Tax Tips for College Grads
Graduating from college can mean a lot of changes in life. Whether you’re relocating to a new city or state, going into full-time employment, or starting to pay back those pesky student loans, many such changes will affect what taxes you are responsible for.
If you’ve worked summer jobs while at college, you will likely have filed a tax return. Not every college grad, however, has sufficiently worked to file with the IRS. Even if you’ve reported your income in a return previously, it may be a different process as an adult with a degree.
To prepare yourself for any tax issues you will likely face, take note of the following tax tips.
Fill out your W-4
When you secure your first job post-graduation, you’ll be required to complete a W-4 form so that your employer knows the amount to withhold from your paycheck.
You’ll need to be 100% accurate when filling in this form. If too little is withheld from your paycheck, you might find yourself with penalties to pay. You also want to avoid too much being withheld. Because you’d essentially end up giving an interest-free loan to the IRS.
Know your IRS obligations
As the tax system in the U.S. is pay-as-you-go, you’re required to pay taxes as you earn. If you’re an employee at a company, your employer withholds your money from your paycheck and sends it to the IRS. So you should be fine as long as you are accurate with your withholding.
Many new graduates take on independent contractor work, as opposed to being an employee. Others take on side gigs. If either of these is applicable to you, you may need to send estimated tax payments each quarter to ensure you’re meeting your IRS obligation.
Claim your student-loan interest deduction
If you have debt from a student loan, you should be able to deduct a maximum of $2,500 of the interest paid.
To claim the deduction, you won’t need to itemize. You’ll be legally obliged to pay the debt, however. You also can’t be named as a dependent on someone else’s tax return.
There’s an income limit when claiming the deduction. The IRS will be able to tell you whether you’re eligible or not. If so, they’ll send you a statement that specifics how much interest you can deduct.
Start thinking “retirement” sooner rather than later
Another way of getting a key deduction is to reduce the amount you pay by investing in retirement accounts.
If you have access to a 401(k) at your job, you can take a deduction. You can also contribute to an IRA and deduct your contribution amount. While IRA contributions are subject to income limits, if you are covered by a retirement plan at work, you can make 401(k) contributions regardless of your income.
Keep your paperwork together
When tax time is approaching, you’ll likely receive an abundance of paperwork. This may include a 1099 from each of the companies you work for as an independent contractor. You’ll also get a W-2, along with statements detailing your retirement contributions or interest from student loan debt.
This paperwork may overwhelm you at first. But you should keep everything together so you can more easily take care of your taxes, as well as provide your income and deductions eligibility in the event that you’re audited. If you’re claiming other credits or deductions, such as for expenses as a self-employed person, make sure to keep all documents related to these deductions.
Find a decent tax filing software program
Most new graduates don’t need an accountant, as their taxes tend to be simple. However, a tax filing program can make filing your taxes even easier. It can hold your hand as you complete your forms and ask you simple questions in order to help you find credits and deductions to claim.
In the majority of cases, if your income is under a certain amount, you can use a tax-filing program at no cost to file your site return, and sometimes even your federal return. Search for reviews of various software programs and think about sampling a couple before you go ahead and purchase one.
Final word
It’s important that you’re fully compliant with the IRS. And that you’re diligent about saving on taxes so you aren’t sending the IRS more money than you need to. The above tax tips will help you for your first tax season as a new graduate. For further help, get in touch with a tax professional. You’ll find them where ever you are, from a Long Island tax lawyer to to a San Francisco CPA, find one and make sure you start on the right foot.