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 personal savings and 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.