Tax Tip: New college graduates earn more, may face higher taxes as well
By The Tax Institute at H&R Block
Recent college graduates likely got that first job this summer. With that offer and paycheck come other first-time responsibilities, like paying taxes. What students often don’t learn while they’re completing a degree is how their specific situation impacts their income tax return.
According to a national study, the average starting salary of 2014 college graduates is up 1.2 percent from 2013. Last year, new graduates earned an average of $44,928, compared to $45,473 this year. This bump in pay could mean a bump in taxes, so it’s important for college graduates to understand the tax laws that affect them.
Know when to file
The first test recent graduates must pass is the one to determine if they even need to file a tax return. Those who graduated this past May or June may still qualify to be claimed by their parents. A recent graduate who cannot be claimed as a dependent must file a tax return if taxable income is at or above the filing threshold, which for 2014 is $10,150 for most individuals.
Usually, recent graduates can still be claimed as dependents for the graduation year if they are under 24 by December 31 and they do not pay for more than half of their support during the year. Those claimed as dependents by their parents have a lower filing threshold because they lose their personal exemption of $3,950 and have a lower standard deduction, which is generally earned income plus $350 (for 2014).
In any case, even graduates who need not file may still wish to file if they have had taxes withheld from paychecks, as they may qualify for a refund.
All starts with the W-4
Filling out the W-4 form properly is the first step in properly filing taxes. H&R Block’s online W-4 planner can help new employees choose the right number of withholding allowances in order to balance take-home pay from each paycheck with the size of the tax refund they want.
Don’t forget the tax breaks
Graduates enrolled in school for a portion of the year may be able to qualify for certain education tax benefits such as the $2,500 American Opportunity Credit or the $2,000 Lifetime Learning credit. Consulting a tax professional may be best for these filers.
Many graduates will begin repaying their student loans once they land their first job and any interest paid may qualify for a tax deduction. Graduates who can pay more than the minimum payment on their loans could see a greater deduction. The maximum student loan interest deduction is $2,500 per year. If eligible, graduates may also choose to save untaxed money for retirement as a way to trim down how much income is taxed while also starting their nest egg early.