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Student with a summer job? Maximize your tax breaks

There's a stark lesson for students slogging it out at summer jobs trying to pay for an education: life isn't fair, and it's been getting less fair.

We all know education costs have skyrocketed — tuition alone can exceed $8,000 a year. In addition, books, supplies, housing and transportation can push the cost of higher education well into the tens of thousands of dollars per year.

What's really unfair is while students struggle to make more over the summer and throughout the year to keep pace; fewer tax breaks are available from the governments who claim they need a more educated workforce.

There was a time not long ago when basic tax exemptions, deductions and credits were high enough to spare most students the burden of paying income tax. Those tax breaks have been rising with inflation but falling way behind increases in what many students need to earn to get a higher education.

For example, the basic personal amount all Canadians can earn before having to pay income tax to the Federal government in 2011 was $10,527. Students who earn more in a year have to rely on deductions and credits specific to them to keep their savings from going to the government.

Increases in that basic personal amount and many deductions and credits (depending on individual circumstances) have not kept pace with the soaring cost of education.

To be sure you are at least taking advantage of what's available here are some of the tax credits for students on a Federal level:

  • Employment Credit on the first $1,065 of your employment income.

  • Tuition fees of more than $100 per year.

  • Education costs of up to $400 for each month of enrollment for full-time students (or part-time students with a disability) and $120 a month for part-time students.

  • Textbook costs to a total of $65 a month for full-time students and $20 a month for part-time students.

  • A Public Transit Pass Credit for monthly or longer transit passes. Like any deduction or credit you will need receipts to make this claim.

Deductions are also available for students who move more than forty kilometres to be closer to school or for a summer job.

Depending on the province of residence there are equivalent provincial credit amounts.

Lorn Kutner, a tax partner with Deloitte says students can keep costs under control by getting educated on the tax breaks available to them. He says if those tax credits aren't needed to offset income in one particular year they can be carried forward to reduce the student's tax burden in a subsequent year.

Student debt, which according to Statistics Canada has reached a record $15 billion in Canada, can also have its advantages. He says interest on student loans made by a qualified lender is also available for a tax credit.

Above all, Kutner says students should file a tax return. For starters, it's the law and it's the only way to make the system work for you.

Filing is even important for students who don't reach the basic personal exemption, he says, because it allows students to accumulate contribution room in their registered retirement savings plans (RRSP), which could come in handy when they start making the big bucks.

Filing also allows the student to transfer unused tuition and education credits to a parent, spouse or grandparent.

There is one tax break, however, available to this generation of students that old timers didn't have — the Tax Free Savings Account. Students who typically put their summer earnings in a savings account to be withdrawn at a later date can instead allow it to grow tax free in a TFSA. In other words, any interest earned on the savings is not considered taxable income.

Market savvy students can even invest in mutual funds, exchange traded funds, stocks or options with no tax implications.

For someone opening up a TFSA the current contribution limit is $20,000. That amount increases by $5,000 (plus inflation) each year.

A couple words of warning concerning the TFSA: First, if you make a withdrawal you can't reclaim that contribution room until the following calendar year.

Second, don't invest your education savings in anything too risky or you could be facing another hard lesson about the challenges of higher education.