Top tax tips for students heading back to school
As the kids head back to college or university in a few days, why not share some tips with them so they can be sure they are taking full advantage of the tax system to maximize the cash in their jeans.
Here are my five top tax tips for students:
1 Maximize your non-refundable tax credits.
If you earn income during the year, perhaps from a part-time or summer job, then the various non-refundable credits available to you as a student should come in handy to reduce your federal, or in some cases, provincial taxes payable.
The most common credits for students include: tuition, education, and textbook credits, a credit for the cost of monthly public transit passes, a credit for interest paid on certain student loans and the relatively new Canada employment amount, if you had employment income in 2009.
2 Your scholarship is tax-free!
The tax rules changed back in 2006 to exempt the full amount of any scholarships, fellowships, bursaries, study grants and artists' project grants received by students from tax, provided the program you are enrolled in entitles you to the education credit.
3 Report only the EAP portion of RESP withdrawals.
Only the educational assistance payments (EAPs) from your Registered Education Savings Plans are taxable. EAPs consist of the income, growth, or Canada Education Savings Grants (CESGs) paid out to you from your RESP. Any contributions refunded to you are tax-free.
4 Claim moving expenses.
If you moved back home from school during the summer months to earn employment income, you can deduct your moving costs against your summer employment earnings provided your move was more than 40 kilometres.
5 Consider a TFSA for extra cash.
Saved some extra cash from working during those summer months? Why not sock up to $5,000 into a new Tax Free Savings Account (TFSA). The money grows tax- free and you can access your funds whenever you want, for any reason. Plus, any amounts you do withdraw can be re-contributed, beginning the following year.
Still saving for kids' education?
If your kids are younger and you're still in the accumulation stage, recall that as of this year, you have two tax-preferred options for savings: RESPs and TFSAs.
While each family's situation is different, it's generally best to direct post-secondary savings dollars first towards maximizing the CESGs. That means contributing up to $2,500 annually to an RESP to get the full 20% annual CESG of $500.
If you're new to RESPs, you can make a larger contribution this year to catch up on prior years' CESGs. You can receive CESGs back to the year the child was born (post 1997) subject to a maximum of $1,000 of CESGs annually and up to a lifetime per-child maximum of $7,200.
Once you've maximized current and prior years' CESGs, it's best to direct any extra post-secondary savings toward your $5,000 TFSA limit, since TFSA funds can be used for any purpose while RESP income and growth are restricted to post-secondary level education.