Tax Exemptions for Students in California

As of late 2018, U.S. college graduates collectively owe more than $1.5 trillion in student loan debt – a record-setting figure that has doubled in size since mid-2009. According to data compiled by the Institute for College Access and Success, the average amount of college debt in California is more than $22,700 per student, with debt reported among roughly 50% of respondents. Graduates of certain universities reported debt loads far higher than the state average, with some owing as much as $38,000 – or more. With student loan debt creating such a heavy financial burden for enrolled students, recent graduates, and their family members, it’s natural to wonder whether state or federal tax laws could offer any relief. While students and graduates are seldom exempt from the requirement to file income tax returns, many qualify for valuable student tax breaks, including various state and federal credits and deductions. Our tax preparation service for college students has compiled just a few examples in this short guide.

Are College Students Exempt from Taxes in California?

In most cases, the answer to this question is no, in regard to both federal and California income taxes. As the IRS explains, it is not your status as a current or former student that determines your tax filing responsibilities, but rather, factors such as:

• How much income you earned
• Whether you are a U.S. citizen or U.S. resident (such as a Green Card holder)
• Whether you meet age requirements for filing taxes

The IRS website features a simple questionnaire form designed to help users determine whether they are required to file a federal personal income tax return, meaning some version of Form 1040. If you are unsure of your filing requirements, or need help determining your filing status, you should discuss your questions with an experienced California CPA for college students. Keep in mind that, in addition to federal filing obligations, you may have separate obligations to file a California resident income tax return, or Form 540.

Tax Credits and Deductions for College Students

Tax credits and tax deductions can both help lower the amount you owe the IRS. However, they don’t work in the same way. Tax credits directly reduce your final tax bill, like receiving a coupon for $10 off on a product. For instance, a tax credit worth $500 would lower your final tax liability by $500. Unlike tax credits, tax deductions do not reduce the final amount that you owe. Instead, deductions lower your overall taxable income, meaning less of your income is subject to tax. Some credits and deductions are available to eligible students nationwide, because they are offered at the federal level, while others are specific to the state of California. A few examples are listed below. However, before proceeding, it’s important to understand a few acronyms that you may come across when planning and filing your taxes:

• IRS – The IRS, or Internal Revenue Service, administers federal taxes nationwide.
• FTB – The FTB, or Franchise Tax Board, is a state agency. It is similar to the IRS, but only handles California taxes.
• TCJA – In late 2017, Congress passed a law called the Tax Cuts and Jobs Act, which drastically overhauled many portions of the tax code.

Federal and California Tax Credits for Students

Some students may be able to claim California and/or federal tax credits to help alleviate college loan debt. Examples of student tax credits include the following:

• American Opportunity Tax Credit – The AOTC is a federal tax credit worth up to $2,500 per qualifying student. In addition, the AOTC also comes with another benefit: as the IRS explains, “If the credit brings the amount of tax you owe to zero, you can have 40% of any remaining amount of the credit (up to $1,000) refunded to you.”
• College Access Tax Credit – The CATC is a California student tax credit. Its potential worth depends on how much the taxpayer has contributed to California’s CATC fund.
• Lifetime Learning Credit – The LLC is a federal student tax credit worth up to $2,000, depending on the student’s educational expenses.

Tax Deductions for Students

In addition to the tax credits listed above, several deductions may also be available for students who meet eligibility requirements. College student tax deductions include the following:

• Student Loan Interest Deduction – This is a federal tax deduction which enables eligible students to deduct as much as $2,500, depending on how much they paid in student loan interest.
• Tuition and Fees Deduction – This is also a federal tax deduction. It allows qualified students to deduct various educational expenses from their income, potentially reducing the amount of taxable income by as much as $4,000.

California Tax Preparation Services for College Students

Student loan debt can put you under serious financial pressure. However, tax credits and deductions could help you save thousands of dollars on your tax bill, depending on whether you meet eligibility requirements. Let our experienced accountants handle the tax filing work for you, so that you can focus on what matters most – taking your studies and your career to the next level. Armed with decades of state and federal tax experience, our knowledgeable and experienced CPAs know precisely what details to look for, making tax preparation stress-free and simple.