Tax time is upon us, and millions of young Americans are scrambling to figure out how to lower their tax bill and get a refund. If you are a college student, recent graduate or young professional looking for ways to reduce your tax bill next year, here are some tax deductions every college grad should know about.
Deductions for Contributions to 401k Plans
Contributing to your 401k or an IRA can pay off on your yearly tax bill. When you contribute to your company’s retirement plan, it lowers your taxable income. So if you earn $50,000 and contribute $5,000 to your 401k, you only get taxed on $45,000. Each year, you can contribute up to $15,500 to a 401k. Similarly, if your company doesn’t offer a 401k plan or you earn less than $50,000, the IRS will let you deduct up to $5,000 per year of your contributions to an Individual Retirement Account (or, IRA).
Student Loan Interest Deduction
If you are working and are trying to pay off your student loans, you can deduct up to $2,500 each year on your tax return. The student loan interest deduction is available if your Adjusted Gross Income is less than $70,000 (or $140,000 if you are married).
Moving Expense Deductions
Did you graduate from college last year and move to a new city? Or did you take a new job and move to a new town? If so, you may be able to deduct your moving expenses. According to the IRS, if you move more than 50 miles from your current location, and work in your new location for at least 39 weeks, you can deduct your moving costs including in-transit or storage costs and travel costs to your new home.
Business Travel Expense Deductions
Do you have to travel to work and your employer doesn’t reimburse you for gas, mileage or other business travel-related expenses. Keep your receipts. If you are using your own vehicle to get to and from work or park, or you have to travel out-of-town frequently and your boss won’t repay you, don’t fret. When you file your taxes, you can deduct business travel costs and reduce your taxable income. Also, many employers have transportation and parking reimbursement programs where you can contribute to a parking or transit account with pre-tax money that can be used to pay for subway passes, trains or parking in a nearby parking garage. While there are limits on how much you can contribute to these programs, they are a great way to save money on taxes and cover some of the basic costs of getting to and from your job.
Mortgage Interest Deduction
Are you a young homeowner trying to keep up with your mortgage payments? If so, you are probably aware that there are a lot of tax benefits to buying a home. If not, here’s the deal: you can deduct the interest you pay on your mortgage. Unlike renting, owning a home has tons of tax benefits. The mortgage interest deduction is just one of the tax benefits of home ownership.
Qualified Work-Related Education Deduction
If you are currently a graduate student or considering going back to school while working, did you know that you may be able to deduct the cost of your education by classifying it as a work-related education expense. That’s right. I did it when I had my old job and literally saved thousands of dollars. While it won’t work for everyone, it may be something you want to consider. To qualify, you have to meet one of the following criteria:
- The education is required by law or your employer to keep your present salary, status or job; or,
- The education maintains or improves skills needed in your present work.
If you are going to school just to meet minimal education requirements for your present job (e.g. “you have to do continuing education as part of your job”) or will qualify you for a new trade (e.g. “you are a banker going to law school”), you can’t deduct your educational expenses and treat them as business expenses.
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