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Full-Time Student on the GI Bill? You Might Be In a Unique Tax Situation

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I had someone propose an interesting question to me the other day regarding Tax Returns. The basic question went something like this: “I’m a full-time student on the GI Bill and I have zero income. Should I file a tax return?” My first thought was, “No you have no requirement to file a tax return.” But then I asked a few more questions.

This individual was attending a private university here in the National Capital Region and his GI Bill did not cover the entire amount of his Qualified Education Expenses (tuition and fees). He was paying for the additional expenses with a loan.

So, what should he do? He should file a tax return because he might get a refund even though he had no income and had no income taxes withheld. Here is how:

  1. All of his income from the GI Bill, like all other VA benefits, is tax-free including the allowance he receives for living expenses.
  2. Even if you take a loan to pay for the additional Qualified Education Expenses (those the GI Bill does NOT cover), those expenses are accounted for in the year you pay for the expenses, not the when you pay the loan.
  3. The individual is in his first four years of college and therefore is eligible for the American Opportunity Credit.
  4. A portion of the American Opportunity Credit is refundable. This means you can receive more in credit than you paid in taxes. The maximum amount that you can receive is 40% of the total credit.
  5. The American Opportunity Credit is 100% of the first $2,000 in Qualifying Education Expenses and 25% of the next $2,000 in Qualifying Education Expenses for a total of $2,500. So, the maximum refundable credit is $1,000.

That is a pretty good deal in regards to your education, but there is one other hurdle. If you are younger than 24, the IRS says the following:

You do not qualify for a refund if items 1 (1.1, 1.2, or 1.3),  2, AND 3 below apply to you.

  1. You were:
    1. Under age 18 at the end of 2011
    2. Age 18 at the end of 2011 AND your earned income was less than one-half of your support
    3. A full-time student over age 18 and under age 24 at the end of 2011 AND your earned income was less than one-half your support
  2. At least one of your parents was alive at the end of 2011
  3. You are filing a return as single, head of household, qualifying widow(er), or married filing separately for 2011.

The IRS states that scholarships do not count as support received. IRS Pub 970 doesn’t specifically state anything concerning whether VA benefits count as support. But based on an example in Chapter 1 of Pub 970, it appears that the VA benefits might not count as support received. As always, consult with your tax advisor to determine how you particular situation should be handled.

The GI Bill is a great benefit. For those who are using it at a private or out-of-state school, you might also get some help from the tax code. Don’t forget to see if you qualify.

 

Curt Sheldon, EA is a Fee-Only Financial Planner and Enrolled Agent based in Northern Virginia.  He can be contacted at (703)542-4000, (800)928-1820 or Curt@CLSheldon.com

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication

The information contained in this blog is for general financial education and should not be construed as individual financial advice. Please consult your own financial, tax or legal advisor prior to applying any principles discussed here to your own financial situation.