February 2021
College and Tax Planning

Entering “the real world” comes with a long list of responsibilities. One of which is accurately reporting and paying income taxes on time. These tips are meant to highlight the essentials of what college students and recent graduates need to know in order to efficiently handle taxes and take advantage of tax deductions and tax credits.

Know Your Tax Bracket

How much you earn will determine how much you pay in taxes each year. A tax bracket specifies the percentage of taxable income that is paid in taxes. In 2020, for instance, single individuals who earned between $9,876 and $40,125 fell into the 12% tax bracket. Those earning between $40,126 and $85,525 fell into the 22% tax bracket. There is a considerable disparity between these brackets, which will impact your total tax liability.

Know How Much to Withhold if You’re an Employee

If you’re classified as an employee, you’ll need to fill out a W-4 form before beginning your job. The way you fill out a W-4 will determine how much your employer withholds from your paycheck. There are multiple options, so you want to choose the right one based on your situation. Failing to withhold enough tax can result in you owing a significant amount of money once it’s tax time in April and potential penalties. On the other hand, if you withhold too much, you’ll likely have a limited budget each month, which can be difficult for college students and recent graduates who are just starting out. Be sure to carefully read through the W-4 to decide how much to withhold.

Know the Tax Filing Deadline

The IRS has strict deadlines about when taxes must be reported each year. Failing to do so on time can result in some ugly consequences. According to Bill Smith, managing director of CBIZ MHM’s National Tax Office, the failure-to-file penalty costs 5% of your unpaid taxes for each month your tax return is late and goes up to as much as 25%. This penalty kicks in the day after the tax deadline ends. That’s why you always need to know the tax-filing deadline and make sure you’re on time — ideally being a little early to give yourself some wiggle room. The deadline for filing a 2020 Individual Federal Income Tax return is April 15, 2021.

Understand Student Loan Interest Deductions

Approximately 70% of students in America take out some type of student loan to fund their education. If you fall into this category, you may be able to deduct up to $2,500 from your taxable income as long as you meet eligibility requirements, including the following:

• No one is claiming you as a dependent

• You’re not married and filing separately

• You currently are or were enrolled at least half time

The amount of the student loan interest deduction is based on the amount you paid in interest on federal and private student loans during the previous calendar year. This deduction is an above-the-line exclusion from income, meaning that you can claim it even if you claim the standard deduction.

Familiarize Yourself With Relevant Tax Forms

Finally, it’s important to have a basic understanding of the types of documents you’ll need for reporting taxes. For example, if you work for an employer, you’ll receive a W-2. If you’re an independent contractor, you’ll receive a 1099 from each company.

The 1098-E is a Student Loan Interest Statement — a form that shows how much interest you paid on your student loan during the year. There’s also the 1098-T Tuition Statement. “Schools must send IRS Form 1098-T to any student who paid ‘qualified educational expenses’ in the preceding year,” says TurboTax. “Qualified expenses include tuition, any fees that are required for enrollment, and course materials required for a student to be enrolled.”

These two forms will be necessary for student loan interest deductions, so be on the lookout for them in the mail.

Whether you are a current student, a college grad or someone helping out one, armed with these tax tips, and the confidence to file your own taxes, you can improve your chances of reducing your tax burden and maximizing any refund you’re due.

If you have questions, please contact us.

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