Mid-Year Tax Planning For College Grads
BOSTON (CBS) - Many recent grads are living with their parents because they could not find a job and right about now mom and dad are making demands they find something so they at least have spending money. There are some jobs out there but not exactly in the field you spent four years studying.
There is some good news; your school loan payments won't start until 6 months after graduation and you will be eligible for a deduction on the interest you pay. Over 60% of students need to borrow for college and graduate with an average of $25,000 of school debt. The interest rates for school loans vary depending on when you received the money and where you borrowed it.
You may be able to deduct up to $2,500 of the interest you paid on student loans on your federal individual income tax return. The deduction is not limited to government-sponsored loans, but does not apply to loans made to students by family members. The Tax Relief Act of 2010 extended the student loan deduction through this year (2012). Next year, the deduction will only be allowed for the first 60-months of repayment.
This deduction is available to single taxpayers with incomes of $60,000 and once you hit $75,000 the deduction goes away. For married couples filing jointly, the phaseout range is from $120,000 to $150,000. The deduction is available whether you file the short form or long form 1040. And the deduction can be used by the student or the parents if they are repaying the loan.
Once you get that new job, think about your retirement. If your employer offers a retirement plan such as a 401(k), sign up. I know retirement is 40 years away but you will make your mom very happy if you do sign up.
There is a tax credit, the Retirement Savings Contribution Credit that is available for low-income wage earners. If you decide to contribute to the 401(k) plan at work or open an IRA for $2,000, you could be eligible for up to $1,000 credit. Here the government is giving you an incentive to start saving for retirement.
Income limits apply; single individuals with incomes up to $28,750 and for married couples with incomes up to $57,500. You must also be at least age 18, not a full-time student, and not claimed as a dependent on another person's tax return.
Now the caveat here is the meaning of a full-time student; according to the IRS if you were in school for 5 months of the year you are considered a full-time student. So if you graduated from college in January you are golden, if you graduated in May you will not be eligible for the credit.
This credit is in addition to whatever other tax benefits may result from the retirement contributions. For example, your contribution to a traditional IRA may be deductible. Contributions to a 401(k) plan are not subject to income tax until withdrawn from the plan.
One more thing: Check out Tax Tips from the IRS for Students Starting a Summer Job
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You can hear Dee Lee's expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.
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