How College Students Can Maximize and Make the Best Use of Their Tax Refund

College students are notoriously known for being bad with their money, but this doesn’t have to be the case. The Internal Revenue Service (IRS) provides students paying for higher education tuition to take some tax deductions that can maximize the amount received as a tax refund. The other side of the coin is that once you receive the tax refund, you have to figure out how to make the best use of the money.

College Tuition Tax Credits

If you’re paying for your own college tuition, you may have the option of taking advantage of one of two tax credits available - Hope/American Opportunity and Lifetime Learning. If you meet certain requirements, these programs can help you reduce how much you pay Uncle Sam and may even require Uncle Sam to pay you back.
Let’s cover what a tax credit is so you can fully understand how it can help you maximize your tax refund. When you earn income, you have to pay taxes on the money you earn. An education tax credit, however, allows you to deduct the amount you paid in college tuition costs, thus reducing the amount of income on which you have to pay taxes.

Hope/American Tax Credit

Part of the economic stimulus American Recovery and Reinvestment Act of 2009 was an expansion of the Hope Tax Credit, which was renamed the American Tax Credit. This tax credit is applicable to the 2009 and 2010 tax years. The old tax credit allowed you to deduct tuition costs for up to two years of your college education. The expanded version of the tax credit allows a deduction of four years of tuition costs and an expansion of income eligibility requirements.

Criteria for Claiming the Credit:
• You must be enrolled at least as a half-time student in an undergraduate degree program or legitimate educational program
• $2,500 is the maximum annual credit per student permitted
• For low-income students who have little or no tax liability, the credit may permit for up to $1,000 to be paid back to you
• The amount of the credit decreases if adjusted gross annual income for an individual is $80,000 and $90,000 or $160,000 or more for a joint return
• In order for a student to claim the credit, they must not be listed as a dependent on their parent’s (or parents’) tax form

Lifetime Learning Tax Credit

The Lifetime Learning Tax Credit allows you to deduct all of the years of your college tuition costs. This credit also allows for deductions for those that take a course or courses in order to improve their hob skills.

Criteria for Claiming the Credit:
• The credit is allowed for 20% of the tuition and fees paid for a college tuition, course or course
• The maximum amount of a tax credit is $2,000 per year, which is 20% of $10,000 in tuition and fees
• The amount of the credit decreases if adjusted gross annual income for an individual is $50,000 and $60,000 or $100,000 or more for a joint return
IRS Publication 970, Tax Benefits for Education, provides more information on education tax credits.


Making the Most of Your Refund

Essentially, you have three options in using your tax refund – spend it, save it or donate it. While it may be more fun to take all of your college pals out for a night at the bar, it’s not really the wisest way to spend your tax refund check. You worked hard for it though, so you should get to enjoy spending some of it on something fun.
Sit down with a paper and pencil and make a list of the ways you want to spend the money. Now list outstanding debt or bills you may have (such as credit card balances). Pull out your bank statements and look at the balances of your checking and savings accounts.

Take the amount of your refund and divide it up into parts, deciding how much you need to pay off or reduce outstanding debt and how much you need to save (make sure you have an emergency fund cushion). After you pay off or pay down at least one bill and sock away some money in savings, see how much you have left to have a little fun. Now look at your list of fun items and choose one based on the amount of money you have left to spend.