This year, you don’t just have to worry about filing your taxes correctly – you have to worry about getting the best financial aid deal out of your taxes. No pressure – right?
It doesn’t have to be overwhelming or confusing; we’ve got you covered. Conquer your taxes – and make the results work to your advantage – with our do’s and don’ts of tax season.
1. Do know the difference between tax-free and tax-exempt scholarships. Scholarships fall into two categories: tax-free and not tax-free. Before you apply, ask the scholarship provider about their tax status. You don’t want to win a scholarship only to lose some of that money in paying taxes. Unless it’s more than worth it, of course.
2. Do take advantage of tax credits. There are two tax credits available to students and their families filing their taxes: the American Opportunity and Lifetime Learning tax credits. Eligible students can claim up to $2,500 with the American Opportunity tax credit; and if the tax credit pays your tax down to zero, you can have 40% of the remaining amount of the credit – up to $1,000 – refunded to you. The Lifetime Learning tax credit is worth up to $2,000, and there is no limit to how many years it can be claimed.
3. Don’t default on your student loans. Defaulting on your student loans has far-reaching ramifications, one of which is no more tax refunds. The federal government has the right to garnish your tax refund for each year you’re in default.
4. Do deduct your loan interest. As a borrower, you are eligible to deduct up to $2,500 on qualified student loans for interest paid. To be eligible, borrowers must make less than $80,000 a year – or $160,000 if married and filing jointly.
5. Do your research on student loan forgiveness and taxability. Student loan forgiveness is a huge benefit for borrowers working in certain fields. After 10 years – more of less depending on the type of service – student borrowers can have the remaining balance of their loans forgiven. However, it comes at a cost. If your student loans are forgiven, you’ll have to pay taxes on the remaining balance paid.
6. Don’t lie on your taxes. Intentional or not, mistakes on your taxes don’t just land you on the IRS watch list. They will affect your financial aid. The FAFSA asks for financial information from the prior prior tax year, meaning you could miss out completely if your taxes are pulled for review.
Filing your taxes plays a large role in formulating future financial aid. Be smart about the process, take your time and double check your financial information.
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