Recent college graduates often go to extreme lengths to save
a little money. Yet many young people overlook money-saving features in the tax
code that offer substantial savings. There are 1.6 million college graduates
hoping to enter the workforce this year alone, according to the National Center
for Education Statistics. Here are some notable tax breaks they should
consider.
Student-loan interest
deduction. The average 2014 college graduate owes over $37,000 in
student loans, according to the NCES. As graduates start receiving paychecks
and paying off their debt, they can reduce their taxable income by as much as
$2,500 for interest paid on both federal and private student loans, according
to the Internal Revenue Service.
Most borrowers who are single filers and who have adjusted
gross income of less than $60,000 are eligible for the full deduction. Those
with AGI between $60,000 and $75,000 are eligible for a reduced one.
Lifetime Learning
Credit. This tax credit is worth up to $2,000 for those who are
paying qualified expenses for postsecondary education, or paying them for an
eligible student. You need to have been in school at least part of that tax
year to claim it.
The credit works as a “nonrefundable” dollar-for-dollar
reduction of one’s tax bill, according to the IRS. If the amount of tax owed is
less than $2,000, for example, the credit will reduce the sum down to zero but
won’t refund the difference. The amount of the credit is phased out when the
filer’s AGI is between $53,000 and $63,000.
Students who graduated in May this year, or are still in
college, also could be eligible for the American Opportunity Tax Credit—a
$2,500 nonrefundable tax credit that is available only for the first four years
of postsecondary education.
Moving-expenses tax
deduction. Many recent graduates looking to relocate could benefit
from this break, though the details can be tricky—and those taking it must
meet stringent conditions imposed by the IRS.
Reasonable moving expenses covered by the deduction include
packing and traveling costs, but not meals or costs related to car maintenance
or depreciation.
Such expenses are eligible to be deducted if incurred within
the period six months before or after the first day the filer reported at a new
job, according to the IRS. The employee also must work full time for at least
39 weeks during the first 12 months after arriving in the general area of the
new work location.
In addition, the new workplace must be more than 50 miles
farther from the employee’s old home than the old job was. If this is his or
her first job, it must be more than 50 miles away from the old home.
Tax-smart saving
strategies. The first place many young workers should start saving is
in their employer-sponsored 401(k) retirement-savings plan. Contributions to
such plans are pretax, meaning that taxes aren’t paid until the funds are
withdrawn from the account. Many companies also offer to match your contributions
up to a certain amount.
Next, consider individual retirement accounts. In a
traditional IRA, contributions are made before taxes are due, and earnings are
untaxed. Taxes are due upon withdrawal. In a Roth IRA, contributions are made
after taxes, but earnings and withdrawals are untaxed.
On top of these accounts, low- and moderate-income
workers—categories many recent grads fall into—also can get a tax credit on
their savings. Voluntary contributions of up to $2,000 into qualified
retirement plans, including 401(k)s and IRAs, are eligible.
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