Graduating from college feels a little like crossing the finish line of a very long race but in reality, it’s just the beginning. Going from the classroom the working world is a major transition that brings new responsibilities, including obligations to Uncle Sam. If you’re just starting out in your first job, seeing how much of your money goes to taxes each payday can be a real shocker. To help you hang on to more of your cash, take a look at these helpful tax tips for new grads.
1. Claiming Your Exemption
While you’re still in school, there’s a good chance that your parents claimed you as an exemption on their taxes to score tax break. For 2014, each exemption you claim reduces your taxable income by $3,950. One of the most important things you need to figure out is whether you’re able to claim a personal exemption for your own benefit.
The IRS guidelines on exemptions are pretty clear-cut for students. If you’re under 24 at the end of the year, you were a full-time student for at least five months of the year and your parents provided more than half your support they’re entitled to claim your exemption. If you’re under 24 and provide most of your own support or older than 24, then congratulations, you can take the exemption for yourself.
2. Pay Attention to Your Withholding
Starting a new job usually entails filling out a mountain of paperwork, including a W-4. The W-4 tells your employer how much taxes to withhold from your pay. Generally, you’ll claim zero withholdings unless you’re newly married or have a child. You can also opt to have additional money taken out beyond your regular exemption limit. Keeping an eye on your pay stubs can tell you how much you’re paying in taxes throughout the year so you can gauge whether you’re withholding too much or not enough.
3. Take Advantage of Tax-Deferred Savings
If your employer offers a tax-advantaged retirement account, such as a 401(k) or 403(b), not contributing is one of the biggest mistakes you can make. Using pretax dollars to fund your account reduces your taxable income and you can build your savings that much faster if your employer offers a matching contribution. You won’t have to pay any taxes on the money until you start making qualified withdrawals and if you end up changing jobs, you can roll it over to another eligible retirement account without a penalty.
4. Keep Track of Deductible Expenses
Deductions directly reduce your taxable income and the more you’re able to claim, the bigger the impact on your bottom line. If you took out student loans to pay for your education, you can deduct the interest you paid for the year, up to $2,500. If you moved to pursue a job opportunity, part of your moving may also be eligible for a write-off. Job search expenses are also deductible if you end up leaving your first job for another position in the same field.
Mortgage interest is deductible if you bought a home and you may be able to score a tax break if you contributed to a traditional IRA. If you’re planning to test your entrepreneurial skills, you’ll want to keep records of all your business expenses since these are usually eligible for a deduction. Just remember that you’re required to itemize in order to write off certain expenses so you may be better off claiming the standard deduction.
5. Get the Credit You Deserve
Tax credits work a little differently than deductions. Instead of lowering your income they offset your actual tax liability. If you paid for some or all of your college costs during the year, you may be eligible to claim the American Opportunity Credit. For 2014, the credit is good for up to $2,500 towards qualified education expenses such as tuition, books, and fees. Keep in mind that you can’t claim the credit if your parents still count you as a dependent for tax purposes or if your modified adjusted gross income for the year exceeds $90,000.
Setting out on your own after college is exciting but it can quickly become overwhelming if you’re struggling to get a handle on your finances. Using our guide as a starting point, you can develop a smart tax planning strategy so you’re not caught off-guard when it’s time to file.