Students get some of the biggest tax breaks available but many fail to file
Reading Week is traditionally a time for post-secondary students to take a break, with maybe a little bit of studying for mid-term exams. While preparing for exams may be the top priority right now, they should not forget to prepare for their next big test: filing a tax return.
Students receive some of the most generous tax credits available to Canadians but you have to file a tax return in order to take advantage. Though you may not be able to enjoy all your tax savings right away, filing a return means you have taken care of an important financial document and prepared yourself for the future when you enter the working world.
Based on my experience, there are five common mistakes that post-secondary students make when approaching their tax return. It doesn't matter what program or how long you have been in school, avoid these pitfalls:
- Tuition slip failure: In order to claim tuition and education credits, you have to have a T2202A Form from your university or college. It includes the amount paid in tuition as well as the number of months you can claim the education and textbook tax credits. Many schools supply this form online so make sure you download it. You need to claim your T2202A Form in the year you receive it. You cannot save up your slips and file them all at once.
- Expecting a major windfall: A tax refund is actually money you have overpaid the government during the year. If you didn't pay income tax in 2014, you cannot expect to get a refund even if you have student credits to claim. However, if you worked part-time during the year, earned less than the basic personal exemption and had tax withheld by your employer, you should file a return to get your federal tax back. The good news is you do get to carry forward your credits to use later. The bad news is that you cannot deduct the full amount of your tuition and education amounts from your tax payable. You can only reduce your federal tax by 15 per cent and your provincial tax by the non-refundable tax credit rate in your home province.
- Leaving it to mom and dad: With the cost of post-secondary education rising, kids may be getting a little financial help from their parents. As a result, many parents may be expecting to claim some of credits too. No matter who pays the tuition, the T2202A Form is always issued to the student and they must claim it first before any transfers happen. If a student has unused tuition and education credits, they are allowed to transfer up to5,000 to a parent, spouse or grandparent instead of carrying it forward to use themselves. However, the student has to file a tax return and sign the back of the T2202A Form to complete the transfer. This is one of the most commonly reviewed credits so make sure you have all the paperwork. If parents cannot produce the signed T2202A Form and the student has not filed first, then the transfer will be disallowed. In addition, the transfer can only happen the same year the student receives the T2202A Form. Once tuition and education credits have been carried forward, you can no longer transfer them.
- Forgetting income: If you worked two or three jobs during the school year, you should receive a T4 from all your employers. Make sure you have them all when you file because the CRA will match them against your return using your SIN. If you are receiving money from a Registered Education Saving Plans (RESP), it is also income and must be reported on your return. Failure to report income twice in a three year span means hefty fines from the taxman even if the amount you failed to report is fairly small.
- Not filing: There is a belief that if you don't earn money or get a refund then it is not worth filing a tax return. This is wrong. If you are planning to get a career, you are going to pay income tax so all of those tuition and education credits will come in handy later. Even if you don't plan on paying income tax in the near future, there are federal and provincial benefits that come as of a result of your tax filing. For example, the quarterly GST/HST benefit is paid out once you turn 18. Provinces like Ontario, B.C. and Manitoba also have benefits. If you don't file, you miss out.
The key lesson for students is whether or not you earned any income this year, make sure you file a return. You will spend your career filing tax returns and facing the shocking reality of how much income tax you pay. There are not many other credits that you can carry forward to use in future years so be sure to claim them while you can. No one wants to pay the government more money than they should. And when you are a student, getting a few extra dollars monthly, quarterly or annually can be a nice surprise.
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