Tax planning for college students (TV-PG; 3:29)
There’s a few key things to know about how the ending of the student loan payment freeze can affect your taxes; plus, learn about some education tax credits many people aren’t aware of.
New legislation and forgotten education credits: What college students need to know
Heading back to college is always an exciting time, filled with dorm shopping and preparations. But amid the chaos of new beginnings, there’s crucial financial information that students and parents need to be aware of, especially when it comes to student loans and potential tax breaks, according to Lisa Greene-Lewis, a TurboTax expert and CPA.
Student loans: Freeze thawed
Students need to be ready for significant changes in the student loan landscape, said Greene-Lewis. For a while, due to the impact of the Covid-19 pandemic, there was a freeze on federal student loan interest and repayments. However, as of September, this freeze is officially over. Interest will start accumulating again, with payments resuming in October. This is crucial for students to remember, especially those who benefited from this temporary relief. “That’s a key thing to remember because that pause was on for a couple of years due to Covid,” she said in an interview with Tracy Byrnes.
There’s also another pivotal update: the Supreme Court blocked the student loan relief which was supposed to offer up to $10,000 for federal student loans and $20,000 for Pell grants.
However, as Byrnes and Greene-Lewis noted, some students don’t need to start making repayments immediately after graduating. Many, though not all loans, allow a grace period, typically up to six months post-graduation, to begin repayments, Green-Lewis said.
Education tax credits: Don’t leave money on the table
Beyond the student loan realm, there are education-related tax credits that often go unnoticed. Two of the primary credits to consider are:
The American Opportunity Tax Credit (AOTC): Applicable for the first four years of college, the AOTC can provide up to $2,500 in tax relief.The Lifetime Learning Credit: Unlike the AOTC, this credit isn’t restricted to the initial four years. It’s applicable even if a student is taking just one class after their fourth year.
Who claims these credits, though? The student or the parents? Greene-Lewis stressed the importance of communication here. These credits are based on income, and many parents might not qualify for them if they claim their child as a dependent, she said.
However, if the parents’ income disqualifies them from benefiting, and the student has some earnings (even if it’s below the IRS filing threshold), the student should consider filing. Doing so could allow them to capitalize on the credits and any federal taxes they’ve had withheld.
“If you’re not getting any benefit from claiming your child because of your income, then you should have your child file their taxes, especially a lot of college students,” said Greene-Lewis. “They work side jobs. But they think they don’t make enough money to file because they’re not at the IRS income threshold. But they’re leaving money on the table, especially if they have federal taxes taken out and they’re eligible for these education tax credits.”
Read the full Q&A below or watch the video above.
Tracy Byrnes: So it’s that time of year. If you have kids going back to college, you’re starting to buy dorm supplies and find sheets for their beds. But don’t forget Uncle Sam offers a bunch of tax breaks. Lisa Greene-Lewis, TurboTax expert and CPA is with us now to talk through them.
So Lisa, first, let’s start with the new legislation. What do we need to know?
Lisa Greene-Lewis: The first thing you need to know is that the freeze on paying your federal student loans is off. And starting September, you’re going to start seeing interest in your account. And then you have to start making payments in October. So that’s a key thing to remember because that pause was on for a couple of years due to Covid.
And then another key piece of legislation that came up on June 30 is the Supreme Court. They did block the student loan relief that was up to $10,000 for federal student loans and $20,000 for Pell grants. So that is blocked right now.
Tracy Byrnes: So just as a reminder, too, kids don’t have to start paying these loans back until they finish with school, right? So there’s no need to panic just yet.
Lisa Greene-Lewis: Yeah. It depends on your loan, but in some cases yes. They do allow a certain amount of time after you finish school. I think it’s up to six months after you finish school because I guess they want to give your kids time to find a job and everything.
Tracy Byrnes: Right, because otherwise parents have to pay the bill. So, yeah, God bless Uncle Sam on that one. But so, check your loan. That’s super important.
Let’s now talk about these education credits that people often forget. American Opportunity is the first one. I think people leave these on the table a lot.
Lisa Greene-Lewis: Yeah, they do. A lot of people are unaware of them. And the American Opportunity Tax Credit — that’s for up to your first four years of college. And it’s up to $2,500. And then the Lifetime Learning Credit — that can be — it doesn’t have to be your first four years of college. It’s actually after your four years. And it could be for one class. So that is one thing to remember for students as well as parents.
Tracy Byrnes: And the final thing we should talk about is who takes these credits. Is it the kids? Is it the parents? I guess it depends.
Lisa Greene-Lewis: Yes. I always recommend having a conversation about who would be eligible because these are income-based credits. And so a lot of times, parents don’t even qualify. But they’re claiming their child as a dependent. So their child can’t claim these credits.
But if you’re not getting any benefit from claiming your child because of your income, then you should have your child file their taxes, especially a lot of college students. They work side jobs. But they think they don’t make enough money to file because they’re not at the IRS income threshold. But they’re leaving money on the table, especially if they have federal taxes taken out and they’re eligible for these education tax credits.
Tracy Byrnes: Yeah, that’s certainly a conversation I’m going to be having with my son, who just graduated this year. Lisa Greene-Lewis, TurboTax expert and CPA, thank you so much for all of that.
Lisa Greene-Lewis: Thank you for having me.
Editor’s Note: The content was reviewed for tax accuracy by a TurboTax CPA expert for the 2022 tax year.