Among students' many looming spring deadlines is an important financial one: April 15, the day tax returns must be postmarked to the IRS. Wading through the forms and rules can be daunting, especially since graduate students often don't have straightforward financial situations.
Six steps every student should take:
Get the facts. Find out first whether you need to file a return, and if so, what education tax deductions and credits you can take and what portion of your income is taxable. Scholarships and fellowships are generally nontaxable, as long as you are a candidate for a degree at an institution that meets the IRS eligibility requirements and use the money for tuition and fees required for enrollment or attendance, or fees, books, supplies and equipment required for your courses. Any portion of the money used for other purposes, such as room and board or optional computer software, is taxable.
The situation gets more complicated when students also work for their university, since payments they receive for performing a service — such as being a graduate teaching assistant — are taxable. However, while that income is technically taxable, students performing services at their university are usually exempt from the Social Security and Medicare withholdings (also known as FICA taxes). The IRS Web site includes information on determining your status.
The key, students say, is to keep careful records — such as receipts, scholarship letters and bank statements — about where the scholarship or fellowship money came from and how you used it, in case you're later audited.
Consider your options. 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. 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 and the tuition and fees deduction. For details, see Publication 970. You may also qualify for the earned income tax credit if you (and your spouse) made less than $38,343. If you are making payments on your student loans, you can deduct some interest.
Check your work. Errors on your tax return can slow the process. Two common mistakes: filling in an incorrect social security number — such as by transposing two digits —and math errors.
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. Find out how to spread out your payments at www.irs.gov/publications/p505/index.html
Use Free File. Graduate student usually qualify for the IRS Free File program, which offers free tax software to taxpayers with an adjusted gross income of $52,000 or less and allows them to file electronically at no cost. The software can calculate taxpayers' education credits, among other things.
Get help, if you need it. While many students file their own returns, others turn to accountants or other tax professionals. Free help is also available through Voluntary Income Tax Assistance sites staffed by IRS-trained volunteers and IRS Taxpayer Assistance Centers.
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