Over the last 6 weeks, I’ve written about the basics of taxes from the perspective of a college student. Since the posts were spread out, here’s a summary with links to each piece.
This is an excerpt from a presentation I give to college students about the basics of income taxes.
If you worked in more than one state, you might have a filing obligation in the state where you’re a resident, and in the state you worked in.
The process for handling this situation is:
- Fill out your out-of-state tax return(s)
- Fill out your resident state tax return
- You may be eligible for a tax credit for taxes paid to other states
If You Get a Form 1099-MISC
If you get a Form 1099-MISC, you’ll probably need to file a tax return, and you’ll probably be liable for a tax called self-employment tax. You can read more about self-employment tax in this blog post.
Should You Do Your Own Taxes?
People are surprised when I say people should do their own taxes. My reasoning for saying this is: if you’re capable of doing your own taxes, you’ll never see value in what a professional preparer is doing for you.
So I tell people, yes, you should do your own taxes, but only if:
- You feel comfortable doing them yourself
- You know what you’re doing, and
- You have time
In Part 2, I outlined some of the DIY options available to people for filing tax returns.
When to Ask for Help
- You feel like you’re in over your head or you don’t have time
- You’re self-employed in addition to being a student. Technically, if you get a 1099-MISC from an employer, you’re “self-employed.” This isn’t so complicated in and of itself. But if you have a real side business with income and expenses, it can get complicated.
- You have income from multiple states and aren’t comfortable with navigating the filings yourself.
Who to Ask for Help
You can find help from people with licenses, such as enrolled agents (like me) and CPAs.
No licensing is required for preparing tax returns (except in a few states), so you can find unlicensed preparers too.
The best way to choose is to ask around.
I do not recommend going to Google and searching for tax preparers and just going down the list calling or sending e-mails. Ask your friends, parents, professors, etc. for recommendations.
This past tax season, I had to prepare an Oregon tax return for a client who had moved from Iowa to Oregon.
I’d never prepared an Oregon return, but this type is situation is pretty basic stuff a preparer deals with all the time.
Except, I had a moment of panic when I was reviewing the return. My software generated a warning saying I needed to enter my Oregon tax preparer information or exemption.
I had a momentary panic attack.
Oregon requires preparers to be licensed with the state.
Unfortunately, Enrolled Agents are not exempt. Of course not.
CPAs and attorneys, of course, are exempt. But since EAs are the freaks in the attic of the tax world, we of course are not exempt. EAs who want to prepare Oregon tax returns must pass a test over federal and Oregon tax law.
Thankfully I discovered an “out” for myself when I noted that an out-of-state EA who doesn’t solicit for clients in Oregon is exempt. I was only preparing an Oregon return because my client had moved there, so I didn’t have to be licensed there.
The Iowa legislature is kicking around a preparer licensing proposal that seems to be modeled closely after Oregon.
Not only are EAs not exempt from this proposed law in Iowa, but the Iowa proposal specifically calls out EAs and explicitly states that we are not exempt — but CPAs and attorneys are exempt.
Oregon’s law does the same thing — it explicitly calls out EAs and says EAs aren’t exempt.
These laws and proposals don’t “forget” about EAs — they specifically call us out as being different and not as good as CPAs or attorneys.
I’m confused as to why the lawmakers who come up with these ridiculous laws would think a CPA would know more about state taxes than an EA.
True, the EA exam doesn’t cover state tax issues. But neither does the CPA exam!
Is it just that EAs are so unknown that we generate no respect? Or lawmakers don’t know what an EA is so they assume we’re inferior?
Next year when Iowa’s legislative session starts up again, a group of us EAs in Iowa is going to go to the statehouse and educate our “dear leaders” on what an EA is, and why we should be exempt from the Iowa licensing proposal.
(Personally, I think these preparer licensing laws are no good to begin with, but my main concern is not in fighting against the proposal itself, but rather with making sure EAs are understood and respected.)
This is all we EAs can do — try to educate people so they understand what we are.
As mentioned in Part 3, there are several tax benefits for college students, including:
- American Opportunity Credit
- Lifetime Learning Credit
- Deduction for tuition and fees
- Deduction for student loan interest
Let’s start by talking about the difference between credits and deductions.
- Deductions reduce your income, which reduces the amount of tax you owe by a percentage, based on which tax bracket you’re in. For example, a $100 deduction saves $15 in taxes for someone in the 15% tax bracket.
- Credits reduce the amount of tax you owe dollar-for-dollar.
Most of the time, a credit is better than a deduction.
For further reading about the topic of tax calculations and how tax credits work, see these posts:
American Opportunity Credit
This is the biggest tax credit available for college expenses. Here are the basics.
- Available for students in their first 4 years of college
- You may be able to get a credit of up to $2,500 for college expenses, such as tuition, books, supplies – and even computers
- STUDENTS CANNOT CLAIM THIS CREDIT IF THEIR PARENTS CLAIM THEM AS A DEPENDENT!
- Amounts paid with scholarship funds don’t count toward the credit
- As you can probably tell by the highlighting, number 3 is the most important thing to be aware of with the American Opportunity Credit.
Lifetime Learning Credit
This credit will typically be claimed by people in graduate school, or taking classes part-time after the first 4 years of college.
The credit is 20% of college expenses, up to the first $10,000 of expenses (so a maximum of $2,000).
In the next part, we’ll get into complications you could run into when filing, such as income from multiple states.
I learn something new almost every day in this job, and here’s one example from this past tax season.
The client is a single woman who runs a daycare out of her house.
After her regular expenses were accounted for, she had a small profit. Then we factor in the home-office deduction, which was greater than her profit. However, a home-office deduction can’t generate a loss*, so she was able to deduct only enough home-office expenses to bring her net income down to $0.
(*-She rents her house, so she doesn’t have a mortgage or property taxes; only mortgage interest and property taxes can generate a business loss via the home-office deduction.)
The daycare was the only thing on her tax return. She had no other income, and made no estimated payments during the year.
Her business income was $0, AGI was $0, taxable income was $0, tax credits and payments were $0, refund was $0 and amount owed was $0.
I ran the e-filing diagnostics and was surprised to see that the return didn’t qualify for e-filing. I’d never had an “all 0” tax return before, so didn’t know about “Business Rule F1040-065-02:
At least one of the following must have a non-zero value on Form 1040: Line 22 ‘TotalIncomeAmt’ or Line 37 ‘AdjustedGrossIncomeAmt’ or Line 44 ‘TaxAmt’ or Line 55 ‘TotalCreditsAmt’ or Line 63 ‘TotalTaxAmt’ or Line 74 ‘TotalPaymentsAmt’.
(From page 4 of this IRS publication.)
What that’s saying is, a tax return must have a non-zero amount for total income, adjusted gross income, tax owed, tax credits, total tax, or total payments. If those fields are all zeros, the return cannot be e-filed.
In my client’s case, all of those fields legitimately landed at $0, so we had to file on paper.