In a NutshellIf you’re a college student who’s never had to file income taxes before, filing for the first time can be intimidating. But you can take steps to make the process as easy as possible and maximize any tax refund you may be due.
This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma. It has been updated for the 2020 tax year.
College is the gateway to adulthood for many people.
You might begin living on your own, get a part-time job, and make decisions for yourself that your parents used to make for you. Filing a tax return is one more rite of passage, and it doesn’t have to be a scary one.
In fact, filing a tax return could mean you’ll get money back. Here are five things you can do that may help you maximize a tax refund if you’re owed one.
- Know your dependency status
- Apply for scholarships
- Get extra credit
- Make interest-only payments on your student loans
- Don’t pay to file your tax return
1. Know your dependency status
Many of your education-related expenses could qualify you for a tax credit or deduction. But if you’re still listed as a dependent on your parents’ tax return, you may not be able to claim those tax breaks.
“Qualified education expenses paid by a dependent for whom the parent can claim an exemption, or by a third party for that dependent, are considered paid by the parent,” says Dr. Sandra Byrd, CPA and professor of accounting at Missouri State University.
Your parents can claim you as a dependent on their tax return if you’re a single full-time student younger than 24. But if you’re paying your own way through college, be sure to talk to your parents about not claiming you so that you can take advantage of tax breaks on your own tax return.
2. Apply for scholarships
Not only do scholarships provide you with free money to help pay for college costs, they’re also generally tax-free. That means they won’t be included as taxable income (unlike money you earn from a job) when it comes time to calculate your tax refund.
To see which scholarships you’re eligible for, check with your school’s financial aid office. Additionally, check out scholarship websites to search for opportunities through other organizations.Are scholarships taxable income? Find out.
Two federal tax credits are specifically designed for college students: The American opportunity tax credit and the lifetime learning credit.
“Students are normally only eligible for the AOTC during the first four years of college,” says Byrd.
If you qualify, you can get a credit of up to $2,500 — that’s 100% of the first $2,000 you spend in qualifying education expenses, and 25% of the next $2,000. Qualified expenses include the following:
- Tuition and fees
- Other required school expenses
- Books, supplies and equipment
If the AOTC helps get your tax liability down to zero, you can get 40% of the remaining credit in the form of a tax refund, up to $1,000.
With the lifetime learning credit, you can claim up to $2,000, or 20% of the first $10,000 you spent during the year in qualified education expenses.
“There is no limit on the number of years the lifetime learning credit can be claimed,” says Byrd.
The credit isn’t refundable, though, so it only helps cover any taxes that you owe. For students that expect a tax refund, this credit isn’t as helpful.
Keep in mind you can only claim these for yourself if a parent doesn’t claim you as a dependent on his or her tax return. Otherwise, your parent would get the credit. Don’t forget, you can only claim one of these two education credits in the same year. Also, you must deduct tax-free financial assistance like grants and scholarships from your qualified education expenses — basically you can’t double-dip with the tax relief.
Unless the government subsidizes your student loans, they usually start accruing interest as soon as you or your school receives the loan money. That interest increases the amount you need to repay after you graduate.
What’s more, if you don’t pay any interest before the loan comes due, the interest may capitalize. That means the interest you still owe could get added to the principal amount you borrowed, and your interest going forward will be based on that new, higher amount.
But if you make interest-only payments, you can prevent the interest from capitalizing. Also, you can deduct that interest paid from your income on your tax return, up to $2,500 a year.
Again, this works only if a parent doesn’t claim you as a dependent, even if you were the one who made the payments.
5. Don’t pay to file your tax return
“Most college students have relatively simple tax returns,” says Mark Kantrowitz, publisher and vice president of strategy at Cappex.com, a website that helps students compare colleges and find scholarships.
If you’re filing either form, you probably don’t need to pay someone to do your return for you, Kantrowitz says. Instead, he recommends learning how to file it yourself or using a free online tax preparation service.
If you’re not comfortable with filing on your own or you want to avoid mistakes, Byrd recommends seeing if there’s a Volunteer Income Tax Assistance program in your area that can prepare and file your taxes for free.
Filing your tax return doesn’t have to be intimidating. Understanding how to maximize your tax refund can make you feel empowered, and put some extra money in your pocket. Use these tips when you get ready for your next tax return, and you could have a better chance at getting more back.
Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.