Learning Outcomes

  • Apply accounting principles to properly minimize and file taxes

Taxes are what we pay for civilized society.

—Oliver Wendall Holmes, Jr.[1]

In general, anyone who works or makes money in any way is required to file a federal income tax return unless their income is less than the standard deduction. The standard deduction for single (unmarried) taxpayers in 2020 was $12,400, and is adjusted annually for inflation. The standard deduction is twice that for married couples filing jointly. In addition, you may want to file a return to claim a refund. Federal income tax refunds primarily come from two sources: withholding in excess of the actual taxes due and refundable tax credits.

Student-Specific Tax Rules

Tax rules are complicated, but if you are using a tax preparation service or a reputable online tool, and if your situation is fairly ordinary (such as a working person with no sideline business or significant investments), you can probably manage your tax filings. Below are a few rules that apply to students, specifically:

Scholarships are excluded from gross income to the extent that they are used to pay for direct costs of higher education, including tuition, fees, books, and other equipment or supplies required for enrollment. However, the amount of any scholarship that exceeds that direct cost of schooling is taxable, including scholarships that are used for room and board or other personal living expenses.[2]

Student-Specific Tax Credits

In 2020, there were two tax credits available for higher education expenses: The American opportunity tax credit and the lifetime learning tax credit.

  • The American Opportunity Tax Credit (AOTC) is available for the first four years of undergraduate education expenses (including tuition, fees, and textbooks) if the student is enrolled at least half time. The credit provides a 100 percent credit for the first $2,000 of qualifying educational expenses and a 25 percent credit for the next $2,000 of expenses, for a maximum credit of $2,500 (in 2020). Up to $1,000 of this credit is “refundable,” which means that even if you don’t owe any taxes, you can still get the refundable portion of the credit.
  • The lifetime learning credit (LLC) is available for undergraduate or graduate expenses (tuition and fees only, not textbooks). The credit lets you claim 20 percent of $10,000 of qualifying educational expenses (over a year), for a maximum credit of $2,000.

Paying Taxes

During the year, as you work, your employer withholds federal income taxes from your wages and periodically sends them to the Internal Revenue Service (IRS) where they are stored in an account tied to your name and social security number. In addition, your employer will withhold Social Security taxes and some other items, like insurance costs, child support, retirement, and state income tax, if any of those apply.

On or before April 15th of the following year, you will file a form 1040 that calculates your actual taxes, and if your withholdings exceed your actual tax bill, you’ll get a refund. If your withholdings were less than your actual taxes according to your 1040, you’ll have to make a payment when you file the return.

A white person sitting at a computer with a calculator. The computer is showing a spreadsheet of tax values.Again, the tax law is complicated and extensive, so it pays to use either an expert system or an actual human expert to calculate and file your state and federal taxes each year.

Don’t get behind on your taxes because they are a legal obligation, but also don’t leave money with the federal government that belongs to you. You are not required to pay anything more than the legal minimum required of you by the Internal Revenue Code. The Supreme Court of the United States established this maxim early on, saying, “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”[3]

Practice Question

  1. inscribed on the archway leading to the offices of the Internal Revenue Service in Washington, D.C.
  2. Gunasekara, Offain. “Taxes 101: A Primer For College Students.” Bankrate., June 1, 2012.
  3. Gregory v. Helvering, 293 U.S. 465 (1935).