Lena Rozzi, CPA •
Congratulations to the Class of 2019! Graduating college can mark an exciting time for new graduates as they transition from being a student to becoming a working professional. This three part series will dive into some helpful information and tips on what to expect as they journey down their career path.
Graduating from college may bring on new responsibilities for filing your own tax return but it can also mean being eligible for tax credits and deductions that you have not qualified for before. In the last part of this series, we’ll explore a few different tax deductions and credits that can help lower your tax liability and put more money in your pocket at tax time.
Congratulations to the Class of 2019! Graduating college can mark an exciting time for new graduates as they transition from being a student to becoming a working professional. This three part series will dive into some helpful information and tips on what to expect as they journey down their career path.
Graduating from college may bring on new responsibilities for filing your own tax return but it can also mean being eligible for tax credits and deductions that you have not qualified for before. In the last part of this series, we’ll explore a few different tax deductions and credits that can help lower your tax liability and put more money in your pocket at tax time.
Student Loan Interest
Many students who took out student loans to help pay for college will begin repaying their loans after graduating. The good news is that you may be eligible for a tax deduction of up to $2,500 on qualified student loan interest paid. As defined by the Internal Revenue Service (IRS), a qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:
Currently, the student loan interest deduction is limited to the lesser of $2,500 or the amount of interest you actually paid during the year. According to the IRS, the deduction is gradually reduced and can eventually be eliminated if your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status. The student loan interest deduction can be claimed if all of the following apply:
Lifetime Learning Credit
If you’re one of the many students that will continue with their post-graduate education, the Lifetime Learning Credit (LLC) can help provide you with tax credits that can be used to reduce the amount of taxes owed on your tax return. The amount of the LLC is 20% of the first $10,000 of qualified educational expenses or a maximum of $2,000 per return. The LLC is not refundable so it will reduce the amount of taxes owed but you won’t receive any of the credit back as a refund.
While many students may be eligible for the American Opportunity Tax Credit (AOTC) during their undergraduate studies, the AOTC is limited to the first four years of higher education. And while, the benefits of the LLC are more limited than the AOTC, there is no limit on the number of years a person can qualify for the LLC provided they meet the criteria of the credit.
According to the IRS, to qualify for the LLC, you must meet all three of the following:
Retirement Contributions
If you’ve read the first part of this series, you’ve heard it before, but we’ll say it again. Saving for retirement is a great way to reduce your taxable income and put money aside for yourself in the future. Find out if your employer offers a 401(k) or 403(b) retirement plan where you can make contributions with pre-tax dollars (you pay taxes on distributions when eligible at the time of retirement) or a ROTH 401(k) or 403(b) plan where you make contributions with after-tax dollars (distributions are tax-free when eligible at the time of retirement).
Some employers will offer an employer match, which is the amount your employer will contribute to your retirement account for your benefit. Employer contributions are typically based on a percentage of the participant’s annual contribution but every plan can differ so ask your employer about the details of the plan before participating. Keep in mind that most employer matches will be based on your contributions to the plan so if you fail to contribute you could potentially be losing out on free money. And even if your employer does not offer a retirement plan, you can set up an IRA or other qualified retirement account to start saving for your future.
Things to Consider
As you begin your journey into the working world, young professionals may experience many life changes that will impact their personal and financial situations. Although it may not happen right away, most graduates will become members of the working community and will need to pay taxes on the income received, however, keep in mind that the IRS does provide a number of credits and deductions to help reduce your taxable income so you keep more money in your pocket when it comes time for filing your tax return. One of the best things to do as you begin your career is to be aware of your responsibilities as a taxpayer and understand the purpose of important tax documents. Don’t be afraid to ask questions and get informed. As many of us will learn, knowledge and education continues beyond graduation!
As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.
See Part I Here - Starting a New Job
See Part II Here - Helpful Hints on Filing Your Tax Return
Many students who took out student loans to help pay for college will begin repaying their loans after graduating. The good news is that you may be eligible for a tax deduction of up to $2,500 on qualified student loan interest paid. As defined by the Internal Revenue Service (IRS), a qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:
- For you, your spouse, or a person who was your dependent when you took out the loan;
- For education provided during an academic period for an eligible student; and
- Paid or incurred within a reasonable period of time before or after you took out the loan.
Currently, the student loan interest deduction is limited to the lesser of $2,500 or the amount of interest you actually paid during the year. According to the IRS, the deduction is gradually reduced and can eventually be eliminated if your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status. The student loan interest deduction can be claimed if all of the following apply:
- You paid interest on a qualified student loan during the tax year;
- You’re legally obligated to pay the interest on a qualified student loan;
- Your filing status isn’t married filing separately;
- Your MAGI is less than a specified amount which is set annually (for the 2019 tax year, the deduction phases out for Single filers beginning at $70,000 and ending at $85,000); and
- You or your spouse, if filing jointly, can’t be claimed as dependents on someone else’s tax return.
Lifetime Learning Credit
If you’re one of the many students that will continue with their post-graduate education, the Lifetime Learning Credit (LLC) can help provide you with tax credits that can be used to reduce the amount of taxes owed on your tax return. The amount of the LLC is 20% of the first $10,000 of qualified educational expenses or a maximum of $2,000 per return. The LLC is not refundable so it will reduce the amount of taxes owed but you won’t receive any of the credit back as a refund.
While many students may be eligible for the American Opportunity Tax Credit (AOTC) during their undergraduate studies, the AOTC is limited to the first four years of higher education. And while, the benefits of the LLC are more limited than the AOTC, there is no limit on the number of years a person can qualify for the LLC provided they meet the criteria of the credit.
According to the IRS, to qualify for the LLC, you must meet all three of the following:
- You, your dependent or a third party pay qualified education expenses for higher education (whether undergraduate, graduate or professional degree courses, including courses to acquire or improve job skills);
- You, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution,
- The eligible student is yourself, your spouse or a dependent you listed on your tax return.
Retirement Contributions
If you’ve read the first part of this series, you’ve heard it before, but we’ll say it again. Saving for retirement is a great way to reduce your taxable income and put money aside for yourself in the future. Find out if your employer offers a 401(k) or 403(b) retirement plan where you can make contributions with pre-tax dollars (you pay taxes on distributions when eligible at the time of retirement) or a ROTH 401(k) or 403(b) plan where you make contributions with after-tax dollars (distributions are tax-free when eligible at the time of retirement).
Some employers will offer an employer match, which is the amount your employer will contribute to your retirement account for your benefit. Employer contributions are typically based on a percentage of the participant’s annual contribution but every plan can differ so ask your employer about the details of the plan before participating. Keep in mind that most employer matches will be based on your contributions to the plan so if you fail to contribute you could potentially be losing out on free money. And even if your employer does not offer a retirement plan, you can set up an IRA or other qualified retirement account to start saving for your future.
Things to Consider
As you begin your journey into the working world, young professionals may experience many life changes that will impact their personal and financial situations. Although it may not happen right away, most graduates will become members of the working community and will need to pay taxes on the income received, however, keep in mind that the IRS does provide a number of credits and deductions to help reduce your taxable income so you keep more money in your pocket when it comes time for filing your tax return. One of the best things to do as you begin your career is to be aware of your responsibilities as a taxpayer and understand the purpose of important tax documents. Don’t be afraid to ask questions and get informed. As many of us will learn, knowledge and education continues beyond graduation!
As always, our CPAs at Mason + Rich are ready to answer any additional questions. Feel free to call us at 603-224-2000.
See Part I Here - Starting a New Job
See Part II Here - Helpful Hints on Filing Your Tax Return
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