Tax Deductions for New (and Not-So-New) Graduates
May 16, 2014 : Kevin Martin – The Tax Institute
Editor’s Note: Finishing college might be one of life’s most bittersweet moments. No longer will you be just five minutes away from your few thousand closest friends. No more sharing meal plan points. No reason for all-night cramming sessions before a test. Ok, maybe that last one is good news. We also have more good news – as a job seeker and new member of the adult economy, you have several new tax deductions available to you!
Now that finals are (hopefully) over and graduation is commencing, you may be taking the next step in your life.
For many of you, this step will involve getting a job, or at least looking for one. Fortunately, even an unemployed graduate can potentially be eligible for certain tax benefits. Once you know about these tax incentives, you may be able to reduce the taxes you will owe once you start working and earning your own paycheck.
A common tax deduction available to a graduate starting a new job is a tax deduction for moving expenses. When you need to relocate for a new job out of school, you don’t need to worry about leaving your beloved futon behind. Instead, you may be able to deduct moving expenses related to that relocation. This tax deduction can apply whether or not your new job is your first job.
However, certain requirements must be met in order to deduct these expenses. First, the move must be closely related (both in time and place) to starting work at the new job. Second, the new home usually must be at least 50 miles closer than the old home to the new place of employment. Third, you must work full-time at the new job for at least 39 weeks out of the 52 weeks after the move occurs. If these requirements are met, then the moving expenses can be deducted. In addition, certain storage expenses related to the move can be deductible as well.
Another one to think about is a tax deduction for any job searching expenses. These deductible items may include resume workshops, travel costs directly related to looking for a new job and fees paid to a placement agency in order to find work, among other things.
Unlike moving expenses, however, these expenses cannot be deducted if you are looking for a job for the first time. Furthermore, anyone who wants to deduct these expenses would need to “itemize.” In other words, someone who wants to deduct these expenses would not be able to use the standard deduction.
You will usually only itemize deductions if the total of these deductions (which are available for items such as state income taxes, charitable contributions and mortgage interest) are higher than the standard deduction. In 2014, the standard deduction for a person filing a single tax return is $6,200, and for a couple filing a joint return it is $12,400.
Retirement, yes, seriously
It is also never too early to start thinking about your retirement. People often overlook retirement tax benefits, especially if they are not all that close to retirement age. After all, it is hard to think about retiring from a job before you even get one. However, once you do find that first full-time post-graduate employment, you may want to think about setting up a retirement plan, such as a traditional or Roth individual retirement account (IRA).
Depending on how much you make and whether you have a retirement plan through work, you may be able to deduct traditional IRA contributions (up to $5,500 in 2014). If you pulled a Thornton Melon and graduated after age 50 but before age 70½), this deductible amount could jump up by as much as $1,000. Your new employer may also have their own retirement plan (such as a 401(k) plan) that can allow you to defer additional amounts. These deferrals would reduce your take home pay, but they will also reduce your liability when tax filing rolls around.
Lastly, don’t forget one last semester of possible education expenses. Depending on how many years it took you to get through school, you may be eligible for either a credit or a deduction. Possible credits include the American Opportunity Credit and the Lifetime Learning Credit, while in other cases it may be more beneficial to claim the tuition and fees deduction.