Congratulations! You may have landed your first full-time or part-time job. When you completed the paperwork for your job, you filled out a Form W-4, which the employer will use to figure out how much tax to deduct from your paycheck every pay period. The Form W-4 is not the most user-friendly form to fill out, and can be intimidating and confusing; however, it is important to file this form so your employer can calculate the sufficient amount of your taxes to deduct from your paycheck. Penalties could occur if not enough taxes are withheld during the year and you have a tax bill that is over $1,000 when filing your yearly taxes. Remember, you can complete a new Form W-4 with your employer at any time and adjust your withholding.
Filing Requirements for Non-dependents — If you are not a dependent on your parent’s return, generally you need to file a return if your gross income is over $9,500 ($19,000 for joint filers; or $12,200 for head of household status). You may want to file a return even if you are under the filing requirement so you can get back taxes you paid during the year via tax withholdings from your pay.
Student claimed as a Dependent and Supported by Parents — If you are a student under age 24 and lived away from home to attend school, your parents may still be able to claim you as a dependent if they supported you. Temporary absences from home, such as college, are considered an extension of the home. If you are being claimed as a dependent on someone else’s return (such as your parents), generally you will need to file a return if any of the following apply:
1. You only received unearned income (such as interest in a bank) that was over $950;
- 2. You only received earned income (from working) that was over $5,800;
- 3. You received both unearned and earned income that was more than the larger of $950, or earned income (up to $5,500) plus $300.
Education Credits/Deductions — If you are going to college, you may qualify for an education credit. If your parents supported you and you can be claimed as a dependent on their return, your parents can take the credit/deduction on their return. There are three main credits/deductions to consider (you can choose only one per student):
1. American Opportunity Credit
This is one of the most popular and generous of credits, where you can get a yearly credit of up to $2,500 for tuition, fees, and course material expenses during the first 4 years of higher education if you are enrolled at least half time. The credit phases out starting at incomes over $80,000 ($160,000 for joint filers).
2. Lifetime Learning Credit — This is popular for taxpayers going to college to either improve job skills or for post 4-year education. The credit can be as much as $2,000 a year, and phases out starting at incomes over $50,000 ($100,000 for joint filers).
3. Tuition and Fees Deduction — This is the least used compared to the other two credits, and is less generous. The maximum deduction against income you can take when figuring out your tax is $4,000, unlike the above credits which are dollar-for-dollar credits against your taxes. The deduction phases-out at incomes of over $80,000 (over $160,000 for joint filers). Take this deduction only if you do not qualify for the American Opportunity Credit (because you’re done with the first 4 years of college) or because you don’t qualify for the Lifetime Learning Credit due to high income.
Start Saving for Retirement with Roth IRAs — Retirement is many years away, and thinking about planning for it might be the last thing on your mind. However, if you have any money saved, you might consider stashing it away into a Roth IRA. The interest will grow and compound over your lifetime, and best of all, you don’t pay taxes on your interest earned when you pull your money out of the account when you retire. Plus, if you are at least age 18 and not a dependent on someone else’s return, you may be able to get a tax credit of up to 50% of what you put in if your income is less than $28,250 (or 56,500 if filing jointly). This is truly a great way to shelter your investments from taxes, get a tax credit, and start saving for a successful retirement.
Like this and want more tax advice? As part of a series of tax planning strategies, we’ve broken down tax advice for specific age groups: Generation Y and Millennials, GenX’ers, those at the “Top of the Hill,” Baby Boomers and the Silver Foxes at or nearing retirement.
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Vincent Mangiapane, EA
Federal Analyst, Taxbrain