By: JIM IRIZARRY
Chances are you’re getting an unusually high amount of mail right now.
Believe it or not, it’s not all junk mail. You need some of that mail to do your taxes. You can probably throw away that furnace part catalog from the people that lived in your house three tenants ago, though.
First, here are some things that you absolutely should know before you sit down to do your taxes.
- Important date to know: April 18 is when your 2015 taxes are due.
Typically, Tax Day is April 15. Why the change? According to the IRS, Washington, D.C. will be celebrating Emancipation Day on April 15, and they won’t be open that day. Thanks to a holiday, you get another three days to do your taxes. Thanks, Obama! For real this time!
- Don’t wait until April 18 to file your taxes.
Chances are pretty good that you’ll get a refund, so why wait until the last minute to get it? Plus, if you do wind up owing taxes, why wait until three hours before they’re due to find out that you need an extra couple hundred bucks?
If that wasn’t enough, tax identity theft is a growing problem and could likely get worse this coming tax season.
“This can be very challenging for victims, who lose access to their refund for approximately 120 days and have to take multiple steps to reestablish their identity,” says Margie Rogers, a tax professional with H&R Block in LaPorte. “One of the best ways to protect yourself is to file early.”
- Get all of your forms together.
You are going to need a W-2 to file your taxes. You’re probably also going to need some other forms, too. Forms like a 1098-T, which deals with your tuition. If you get health insurance through the government, you’re going to need a 1095-A. You should have gotten every form you need in the mail or been able to download them by now. Also, remember those receipts from when you bought your books? Those can be helpful.
“Tuition receipts for higher education, receipts to back up any tax breaks claimed—for example, for charitable donations—and personal property tax receipts will help taxpayers file accurate tax returns,” says Rogers.
- Figure out if you’re really capable to doing this.
If this is the first time you’re doing your taxes yourself, you’re going to ask yourself an insane amount of questions. “Am I doing this right? Can I file for free? Do I have to report that I won $20 on a scratchy lottery ticket?”
It’s okay. Do-it-yourself software and online tax programs select the appropriate forms and use everyday language, making tax law easier to understand. Still, if you don’t feel confident enough to do your taxes yourself, tax professionals are ready to help.
“The assistance from a qualified tax professional can help put taxpayers of all income levels at ease and does not require any understanding of taxes,” says Rogers. “Ultimately, it is the taxpayer’s comfort level and personal preference that determine the best method.”
- Sit down and do it.
Seriously, if you’re doing it yourself, it takes maybe an hour. Get it done. Collect that cash (or, pay what you owe).
- DON’T LIE.
Just… don’t. Rumor has it that even the most white-collar jail is pretty bad.
Are there any special considerations that a student should make when filing their taxes? Does money from student loans count as income?
Whether a scholarship is tax-free depends on what restrictions it imposes. Scholarships restricted to tuition, fees, books, supplies or required equipment are tax-free. Students will not have to pay income tax on these scholarships. For example, a student with an effective tax rate of 10 percent could save up to $1,000 with this tax-free benefit.
The American Opportunity Credit also covers tuition, fees and course materials like textbooks. Students or their parents can receive up to $2,500 for $4,000 in these expenses. For example, a family that pays $10,000 in tuition could get the maximum $2,500 credit on the parents’ tax return.
Students cannot pay their tuition with a tax-free scholarship and then claim that amount as an eligible expense toward the American Opportunity Credit. For example, if the student had both a $10,000 scholarship and $10,000 in tuition, they can’t “double-dip” and get the $2,500 credit on the parents’ tax return and have $10,000 excluded from the student’s income. They may only use one benefit for the same expense.
Are there any special deductions for tuition or student loan interest?
Students with an unrestricted scholarship have more options to maximize their tax benefit. By using the scholarship to pay for nonqualified expenses and paying taxes on their scholarship, they could become eligible for the American Opportunity Credit.
For example, a student with a $10,000 restricted scholarship, $10,000 in tuition and $4,000 in room and board cannot get a tax credit. The student’s only tax benefit would be excluding the $10,000 scholarship from income for tax purposes. The parents would not derive any additional tax benefit.
If the student instead had an unrestricted scholarship, the student could allocate $4,000 of the scholarship to their room and board and pay $4,000 in tuition from their own resources. The $4,000 they spend toward tuition would make the parents eligible for the maximum tax credit of $2,500. The student would also get the remaining $6,000 of the scholarship tax-free.
If the student was in the 10 percent tax bracket, the student would pay $400 on the $4,000 of scholarship money that went toward room and board. Combined with the $2,500 tax credit and tax-free part of the scholarship, their total tax benefit increases to $2,700. This is more than $1,700 extra than if they had taken the entire scholarship tax-free.
The bottom line: a $2,500 tax credit can be greater than tax on $4,000. In most cases, the credit taxpayers could get would be greater than the tax paid on an unrestricted scholarship. So, a student or their family could maximize their tax savings if they have less than $4,000 in eligible expenses and can use an unrestricted scholarship toward nonqualified expenses.
Students, along with their parents, could have some tricky tax situations to navigate. Do scholarship terms allow recipients to choose to use funds for tuition, books or nonqualified expenses (such as room and board)? Who is best served (the student or the family) by claiming the credit? Are there “kiddie tax” or Alternative Minimum Tax (AMT) complications from paying tax on an otherwise tax-free scholarship? In each case, students should make sure their tax-free scholarship is really the best deal. They may find that paying the tax man puts more money back in their college account.