Tag: education

Tax Rules for Students Working

Scenario: An 18-year-old college student, who is claimed as a dependent on his parents’ tax return, decides to get a job. He wants to know how this will affect his parents’ return. 

There are three main concerns when a student takes up a job while being claimed on his parents’ tax return.

#1. Can my parents still claim me?

Your parents can still claim you even if you get a job, so long as you’re still under the age of 24 at the end of the year, remain a student, and you don’t provide over half of your support. Technically, you’re supposed to live with your parents, unless the only reason you’re not is because you’re going to school.

#2. Do you have to file a tax return?

Maybe. As a dependent, there are certain filing requirements you must meet to be required to file.

If your income comes solely from a W2 job and you haven’t married, you must have made over $12,550 (for the 2022 tax year). If you made less than this, you might still want to file if a refund is in order. Which leads us to our third concern.

#3. If I file, will I owe?

How much you’ll get back or owe boils down to your standard deduction. As a dependent, your standard deduction is the larger of $1,100 or the income you earned plus $350 (but not more than $12,550).

For example, you got a summer job and made $5,600. Your standard deduction is the larger of $1,100 or $5,600 plus $350. Your standard deduction is $5,950. On a straight-forward return like this, taxable income is 0 and there’s very likely a refund.

Note: It’s important for you and your parents to be on the same page. The best course of action is to consult a tax professional before getting a job to have a higher degree of certainty of what to expect come tax time.

The American Opportunity Tax Credit

If you, your spouse, or dependent(s) attended postsecondary school and have not completed the first four years, you might be eligible to claim the American Opportunity Credit. This credit is per eligible student. If there are two eligible students on the return, then the credit can be claimed for both students.

The credit must be claimed for expenses paid during the relevant year. For example, you cannot claim the credit on your 2023 tax return if the expenses paid were for an academic period in 2022. The only exception is if expenses paid in 2022 were for an academic period that began in the first 3 months of 2023.

The IRS has four requirements that must be met by the qualifying student.

  1. The student must not have completed the first four years of postsecondary education.
  2. The credit must not have been claimed by you or anyone else for the student for any 4 tax years before the given tax year in which the credit is being claimed.
  3. The student must have been pursuing a degree, certificate, or recognized educational credential; and, must have been enrolled at least part-time as determined by the educational institution.
  4. As of the end of the tax year in which the credit is being claimed, the student must not have been convicted of a federal or state felony for possessing or distributing a controlled substance.

Once it’s been determined that the student and the educational institution are eligible for the credit, it’s time to add up the qualified expenses.

Qualified education expenses include any student activity fee that must be paid to the institution as a condition of enrollment. Books and supplies required for any course, whether paid to the institution or not, are also qualified expenses.

There are two important things to know when claiming this credit.

  1. Form 1098-T is mandatory. This form is issued to the student by the educational institution. So, whether you self-file or go to the a tax preparer, make sure you have access to this form.
  2. The taxpayer bears the burden of proof whenever a credit is claimed. This means that the taxpayer must keep records to substantiate the eligibility of the student and institution, as well as the qualified expenses paid.