Transitioning from a full-time student to a graduate can be an overwhelming experience. Graduation is over, job prospects are on the horizon, and you will soon receive your first post-graduate paycheck. Your first year after graduation will be filled with financial decisions that will be very new to you.
We’ve compiled a list of tax tips for new graduates so you can navigate through your first year of post-grad life with these in mind. There are specific tax deductions and credits available to recent graduates- these tips will reduce the amount you need to pay in taxes each year so you have one less thing to worry about.
Keep in mind that the tax laws often change and that everyone’s financial situation is a little different. Since these factors often vary, it is a good idea to talk with an experienced tax professional before you file your income tax return.
Do You Need to File Taxes?
If you have just graduated from school and just landed your first job offer, then you will more than likely need to file your taxes when April 15 rolls around. For the 2015 tax year, if you are under 65 years old, single, and make more than $10,300, then you will need to file taxes. You also will need to make sure that your parents are no longer claiming you as a dependent before you file your own taxes. If you pay for the majority of your expenses on your own, then your parents can no longer claim you as a dependent, and you should be able to take advantage of these tax credits yourself.
Filing Your Return
Most young grads have fairly simple taxes and can file Form 1040EZ. Many tax software providers offer free filing of simple federal returns and 1040EZ is usually the standard for young filers.
Also keep in mind that you can use your state’s website to file your state income taxes. Most states will allow you to file your state return for free. For example, California’s site allows you several options for state filing.
Student Loans
Graduation means the end of class and the start of a new job! If you recently graduated and are paying the interest on your student loans you will qualify for the student loan interest deduction. Your school will send you a 1098-E that will show how much interest you paid in the year.To deduct student loan interest, you write the total of your interest paid (subject to a $2,500 annual limit) on the Student Loan Interest deduction line, on Form 1040 or Form 1040A. You will be able to subtract that interest paid from your total earnings as an adjustment so you will have a lower adjusted gross income.
Health Insurance
Not having insurance after graduation doesn’t mean that you’ll automatically receive a tax penalty. Under the Affordable Care Act, tax penalties occur when you go uninsured for three consecutive months or more in the same calendar year. The tax penalty for going uninsured in 2014 is the greater of $95 or 1% of your annual household income above the tax filing threshold of $10,150 (for an individual). Depending on how much you earn, your tax penalty for going uninsured could be hundreds of dollars.
Another note regarding your health, if your new employer offers a health savings account (HSA), take advantage of it! Contribute as much as you can to it because it can be carried over to future years and if used for your health expenses without ever paying tax on it. You can deposit up to $6,150 per year of tax-deductible money. Withdraw and use for medical expenses without taxes!
Education Credits
Lifetime Learning credits or the Tuition and Fees Deduction are available for college courses you take even after graduation. These can be a tax saving way of increasing your value to a potential employer.
Under the Lifetime Learning Credit, you can claim qualified tuition and related expenses you’ve had at eligible educational institutions. You can claim a tax credit equal to 20% of the first $10,000 paid for tuition, required fees, and certain other expenses during the calendar year. If you don’t qualify for the credit, you may be able to claim the “tuition & fees deduction” for qualified educational expenses. This deduction is available for qualifying expenses paid during the tax year in connection with enrollment during the year or any academic term.
You cannot claim either deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. This deduction phases out at higher income levels.
Retirement
New graduates should start looking into their retirement options sooner rather than later. We’ve compiled some of your retirement options below:
Traditional IRA. With a traditional IRA, you take an income tax break when you contribute the money and are taxed when you take distributions from the account. The funds are then able to grow tax-deferred until qualified distributions are taken which may be subject to income tax. Distributions are able to be taken out of a Traditional IRA without penalty starting at age 59 1/2. Once the account holder reaches 70 1/2 distributions are then required to be taken from the account.
Roth IRA. There is an income threshold ($110,000) to invest and the investment grows tax free over the lifetime of the investment. Furthermore, you can pull out your money from a Roth IRA before your retirement without getting hit with a penalty, which would happen under a traditional IRA.
Make sure to claim the Savers Credit on contributions to an IRA. You might be eligible to claim the Savers Credit on your tax return on up to $2,000 of your IRA contribution. This credit applies for individual taxpayers over age 18 with incomes up to $30,500 for 2015. This credit doesn’t apply if you were a full-time student during the year or were claimed as a dependent on someone else’s tax return.
401(k). If you employers offers you a 401(k)- contribute to it. Not only will this practice help to lower your overall taxable income for the current tax year but it also allows you to start deferring tax on income until a much later period.
Final Words of Wisdom
You should also get into the habit of saving documents related to possible deductions – receipts for clothing donations, for example – so you can be sure you get your maximum refund! Also remember, if you have to move at least 50 miles to take a new job, your moving expenses may be tax deductible. And lastly, if you end up taking a job that requires you to work from home, you may be able to take the home office deduction for a home office that you use regularly and exclusively for business.