Graduate Student Taxes


It’s tax time here in the U.S. Figuring out how much your taxes will be is a headache for many, including grad students. Each semester seems to bring a different set of circumstances.

Earlier in the semester I went to a seminar held by the university to help domestic grad students navigate their taxes. I think it helped me to understand the nuances a bit. I use tax software to get the job done since it’s proven to be more efficient and more accurate than me sitting down with my 1040. But it’s always nice to understand what’s going on inside that black box of TurboTax or whatever you might be using.

Of course, I don’t have to tell you that I’m no tax expert and claim no responsibility if things go wrong on your taxes. But hopefully this information will help other grad students unsure about how to maximize their tax benefits.

Student-specific tax considerations

Just focusing on the student aspect of your tax return, there are several possible deductions and credits that you may be entitled to. They are:

  • Tuition and Fees Deduction
  • Student Loan Interest Deduction
  • American Opportunity Credit
  • Lifetime Learning Credit

One of the tricks here is that you may have to make a choice between them on your taxes. For example, the American Opportunity Credit and the Lifetime Learning Credit can’t be claimed in the same year.

It’s worth noting that in general, a credit is better than a deduction.

Credits do more to minimize your tax liability, because they get you a dollar-for-dollar reduction in your taxes. If you get a credit for $300, that’s $300 off your tax bill (or added to your refund!). A deduction of the same amount will reduce your tax bill by a fraction of that amount, based on your tax bracket. Deductions work to reduce the overall amount of income you’re being taxed on.

(The exception to this rule may be if you’re on the border between two tax brackets and taking a deduction will put you into the lower bracket overall.)

Qualified Education Expenses

All of these deductions and credits take into account your qualified education expenses, but that term can have a different meaning depending on which deduction or credit it is. Also, once you use a portion of qualified education expenses for one credit or deduction, it can’t be used toward another.

What counts as qualified education expenses (in general)?

  • Tuition and fees required to enroll in or attend your university paid with taxable income
  • Required course-related expenses (e.g. books, supplies, equipment) paid with taxable income

What doesn’t count?

  • Room and board (with one exception! See below.)
  • Travel
  • Research
  • Equipment that’s not required by your university

There’s one exception to the rule here: room and board DOES count as a qualified education expense for the student loan interest deduction. So it’s possible to deduct from your taxable income interest you paid on a student loan that was used to cover your room and board.

The amount of your annual qualified education expenses can be distributed amongst the deductions and credits you’re taking. Each of the deductions or credits has a maximum limit on how much you can claim. For example, if you paid $15,000 in tuition in 2013, you can only deduct a maximum of $4000 for the tuition and fees deduction. That leaves you with $11,000 to distribute between the other credits and deductions.

The Details

Tuition and Fees Deduction:

  • Used to reduce your total amount of taxable income based on your qualified education expenses.
  • Maximum deduction: $4000
  • Use Form 8917

Student Loan Interest Deduction:

  • Maximum deduction: $2500 (or total amount you paid in student interest if it’s smaller than $2500)
  • Must be enrolled half-time and pursuing a degree
  • Your loan must have been used to pay for qualified education expenses* and cannot be from a relative or from a qualified employer plan
  • Use Form 1098-E

* Remember qualified education expenses for the Student Loan Interest Deduction are a little looser than for the other credits and deductions. Your student loan must have been taken out to cover…

The usual stuff:

  • Tuition and Fees
  • Books, supplies, and equipment

And/or:

  • Room and board ( the smaller of how much you paid or how much your university designates as the “cost of attendance”)
  • Other necessary expenses (such as transportation to and from school)

American Opportunity Credit (Line 49 of Form 1040):

  • Can only claim for 4 years of postsecondary education
  • Must be pursuing a degree, enrolled at least half time
  • Maximum credit: $2500 per person
  • If you spent at least $4000 in qualified education expenses you can claim the whole $2500 credit (100% of the first $2000 of qualified education expenses and 25% of the next $2000 of qualified education expenses)
  • Use Form 8863
  • Note: You can’t claim the American Opportunity Credit and the Lifetime Learning Credit in the same year.

Lifetime Learning Credit (Line 49 of Form 1040):

  • Available for any number of years of postsecondary education
  • Available for anyone taking courses to gain or improve job skills (no need to be pursuing a degree!)
  • Maximum credit: $2000 per tax return
  • You can claim 20% of the first $10,000 of qualified education expenses
  • Use Form 8863
  • Note: You can’t claim the American Opportunity Credit and the Lifetime Learning Credit in the same year.

Bonus Tax Tips

Be strategic about which credits and deductions you take.

There are limits on how much you can claim for a credit or deduction and also which benefits you can combine. In order to maximize your taxes, you have to be strategic about how to distribute your qualified education expenses because you only have a certain amount to divide between the different options. Because credits are generally a better idea, it’s a good idea to start with the biggest credit you qualify for and work your way down the list of credits, then in descending value of the deductions, until you’ve allotted all of your qualified education expenses.

For example, if you have $4000 in qualified education expenses and didn’t pay any student loan interest and you choose to deduct it from your income using the Tuition and Fees deduction, then you wouldn’t be able to take any of the other credits or deductions listed here because you’d have used up all your qualified education expenses. If you are eligible for the American Opportunity Credit (AOC) and chose not to take it, you could be missing out. Instead, you could use that $4000 toward the AOC and forego deducting that amount from your taxable income. It’s worth comparing the two scenarios to see which saves you the most money.

If you’re on a fellowship or grant that doesn’t withhold taxes, make sure you’re paying your estimated taxes quarterly.

There are penalty fees if you don’t pay estimated taxes throughout the year, plus this will reduce the shock of a huge tax bill in the spring. The IRS provides forms to do this and I’m sure there’s an option to go through the process using the various tax software out there.

Minimize your refund.

This isn’t just advice for grad students. A lot of people get excited about spending their tax refund every spring, but getting a tax refund should not be the goal. The goal is to break even in April, so that you don’t owe any taxes and you don’t get a refund.

A tax refund is the government giving back your money you lent it at 0% interest. Which is to say, the money you could have had invested in S&P index funds making 30% return last year. Or the money you could have already spent on that new pair of shoes you’re planning to buy with your refund. Not only did you miss out on the investment returns or the extra few months with your shoes, the money in your refund has slightly less buying power than it did when you first earned it when you consider inflation. So if you have a big refund this spring, consider decreasing your tax withholding on the W-4 form.

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