Graduating from college often means lots of life changes. Whether you're moving to a new place, starting a new job, or finally starting to pay back student loans, many of those changes are going to affect your tax obligations.
If you've had summer jobs while in school, chances are good you've filed a tax return before. But not every college grad has worked enough to file with the IRS in the past. And even if you've already filed a return to report income, the process may be different now that you're a full-fledged adult with a degree.
To make sure you're prepared for the new tax issues you're likely to face, follow these six tax tips for new grads:
1. Get your withholding right
When you get your first post-graduation job, you'll need to fill out a W-4 form to let your employer know how much to withhold from your paycheck.
It's important you're accurate in completing this form. You don't want too little taken out of your paycheck because you could get hit with penalties if you don't pay enough during the year. But you also don't want too much withheld -- even if you're excited to get a big tax refund -- because then you end up giving the IRS an interest-free loan and tying up your money.
There are instructions on the W-4 to help you figure out how many allowances you should claim. Read them carefully, especially if any special circumstances apply to you -- like working multiple jobs. And you can use the online IRS withholding calculator to simplify the process of determining if your employer is taking enough out of your paycheck for the IRS.
2. Understand your obligations to the IRS
The U.S. tax system is pay-as-you-go, so you're expected to pay your taxes as you earn money. If you work as an employee, your employer takes care of withholding money from your check and sending it to the IRS, so you should be in good shape as long as you follow the first tip and get your withholding right.
But lots of new grads work as independent contractors rather than employees -- or have side gigs where they earn extra income as a contractor. If you do either of these, you may have to send in quarterly estimated tax payments to make sure you're meeting your obligation to the IRS as you earn.
You're expected to pay estimated tax payments if you're likely to owe the IRS at least $1,000 when you file your return. You'll need to calculate your taxable income minus deductions and credits to determine if you're likely to owe the IRS at least $1,000. If you're not sure, it may be best to err on the side of caution and just send in four payments per year by April 15, June 15, Sept. 15, and Jan. 15.
3. Don't forget to claim your student-loan interest deduction
If you have student loan debt, you should be eligible to deduct up to $2,500 of the interest paid on your loan.
You won't have to itemize to claim this deduction. But you do need to be legally responsible for paying back the loan, you can't be a dependent on anyone else's tax return, and you can't file your taxes as married filing separately.
There's also an income limit to claiming the student-loan interest deduction. The IRS has a tool to help you determine if you're eligible for this deduction. If you are, you'll receive a statement specifying the amount of interest you can deduct. Keep this paperwork, and claim the deduction when you file your taxes.
4. Start taking tax deductions for retirement right now
You can also get another important tax deduction to reduce what you pay -- while setting yourself up for a secure future. This deduction comes from investing in retirement accounts.
If you have access to a 401(k) at work, you can contribute and take a tax deduction for up to $19,000 in 2019. Regardless of whether you have a workplace 401(k) or not, you could also contribute up to $6,000 to an IRA and deduct the amount you contribute. Later in your career, those amounts go up, with those 50 or older getting to save $25,000 in a 401(k) and $7,000 in an IRA for 2019. While there are income limits for IRA contributions if you or your spouse is covered by a retirement plan at work, you can make 401(k) contributions no matter how much you earn.
Deductions for contributions to retirement plans can be taken even if you don't itemize on your taxes. And they can be worth a lot. If you're in the 22% tax bracket and you contribute $6,000 to max out your IRA, you'll save $1,320 on your federal tax bill. And if you're a new grad and make this $6,000 contribution at age 21, that $6,000 will be worth more than $118,000 by age 65, assuming a 7% annual rate of return.
5. Keep your tax paperwork together
As tax time approaches, you'll probably get lots of tax paperwork in the mail. This can include a 1099 from each company you work for as an independent contractor, as well as a W-2 from your employer, and statements showing your student loan interest or retirement plan contributions.
All this paperwork can become overwhelming, but you'll need to keep it together so you can do your taxes easily -- and to prove your earnings and eligibility for deductions in case you're audited. If you're claiming any other deductions or credits, such as for business expenses as a self-employed worker, be sure to keep all the documents related to these deductions as well.
6. Find a good tax filing program
A good software program will help you file your taxes more easily.
Most new grads don't need to hire an accountant because their taxes aren't that complicated. But tax filing programs can make filing much simpler because good programs walk you through completing your forms -- and they ask you questions in plain language to help you find deductions and credits to claim.
In most cases, if your income is $66,000 or less, you can use tax-filing software for free to file your state return, and sometimes your federal return. Read reviews of programs and consider sampling a few before you decide which software to use to file your taxes. It's easiest not to switch programs once you start using them -- the program will store your information from year to year, making filing easier in the future. So try to start with software you'll want to stick with for the long haul.
Getting your taxes right makes your financial life easier
It's important that you're in full compliance with the IRS -- and that you do everything you can to save on taxes so you don't send the government any more of your hard-earned money than necessary. By following these tips, you'll be ready for your first tax season as a new grad.