There are quite a few University/College students who email me with questions regarding personal finance. The most typical question usually regards the tax advantages of being a student. The good news is that there are quite a few tax credits for students, the bad news is that most students don’t make enough income to take advantage of them (but can be carried forward/transferred).
It’s been quite a few years since I’ve been in University, but even as a young man with very little income, I thought about various tax strategies. One of which was how to best use the tax credits given to students. What tax credits? Students are offered a tuition tax credit, student loan interest tax credit, an education amount, and a textbook tax credit.
One thing to note is the difference between a tax credit and tax deduction. A (non refundable) tax credit will reduce your taxes owning whereas a tax deduction will reduce your taxable income. A non-refundable tax credit will typically give you 15% (lowest federal tax bracket) of the amount which is sometimes matched by the province. A deduction reduces your taxable income, thus your taxes payable when you file.
Having said that, lets get to the specific tax credits for students:
Tuition Tax Credit
This is perhaps the largest tax break where students will get a non-refundable tax credit (15%) on tuition fees at qualifying institutions. How does this work? If the students tuition for the year was $10,000, then he/she will be able to reduce their income tax by $1,500. If the student hasn’t made any income throughout the year thus no taxes payable, the amount can be carried forward indefinitely.
In addition to the tuition tax credit, $400 can be claimed for each month of full time study as the education amount. Part time students can claim $120/month providing the education is at least 3 weeks long and 12 hours per month. Employees can claim the education amount providing that the tuition is not reimbursed by employer.
Remember though that the amounts above are what’s eligible to be claimed, and not what you get back. So if the student is full time for the year, they can claim $4,800 ($400*12 months) which results in the amount $720 refunded ($4,800*15%).
Textbook Tax Credit
Students eligible for the education amount can also claim the textbook tax credit. The benefits are a non-refundable tax credit in the tune of $65/month for those who qualify for the full time education amount and $20/month for part time. As with the education amount, the tax credit is worth 15% of the total claimed. Therefore, students can get back $117 / year (15% of $65*12 months) for full time or $36 /year for part time. My calculations are assuming that the student is in school year around.
Student Loan Tax Credit
If you were lucky, you didn’t have to experience the pain of obtaining student loans. I remember back when my wife had to get student loans, the worst being the long, all day wait, lineups. The bright side being is that a student loan is like an investment loan for higher future income for which I am grateful. Tax wise, a student loan is similar to an investment loan. But instead of the interest on the loan being tax deductible, there is a federal tax credit offered (15%). So if you paid $1,000 in student loan interest for the year, then you can $150 back on your income tax paid in already.
Note that every province has different incentives/rules regarding student loans. For example, in 2008, NL announced the elimination of NL student loan interest.
Transferring Unused Credits
As I mentioned above, the typical student does not earn much income therefore, very few pay income tax. If that is the case, the tax credits are useless and should be carried forward to a future year. In addition to the carry forward, there is the option of transferring unused credits to a spouse/parent/grandparent. If the student is not able to use the tuition, education, or textbook tax credits in the tax year, then up to $750 in tax credits can be transferred. Note though, any carried forward amount cannot be transferred.
There are quite a few tax advantages of being the student. We took advantage of these credits by accumulating them while we were students and carrying them forward to future, higher income, years. Did you take advantage of student tax credits?
Reference: KPMG Tax Planning 2009
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