Money Matters

Woman with head buried in tax papers

January not only marks the start of a new semester: It's also the month when you'll receive the paperwork to complete your tax returns-due on April 15. Wading through the forms and rules can be daunting, students say.

"As graduate students, we don't have very simple, straightforward cases," explains Mary Politi, a fourth-year clinical psychology student at George Washington University in Washington, D.C. For example, it can be especially confusing to decide how to claim income from stipends, fellowships and scholarships-which can be taxable or nontaxable, depending on the situation (see Taxable or nontaxable? gradPSYCH asked the IRS).

How can you sort it all out?

Start with reliable information, Politi advises. Aside from your financial aid office or a tax adviser, you can tap the Internal Revenue Service (IRS) Web Site-www.irs.gov.

The site includes a section specifically for students and copies of relevant publications.

Other tips tax experts give:

  • Do your homework. Find out what education tax deductions and credits you can take and what portion of your income is taxable. For example, Kathryn Roecklein, a fourth-year clinical and medical psychology student at the Uniformed Services University of the Health Sciences (USUHS), found that her student handbook outlined whether her stipend was taxable, then verified its guidance with a tax adviser.

  • Consider your options. Some tax benefits cannot be used in conjunction with others. For example, you can only claim one of the IRS's education credits each year. Calculate your return using the different education credits and deductions to determine which is best for you and your family, advises IRS spokesperson Nancy Mathis.

She adds that credits tend to be more advantageous than deductions: A deduction reduces your taxable income, while a credit comes right off the bottom-line number you owe.

Two common benefits for graduate students who pay at least part of their tuition and fees are the lifetime learning credit, which allows you to subtract up to $2,000 in qualified educational expenses, and the tuition and fees deduction, which allows you to deduct up to $4,000. You may also qualify for the earned income tax credit if you (and your spouse) made less than about $35,000 (see Publication 596). If you are making payments on your student loans, you can deduct up to $2,500 in interest (see Publication 970).

Check your work. Errors on your tax return can slow the process, says Mathis. The two most common mistakes: filling in an incorrect social security number-such as by transposing two digits-and math errors. Mathis advises taxpayers to file electronically since e-returns have a 1 percent error rate, compared with the 20 percent error rate of paper returns.

Find out if you can tap free services. The IRS Free File program offers free tax software that can calculate taxpayers' education credits and allows them to file electronically at no cost. Graduate students usually qualify for the low-income program, says Mathis.

Consider filing quarterly. If your employer doesn't withhold the necessary federal income tax from your paycheck, you can wind up with a hefty bill at tax season. That's what happened to Roecklein after her first year of graduate school. Since USUHS takes care of her tuition, only a small portion of her stipend went toward qualified educational expenses, and she ended up taking out a loan just to pay the taxes on the rest. Since then, a tax adviser helped her set up quarterly payments to avoid the lump sum strain. She sets aside money each month, and then uses the IRS's prestamped envelopes to mail in her payment four times a year. (See Publication 505 for details.)

"There's a myriad of stresses in graduate school," Roecklein says. "If you get your budget in place, you don't have to think about it when you have other priorities in mind."

Consider turning to a professional. While many students file their own returns, others such as Roecklein turn to accountants or other tax professionals. Free help is also available through Voluntary Income Tax Assistance sites staffed by IRS-trained volunteers-to find one, call the IRS at (800) 829-1040 or look in your local newspaper-and IRS Taxpayer Assistance Centers, which are listed at www.irs.gov/localcontacts.

USEFUL IRS PUBLICATIONS

505 Tax Withholding and Estimated Tax
520 Scholarships and Fellowships
525 Taxable and Nontaxable Income
596 Earned Income Credit
936 Home Mortgage Interest Deduction
970 Tax Benefits for Education
972 Child Tax Credit

Read these publications at www.irs.gov.