My nephew recently graduated from college, so I thought I'd put together a few pearls of financial wisdom for him, sprinkled with a few quotes from Ben Franklin. (because, why not?) I hope you enjoy!
Recent college graduates have a to think about when it comes to finances, but long-term planning usually isn't at the top of their list of priorities.
The good news is that there are a number of significant tax breaks that you can help them with right now. Check out these personal finance & tax tips for recent college grads, with a little inspiration from one of history's shrewdest men.
1. Get a tax advantage saving account
“Money makes money. And the money that money makes, makes money” - Ben Franklin
When you're just starting your first job or business, the last thing on your mind might be saving retirement! While you're probably putting every dollar you have to use, failing to think about your future is a seriously bad move.
Getting yourself a tax advantage saving account (such as the Roth IRA) means that you can begin putting away money for your future without having to pay taxes on it.
In short, this means that you generally pay less on what you earn, while also making sure that you have a nice little nest egg for your golden years. As Ben Franklin reminded us, compound interest may be the, "eight wonder of the world."
2. Understand ‘part-year’ withholding
Getting your first job after graduation can be a little intimidating. After all, there are all these forms and the like that you have to fill out and new rules to follow.
If it takes you a while to land on your feet in the working world, though, make sure that you know about the ‘part-year’ withholding system. It might just save you a whole load of cash along the way!
So, how does it work? Well, if you start a new role part way through the tax year (and expect to work no more than 245 days in that year), you could be eligible for this method.
It differs from the standard tax method since it doesn’t consider the full 12 months of your salary. That means that you only get taxed on the money that you actually earn, rather than your projected earnings.
3. Deduct your student loan from your taxes
"An investment in knowledge pays the best interest." Ben Franklin
Very true, Ben, but after you’ve finished college and started working, you will need to start repaying that pesky student loan. Eek! It’s no fun. Still, there are a couple of things that you need to know about how the system works.
Now that you are claiming your own exemption, you can also start using the interest paid on your student loans as a tax deduction. You can write-off up to $2500 of this interest per year, so it’s a significant deduction!
Keep in mind that even if the college loans for which you are liable are being paid by your parents, it can still benefit you at tax time. You’ll be able to deduct the interest on form 1040 or 1040A, provided that you have an adjusted gross income (AGI) of less than $80,000 as an individual, or less than $160,000 if filing jointly.
4. File Your own (simple) Taxes
The average cost of employing a professional to file your taxes is about $275, but doing your own taxes can save you over $100 and teach you a lot about your saving and spending habits.
You can also find online tax coupons for software like TurboTax and H&R Block, which will save you an extra $20 or more.
5. Sign up for a 401(k)
"A penny saved is a penny earned." - Ben Franklin
When you do get a job, you might shy away from signing up for the 401(k). Sure, you’ll want to save as much money as you can, but this retirement plan is one that you actually cannot afford to miss out on. You should contribute enough so that you gain 100% employer match payments too.
The wonderful thing about this system is the fact that it’s pretax (i.e. you don’t have to pay taxes on it before saving it!). That means that when you pop $400 away, you only see $300 disappear from your pay package.
6. Deduct your moving costs
Make no mistakes, moving for a new job can be expensive. This is something that Uncle Sam understands, which is why there is some relief available for you right away.
If you have to move more than 50 miles from your old home for a new job, you may be able to get some cash back from your taxes. That should really help with the burden of having to pay for movers, deposits, and (of course!) transport too.
7. Health insurance: Consider an HSA
If you get yourself a health savings account (HSA) and a high-deductible policy, you will get a triple tax break on the money that you save. That’s a whole load of cash and certainly nothing to be sniffed at.
For one thing, any contributions you make will be ‘pretax’ or tax deductible. That means that you won’t have to pay extra when you save for your health. What’s more, as these savings grow more and more, they will be tax deferred and should you need to use them for medical fees, you can do so tax-free.
We shouldn’t have to tell you the importance of getting a stable health insurance policy. As soon as you start earning, it’s crucial that you consider this thing. Otherwise, you could find yourself in a sticky and expensive situation further down the line.
8. Keep on studying!
Do you still need to take classes? Don’t worry - there may be some financial help you can get along the way. The Lifetime Learning Credit can give you tax breaks when you continue studying after college.
This little tax break will mean that you can claim back 20% of up to $10,000 per year on extra classes or tuition. If you’re not ready to stop learning, this tax tip is key!
Also, if you are still taking classes, look for an even cheaper student edition of popular brand tax software that specifically target education credits and deductions.
“Well done is better than well said.” Ben Franklin
Fresh out of college your energy is surely on making money, but saving it is just as important. Taking advantage of every available tax break is a great way to hold onto your hard-earned money and put it to good use!