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This article has been updated for the 2018 tax year.
The first years after college graduation are full of milestones.
In addition to getting your degree, you might have started your career, moved out of your parents’ house, begun saving for retirement or bought a car. Soon, you’ll face another rite of passage: filing your taxes as a college graduate.
If you worked through high school and college, you probably already filed income tax returns. But now you have a career, more income, and possibly some credits and deductions. Doing your taxes will require more than just handing over your W-2 to your parents or their accountant.
Now you need to organize receipts and tax documents, minimize your taxable income, and maximize any deductions and credits that may be available to you. Here are tax tips for college graduates that could help you.
1. Organize tax documents in one place
Tax preparation requires a lot of paperwork, even if you plan to e-file. Gather and organize all your important tax documents in one place. A simple folder or large envelope will do.
Forms and documents you may need to file your taxes include (but aren’t limited to):
- Your W-2 from your employer.
- 1099s if you’re self-employed full or part time.
- Receipts for charitable donations.
- A 1098-E that shows interest you paid on your student loans.
- 1099-INTs for any interest you earned on bank accounts or investments.
Did you notice we mentioned a 1098 above? That’s because student loan debt often follows four years of college. You may think repaying yours is a pain, but your student loan can benefit you at tax time. That’s because some of the interest you pay on your student loan could be tax deductible.
The IRS allows you an annual deduction of up to $2,500 of the interest paid on your student loans during the 2017 tax year if:
- Your modified adjusted gross income is less than $80,000 for an individual or $160,000 if you’re married and filing jointly.
- You’re legally obligated to pay interest on a qualified student loan.
- Your filing status isn’t married filing separately.
- And no one is claiming you as a dependent on their taxes
To claim this deduction, you’ll need to use Form 1040. Since the student loan interest deduction is claimed as an adjustment to income on Form 1040, you can claim it even if you don’t itemize deductions on Schedule A.
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The rapid pace of the business world may mean you have to start taking classes to keep up your skills almost as soon as you start working in your first job.
The Lifetime Learning Credit could allow you to recoup up to $2,000 of tuition and fees for you, your spouse or a dependent, if you have a modified adjusted gross income of $65,000 or less ($130,000 or less for a married couple that files jointly).
4. Look for ways to reduce your taxable income
Reducing your taxable income can reduce your tax burden, and could even lead to a bigger refund if you’re eligible for one. There are multiple ways to reduce your taxable income, and three of the most common — and most useful for newly graduated young professionals — are:
- Retirement accounts, like a 401(k) or Individual Retirement Account (IRA).
- Health Savings Accounts (HSAs) and Flexible Savings Arrangements (FSAs).
- Charitable donations.
You just graduated from college, so you’re probably more focused on building your career than growing your retirement savings. But saving for retirement doesn’t just create a nest egg, it helps you reduce your taxes now.
That’s because the money you contribute to a 401(k) is considered pre-tax, meaning it doesn’t figure into your taxable income. What’s more, when the investments you make through your 401(k) earn you more money, you won’t pay taxes on that income either until the day you withdraw it. At that time, your tax will be based on the tax rate for your tax bracket during retirement, which, in theory, will be less than your tax rate now while you’re working full time.
IRA contributions can work similarly, although whether your IRA contributions are tax deductible can depend on your income, the type of IRA (traditional or Roth) and other factors.
Remember, the IRS puts limits on how much you can contribute to your retirement plans (401(k), IRAs, etc.) in a single year. It pays to check out the limits, so you know exactly how much you’re allowed to contribute.
Saving for retirement can be complex, so your best bet is to read up on what the IRS has to say about your options. You can find information on 401(k)s here, information on traditional IRAs here and on Roth IRAs here.
Health Savings Accounts and Flexible Spending Arrangements
HSAs and FSAs are two ways to manage healthcare-related costs while gaining some tax benefit.
HSAs are connected to high-deductible health plans, or HDHPs. These plans have low premiums but high deductibles (at least $1,300 for an individual plan and at least $2,600 for a family plan). They also come with higher out-of-pocket costs, so you pay more for healthcare services than people in other health plans.
HSAs can help pay those out-of-pocket costs, as much as $6,650 for an individual or $13,300 for a family for in-network services. The IRS doesn’t tax HSA contributions or cash withdrawals to pay for qualifying medical expenses.
It’s important to understand that not everything healthcare related will be a qualifying expense that you can pay for using HSA funds. If you have a high-deductible health plan and an HSA, check with the plan administrator for a list of eligible expenses.
Money left over in your HSA at the end of the year stays in the account. It’s yours and can continue to grow tax-free.
FSAs are similar to HSAs but have some key differences. FSAs let you contribute tax-free to an account for your healthcare costs, but any money left in the FSA at the end of the year goes away. So you want to make sure you spend the FSA dollars before you lose them. Again, it’s important to know what expenses qualify to be paid for with FSA dollars, so talk to your plan administrator.Learn more about how FSAs work
Donating to charity is another great way to reduce your taxable income, while also doing something good for others.
Charities must be qualified organizations in order for you to deduct contributions. You can search online at IRS Exempt Organizations Select Check for qualified organizations. However, keep in mind this list doesn’t necessarily include every eligible organization. If you file a tax deduction for charitable giving, you need to itemize it on Schedule A on your Form 1040, on lines 16-19.
Make sure you have proof of the donation. This can include a canceled check, credit card receipt or receipt from the eligible charitable organization you donated items to. You’ll want to make sure the receipt shows the date of donation and an itemized list of what you donated.
5. Don’t be afraid to do your own taxes
Once you start working, your taxes probably won’t be quite as simple as they were when you were in college. But don’t let the added complexity intimidate you into spending money on paid tax preparation. Chances are you can still do your taxes yourself, even if you have student loan interest, moving expenses, retirement savings, HSAs and charitable contributions to handle.
Plenty of online resources are available to help college graduates file taxes, including Credit Karma Tax®. The online tax preparation software is always free. Most people can use it to file simple federal and state income tax returns, and it supports a wide range of forms, including 1098-Es for student loan interest, 3903s for moving expenses, 8889s for HSAs and more. For a complete list of supported tax forms, check here.
Graduating from college can change every aspect of your life, including how you file your taxes. Armed with these tax tips for college graduates, and the confidence to file your own taxes, you can improve your chances of reducing your tax burden and maximizing any refund you’re due.