Tax Tips for College Grads
Big changes may be coming your way as a recent college graduate. Obtaining a full-time job, moving to a city or state far away from home, renting or buying an apartment/home, or enrolling in graduate school are a few of the events that can have a major impact on your life. You also may want to start thinking about taxes in a new way. Particularly, what you can do to help reduce the amount of money you owe the IRS annually. Here are a few considerations to help you with your taxes as a new grad.
Ask for Part-Year Withholding
Most new grads are thrilled when they obtain their first full-time job after school and don’t think about how they’ll be taxed. Unless you specifically ask for part-year withholding, your employer will most likely deduct taxes as though you’ve had the job all year. When taxes are withheld from your paycheck based on a 12-month calendar rather than partial year, you can end up paying more than you should. Some employers simply don’t offer part-year withholding, but it never hurts to ask.
Write Off Student Loan Interest
If you borrowed money to cover the cost of earning your degree, you owe interest on those loans. The IRS lets you write off up to $ 2,500 annually, even if your parents assist you with your student loans. Keep in mind that if your post-graduation job pays $65,000 (if you’re single) or $130,000 (if married and filing jointly), you won’t qualify for this write-off.
Deduct Unreimbursed Moving Expenses
You might accept a job in another city or state, in which case you can deduct job-related moving costs that your new employer doesn’t reimburse. The only catch is that the job must be at least 50 miles away from home for you to qualify for the tax deduction. Save your receipts for expenses such as:
- Boxes and packing materials
- The cost of a moving van
- Mileage, if you drive to the new city on moving day
- Hotel stays on the way to your new home
Take Advantage of the Lifetime Learning Credit
You may have bachelor's degree, but that doesn’t mean you’re done with learning. You might enroll in graduate school on a full- or part-time basis, or just take classes to boost your job prospects. The government lets you deduct up to 20% of $10,000 paid toward higher education, and you can take this tax credit even if you take just one class.
Consider Contributing to a 401(k)
The last thing many new grads want to think about is retirement. After all, you’re just starting out in life. But there’s a really good reason to contribute to a 401(k) even if you have a long career ahead of you—it can lower your taxable income. If you opt in to your employer’s traditional 401(k) plan, the amount you contribute monthly is deducted from your income before taxes, which lowers the amount of taxes you owe on your salary. You do pay taxes on the money in your 401(k) account eventually, but that's many years down the road.
More tax information for students
This is My First-Time Filing
Filing taxes for the first time is a major step toward financial independence. For those graduates who have yet to prepare their first tax return, here are a few additional considerations to help ensure that your return is prepared correctly:
Talk to Your Parents
If your parents still help you out financially, they may still be eligible to claim you as a dependent. If this is the case, you can still file and receive a refund, but you can't claim the personal exemption. If you file your taxes and claim the personal exemption, and your parents claim you as a dependent, it will cause problems with your parents return. Being on the same page with your parents makes tax filing a smoother experience for all of you.
Understand the Different 1040 Forms
Many first-time tax filers can use the 1040EZ, which is the simplest tax form on which to report your income. However, you may be eligible for tax deductions and credits beyond those that may be claimed on the 1040EZ. In this case, you might want to proceed with a Form 1040A. This will allow you to deduct a charitable contribution, take advantage of the education tax credit, or deduct student loan payment interest. When you file with E-file.com our software will automatically adjust to the most appropriate form based on your information, thus providing you with the ideal form for your filing situation.
Report All of Your Income
If you are employed, your employer should send a W-2 showing how much was withheld throughout the year. But if you're an independent contractor or have a "side hustle" where you earn money, you're also required to report this income to the IRS. If you earn over $600 as an independent contractor, you'll likely receive a 1099 showing how much money you earned.
Paper tax forms are an option for all taxpayers, however, if you're a first-time filer and want to keep things as simple as possible, it may be a good idea to opt for tax filing software. Some software programs can be found in disk form at office supply stores. Others, like E-file.com, are completely cloud-based and made available exclusively online. The nice thing about using a tax preparation software program is that all the calculations are done for you, minimizing the risk of a calculation error. Some online programs will even import wage information from your employer so that all you need to do is verify it, answer a few questions about your filing situation and submit it to the IRS.
If this is your first time filing taxes, you don't want to rush things. Pull together your documents ahead of time. Make sure you have any receipts or tax statements for possible deductions or credits eligibility. Utilize a tax software program to assist you and take your time to complete all the questions. Once done, make sure to keep documents and related paperwork along with copies of your return in a safe place (for at least three years).