If you're a recent college grad and have already secured your first job, you'll need to become familiar with what Uncle Sam will expect of you at tax time. For starters, you will most likely be required to file a tax return as long as you keep earning that steady paycheck. In years past, you may have filed only to claim a refund of taxes you've had withheld or claim an education credit for all of that tuition money you've been shelling out. This year is different!
On your first days of work, you were probably asked to fill out a form W-4. This form tells your employer how much federal income tax to withhold on your behalf. The exact amount is determined by your salary and the number of "allowances" you claim. If you have too much withheld throughout the year, you'll be due a refund. If you haven't paid enough, you'll be writing Uncle Sam a check sometime before April 15th of next year.
Aside from withholding appropriately, there are several other ways to save money at tax time.
1. Start saving for retirement. If your employer offers a 401(k), consider joining right away. Every dollar you contribute to the plan will be tax-deferred until you retire. Additionally, many employers will match your contributions up to a certain limit. If this is the case, you'll want to make sure you are contributing enough to capture those matching dollars.
2. Deduct your student loan interest. If you've already started repaying those student loans, the interest amount will be reported to you on a 1099 form. You'll want to be sure to capture the amount of student loan interest paid as an adjustment to your income. The amount of interest you pay will reduce your income dollar for dollar before tax is calculated.
3. Claim your education credits. If you graduated in 2011, you most likely paid tuition for some portion of the year. If so, you'll want to determine which education tax credit you are eligible for. The credit you claim will reduce your tax dollar for dollar and may even offer a little something extra!
Preparing to file your first tax return can be overwhelming. The most important thing you can do is educate yourself prior to filing. To begin, you'll want to understand how to read your W-2 form. This will be the most important form to look for early in the year (your employer will mail it to you by January 31st). Your W-2 will show your total wages and any taxes you had withheld. This will be the starting point of your return.
Most recent grads will use a 1040EZ to file their return. Both single and married people with no dependents are eligible to use this form. If your situation requires more detail, then a 1040A or 1040 may be appropriate. Regardless of the form you use, the IRS provides line-by-line instructions and help at www.irs.gov.
If you run into questions along the way, be sure to contact a tax pro for help. A good tax preparer will provide an education while they prepare your return. This can be extremely helpful as you plan for the following year. Best of luck with your first tax return!
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.