Since there has been a lot of confusion about this, I thought I would add a few words of clarification here.

Filling out the FAFSA does NOT put you in the front of the line.

First, a reminder that we do not have an active draft. Remember we have an all volunteer armed forces (and we owe a great deal of gratitude, honor, and appreciation to those who volunteer for service). It would take an act of Congress to re-institute the Draft, and there is currently no move to do so.

Secondly, while registering for Selective Service is a requirement for men who are 18 years of age and older, and checking your status is a requirement for receiving Federal financial aid, there is no “priority” for those who complete the FAFSA. In fact, the information confirming your registration comes from a database match between the two systems (FAFSA and Selective Service) and no permanent record is maintained of this check on the Selective Service side.

So what is Selective Service? It is a system that guarantees that IF a draft is ever declared that all men ages 18 to 24 would be eligible for service. But again, this hasn’t been used since the Vietnam War and no one has suggested that the Draft would be restarted.

So now that we have put that issue to bed, let’s return to taxes. The first question you should be asking is do I have to file a Federal Income Tax Return? Generally if you are single, under the age of 65, and not self-employed (only paid by your employer through a standard paycheck), then as long as you earned less than 12,000 in 2019, you do not HAVE to file. a Federal Tax Return. If you are claimed by someone else as a dependent, you are married or self-employed (or both), or you have other special circumstances you should check with the IRS to see if you are required to file. The IRS has an interactive tool that can help you determine if you are required to file a return.

Just keep in mind, even if you don’t have to file a return, you may still WANT to file a return. Check your paystub or W-2; if your employer has taken out Federal Income Tax, the only way you can get this money back is by filing a tax return. And the amount withheld may make it worthwhile.

Especially because there are many free resources to help you file your taxes. More on this next time.

What paperwork should you have ready when it is time to file your return? First, make sure you have the W-2 forms from each of your employers for 2019. These forms show how much you earned for the year and how much Federal Income Tax was withheld. Note that companies might not send these to you until the end of January. You also want to make sure you have any 1099 Form for miscellaneous income (or self-employment income). Also make sure you have any other tax forms you might have been sent (like interest forms from your bank, or loan repayment forms for your education loans, and your 1098-T from your college for tuition paid).

We’ll get more into the filing process next time on the blog! Stay well!

I hereby resolve… and other resolutions

Happy 2020 to my dear readers. May the coming year bring you happiness, health, and great college experiences!!! Here we are at the start of another year, and once again it is time to turn to that most majestic of annual traditions. It is a tradition where we state a goal at the beginning of the year and then (hopefully) work towards the goal throughout the year; some of us pay close attention to this and others simply ignore it except at this time of the year. Yes, I am talking about — taxes. (Did you think I was going to discuss New Year’s Resolutions? Yes, that conversation will come soon too!

2020 and the 1040 – a match made in heaven

For many of you, January is the month where you will file your tax returns (or at least get ready to file them) so that you may receive your tax refund as quickly as possible. If you will owe money, remember that you have until April 15 to file your Federal Tax Return (much more on this to come).

In the coming month we are going to address how to file a tax return (including free resources to get it done), why you might want to file, and common traps to avoid.

To begin, let me know if you have any particular questions about income tax forms which have been puzzling you. Remember that your financial aid is based (in large part) on the information on your (and, for dependent students, your parents’) tax returns, so you want to make sure you file them in a timely manner so you don’t delay your financial aid application. With the current financial aid system, the income tax return for 2019 (which you will file in the next few months) will be used in your financial aid application (FAFSA and others) for 2021-22 (which you will be able to start completing as of October 1, 2020).

Confusing, I know. But moneyman is here to help! We will tackle each piece one step at a time.

For now though let’s talk about resolutions. What New Year’s Resolution have you set for yourself? What commitments will you make to your financial health (as well as your emotional, physical, psychological, and spiritual health)? Add yours as comments to this post and let’s be a community of support for each other.

With eyes wide open (20/20 – get it?), here’s to a year of great success and clear goals. Happy New Year!