As the beginning of a new school year approaches, we’ve been getting a lot of questions from parents with kids who are heading off to college. In case you’re also in this boat, we’ve put together some information about the tax changes you can expect next year:
Can I still claim my college student as a dependent? Determining who can claim a college-aged student as a dependent on a tax return can sometimes be a complex matter. Here are a few key points to consider for your college student:
- Relationship: In most cases, you are eligible to claim your college-aged child as a dependent if the child is your biological child, adopted child, stepchild, foster child, or a descendant of any of these individuals.
- Age and Residency: To be claimed as a dependent, your child must typically be under the age of 24 if they are a full-time student. However, if your student is permanently and totally disabled, there is no age limit. Your student must also have lived with you for more than half of the year, unless they meet specific exceptions for temporary absences. Note that absences to attend school do not count as absences.
- Financial Support: You must provide more than half of your student’s financial support during the tax year. Support includes expenses related to housing, education, medical care, food, and other living expenses. If your student receives scholarships, grants, or other forms of financial aid, these amounts are generally not considered support provided by you.
Are there any tax credits for college tuition? There are two federal credits available to (help) offset the cost of college tuition–the American Opportunity Credit (AOC) and the Lifetime Learning Credit (LLC).
The AOC offers a maximum credit of $2,500 per eligible student for the first four years of post-secondary education, while the LLC provides a credit of up to $2,000 per tax return per year for any level of higher education.
To claim education tax credits, your child must be enrolled at an eligible educational institution. I’d be happy to help you determine if you are eligible for the credit.
In addition to the AOC and LLC, if you or your child are paying interest on qualified student loans, you may be eligible to deduct up to $2,500 of the interest paid. Again, this is subject to income qualifications.
Are distributions from 529 plans taxed? If you’ve been using a tax-advantaged education savings account, such as a 529 plan or a Coverdell ESA, to save for your child’s college expenses, it’s crucial to understand the tax implications.
Qualified withdrawals from these accounts are generally tax-free, while non-qualified withdrawals may be subject to taxes and penalties. Withdrawals for tuition, room and board, and related educational expenses are generally considered qualified.
Does my college student need to file a return? Your college student needs to file a tax return if they meet certain income thresholds or if they have specific types of income that require reporting. Here are some general guidelines to consider:
- Income Thresholds: For the tax year 2023, college students are required to file a tax return if their earned income (such as wages from a job) exceeds $12,950. If your student has unearned income (such as interest, dividends, or capital gains), they are required to file a return if that income exceeds $1,100. These income thresholds change each year.
- Self-Employment Income: If your child is self-employed and nets $400 or more, they are required to file a tax return. Self-employment income includes income from freelance work, gig jobs, or any other form of self-employment.
- Other Tax Obligations: Even if your child’s income falls below the filing thresholds mentioned above, they may still want to file a tax return if they qualify for certain refundable tax credits or if they had federal income tax withheld from their pay and are eligible for a refund.
If you have any questions or require further assistance, please don’t hesitate to reach out to us. We are here to help ensure your tax-related matters are handled efficiently and accurately.