You’re graduating into a pandemic world…and then there are taxes too
What: New college graduates already have had several new and stressful experiences. Many have spent the last year and a half of their college tenure studying remotely rather than on campus. Some may have had to limit their normal social interactions to a very small pod of people. Now, they could face a job market that’s still full of uncertainty.
College graduation is always a time of new opportunities and challenges for those entering the job marketplace. They may be moving for the first time from being dependents on their parents’ tax return to filing their own taxes. As they start their new job, they will be faced with issues such as tax withholding or estimated tax payments, retirement benefit elections, health benefit elections, as well as other decisions that come with different tax implications.
Why: With all of the pandemic challenges that these graduates have already faced, new graduates may be more adept than most at preparing to face the income tax laws. Some of the tax law changes resulting from the pandemic may even provide an added benefit to new graduates. Here are some of the tax issues that college graduates should contemplate.
- Coordinate taxes with your parents. Your parents may have been claiming you as a dependent on their tax return. Once you enter the work force, that probably has to change. Filing their own return may qualify a new graduate for a recovery rebate credit on their 2021 tax return, even if their parents received an economic stimulus payment for them in 2021 as a dependent on their parents’ 2020 tax return
- Student loan interest. You or your parents may have been getting tax breaks for tuition, fees, and other college expenses while in school. Tax breaks can continue for interest paid on outstanding student loans after graduation, but the rules get a little complicated
- Continuing your education while starting work. Work-related continuing education is no longer deductible as a miscellaneous itemized deduction, but it may still qualify for exclusion from income if part of an employer-provided educational assistance program. And, the employer may be able to include student loan debt repayment as part of the educational assistance program. The Lifetime Learning Credit may also be available for graduate school or other post-college training
- Retirement accounts. It is never too soon to start contributing as much as possible to retirement accounts, such as a 401(k) plan offered by your employer, a retirement plan for the self-employed if starting out on your own, and an IRA or Roth IRA account
- Health insurance. In addition to an exclusion for employer-provided health insurance and a deduction for self-employed health insurance, there are also tax-advantaged Health Savings Accounts and Flexible Spending Accounts to consider
- Earned Income Tax Credit. The Earned Income Tax Credit has temporarily been expanded to provide additional benefits to lower-income childless taxpayers, which may benefit new college grads
- Side gigs. Students often have had some experience working side gigs while in school, either as an employee or on their own. Keep good records of business-related expenses, which can be deducted if self-employed. Self-employed persons may also have to pay estimated taxes, which includes both income and self-employment taxes
- Part-year withholding. Starting a job mid-year can result in over-withholding based on the assumption you earned the same amount for the entire year. Check with your employer to see if part-year withholding is available
- Record-keeping. Keep a file of tax-related documents, such as expense receipts and tax statements, so you are ready for your tax professional at tax return preparation time
A little tax knowledge can help a new college graduate get a great start on their career and later in life, as well.
Who: Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help discuss the potential tax issues facing new college graduates.
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Contact: To arrange an interview with Mark Luscombe or other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.
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