April 15th is still a few months off but as we get closer to the end of 2014, it’s time to start looking ahead the next tax season. For recent grads who are filing on their own for the first time, that means getting acquainted with the different credits and deductions they qualify for.
Credits and deductions cut down on the amount of money you owe to Uncle Sam, but in different ways. A credit directly reduces your tax liability while a deduction lowers your taxable income. The more you’re able to claim, the less cash you’ll have to fork over when you’re ready to file your return. If you’re not sure where to get started, here’s a look at some tax breaks for grads that you can start planning for now.
1. Cash in on a move
When the ink is still wet on your diploma, looking for a job should be at the top of your to-do list. While you can’t write off the cost of your job search, you may be able to deduct some of your expenses if getting hired involves a move. That includes things like renting a moving van, shipping your belongings or pets to your new city, storage costs and mileage if you’re driving your personal vehicle. You don’t have to itemize on Schedule A, which is great for grads who may not have a lot of other deductible expenses.
The IRS uses a three-step test to determine if you’re able to claim the moving expense deduction. First, the move has to be related to the start of a new job. Next, you have to satisfy the distance requirement. If you’re moving for a first job, it has to be at least 50 miles from where you used to live. Finally, you have to work full-time for at least 39 weeks in the first 12 months after you move. If you just got hired, you can still take the deduction if you expect to meet the time requirement.
2. Get credit for your tuition costs
The tuition and fees deduction expired last year but there are still several tax breaks for grads who were responsible for covering some of their education costs. The Lifetime Learning Credit, for example, is worth up to $2,000 for 2014 if you paid eligible education expenses during the year and your income is within certain limits. The credit is good for new grads who were enrolled for at least one semester during the tax year but it can also benefit students who have moved on to grad school.
If your grace period has ended and you’re already making payments on your student loans, you should be able to deduct some of the interest you’re paying. The Student Loan Interest Deduction is worth up to $2,500 in 2014 but you can only claim it if no one else is taking an exemption for you on their tax return. If you lived with your parents for part of the year or they provided the majority of your financial support, they get first dibs on the exemption.
3. Start working on your nest egg
Saving for retirement might be the last thing on your mind when you’re fresh out of college but getting a head start can reap some big rewards. If your new employer offers a 401(k) or a similar plan, signing up for it as soon as you’re able to is a no-brainer. If a retirement plan isn’t included in your benefits package, you can still get a jump on saving by opening an IRA.
There are lots of tax advantages that go along with saving for retirement, including a credit for what you sock away. For 2014, the credit is worth up to $2,000 for grads who are saving in an employer-sponsored or individual plan. Your adjusted gross income has to be less than $30,000 to qualify if you’re single, but if you’re working in an entry-level position, that may not be much of an obstacle.
4. Check your pay stubs
The Earned Income Credit is designed just for taxpayers who don’t make a lot of money and while it’s geared mostly towards families, some new grads may still be able to claim it. If you’re single and earned less than $14,590 in 2014, you should be able to snag the credit. Young married couples can claim it with an income of $20,020 if they have no children. The amount of the credit ranges from $496 to $6,143, depending on your filing status and how much money you make.
5. Give back to get more
Donating money to a worthy cause can give you a deep sense of emotional satisfaction but it’s not too bad for your bottom line either. That’s because the IRS offers a deduction for charitable donations equal to up to 50 percent of your adjusted gross income. You do have to itemize on Schedule A to claim it but it’s worth it to run the numbers to see if you’ll benefit more compared to taking the standard deduction.
If you gave money to your school’s alumni association, tithed at your church or donated some of your old stuff to a local organization in your community, you’ll need a receipt to prove it. The receipt should show the date and who you made the donation to, along with the amount or a list of what was donated. That way, you’re covered if the IRS decides to take a closer look at your return.