be difficult for us to think about April 15th on October 13th,
especially when we have holiday preparations lined up from
Halloween to Mardi Gras. However, now is the best time to
begin our tax preparations, especially when we have new scholarships
and school loans lined up to activate throughout the school
year. How will this extra income affect our taxes next year?
school loan, provided in many cases by our local banks,
and in most cases through government loans provided through
is a binding contract that supplies money for education now
with a huge debt after graduation. The major advantage to
a government loan is the low interest rate. Plus, the student
is granted a six-month reprieve after graduation to begin
repayment. In some mitigating circumstances (like a lousy
job market), the student can plead for an extension on the
repayment plan. As an added bonus, the IRS does not
view a school loan as income. Here's what they say:
school loan is not taxable at the time you get the money and
should not be included as income on your return. A loan is
not income because you are expected to repay the amount borrowed
(plus interest). If, at a later date, any part of the loan
is forgiven, the amount forgiven would be income in that year.
Under certain circumstances, student loans forgiven are not
loans are advantageous for families with limited incomes,
because the interest can be paid even while the student attends
school. Plus, students and/or parents can opt out of the full
amount granted in the loan. For instance, a graduate student
that provides proof of need usually receives $18,000 per year.
This amount is expected to pay for rent, food, books, classes,
and other extraneous necessities and fees throughout a 12-month
period. Believe me, this is difficult to budget, especially
if the student doesn't work (and many grad students are restricted
from work by their institutions of higher learning, especially
at the doctoral level).
if the student is granted a scholarship, fellowship, or other
financial assistance, the student may want to opt out of a
portion of that $18,000 loan. This can be done! In fact, it
can be done at any time during the school year for that quarter
or the following quarter and even for the following year if
the loan is granted for that year. But, what happens to our
taxes if we opt out of the loan and accept that scholarship?
fellowships, and other school grants are special, because
we aren't expected to repay these educational financial aids.
It's like getting a huge birthday present from an unknown
rich relative. Additionally, the IRS does not view
any of these gifts as income IF we meet certain criteria.
Let's look at the regulations for a tax-free scholarship:
student must be a candidate for a degree at an educational
institution. If you are not a degree candidate, the entire
scholarship/fellowship, etc. amount is taxable.
you receive as a scholarship or fellowship must be used
for tuition and fees required for enrollment or attendance
at the educational institution, or for books, supplies,
and equipment required for courses of instruction, and
amounts received are not a payment for your services.
amount used for room and board is not tax-free.
student might be a little leery about #3, because many grad
schools pay stipends to their doctoral degree students. This
income is usually meant to compensate for a loss of income
in pursuit of this degree; however - and a big however - this
income also compensates for the teaching/assistance/ research
provided by the grad student for their professors as part
of this degree. So - the best option to avoid a #3 tax-paying
scenario is to make sure your educational institution considers
the stipend a gift, not payment for employment. See the IRS
FAQ with references to further publications on loans,
scholarships, and other educational funds.
way to avoid a major tax headache is to rent a cheap place
or stay in a dorm, and eat less-expensive fruits and veggies
and avoid wallet-sucking fast-food places (and this practice
is also healthier). Another tip employs the choice of jeans
over designer clothes and this includes trips to used-clothing
stores instead of to places that utilize high mark-ups. Additionally,
check how your student (or you) fits within the IRS
Hope and Lifetime Learning educational credit programs.
Sometimes these credits supply a welcome break from stressful
financial situations during a college career.
though, if the student paid for books, classes, and other
school-related items, and a low-budget lifestyle leaves money
in the bank at the end of the year? Leftover money is not
taxable if the intent is to use the money - eventually - for
educational expenses. In the meantime, this leftover cash
can be used to lower next year's loans, and can be used for
investments which gain interest to offset the lower-interest
FAFSA loans. The latter choice is fraught with taxable implications
unless you opt for equities that pay out in tax-free dividends
and if you don't sell the equities during the tax year. Additionally,
the money used for investments may be viewed as income, unless
the money is withdrawn to pay for school classes, books, etc.
during the college career.
the investment risk factor comes into play with the latter
ploy, because the stock market may be bearish instead of bullish
when the need to use that money arrives. The tactic to use
here is diversity, where - as mentioned in last week's article
- equities are balanced with compound-interest savings accounts
and bonds. This practice of frugal living combined with diversified
investment strategies may yields results in the long run.almost
as fruitful as a good education. Students who stay in school
and achieve higher
degrees often make more money. We'll compare at how
much more we can make and use for investments next week.
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