As a new grad, the world of taxes probably seems pretty foreign. And with the April 18th tax filing deadline mere days away, you might be panicking to get your return completed and submitted on time.
Don’t fret: we’re here to help you navigate the various tax rules, credits, and deductions specifically for new professionals entering the workforce so you can get that return in and maybe even save money in the process.
5 last-minute tax savings tips
Follow these steps to help maximize your potential tax savings.
1. Know the difference: tax deductions vs. tax credits
Yes, there is a difference between a tax credit vs. tax deduction and it’s important to familiarize yourself with each.
Tax deductions are considered “above-the-line” transactions and are applied to the front portion of your tax return. They help reduce your gross income so your overall taxable income is lower, helping you pay fewer taxes.
Tax credits are applied on the back of your tax return (“below-the-line”) and are calculated after your taxable income has been determined. Credits reduce the amount of tax you pay, dollar-for-dollar.
In many cases, you may qualify for various tax credits and tax deductions, so don’t miss out on these commonly overlooked tax savings.
2. Claim all your tax deductions
As a recent graduate, there are several tax deductions that are often overlooked. Below are just a few of the most common ones. Be sure to check with a tax professional to see what other deductions you may be able to claim.
Student loan interest deduction: This deduction could reduce your taxable income by as much as $2,500. But in order to qualify, you must have been enrolled in a degree or certification program for at least half-time. The loan must also be in your name or your spouse’s name.
Job search expense deduction: As a young professional, you’re likely looking for a new job; any job-related hunting expenses are tax deductible. You can deduct items such as preparing and mailing copies of your resume, employment agency fees, and transportation expenses while traveling to interviews.
For a full list of tax deductible job hunting expenses, check out this page from the IRS.
Moving expense deduction: In the event you land your new job, but it requires you to move to a new city, be sure to track all your expenses as these are tax deductible.
To qualify, your new job location must be at least 50 miles or further from your former residence. You must also live in this new location for at least 39 weeks (if you’re an employee) or 79 weeks (if you’re self-employed). Check out this publication for more information.
3. Don’t miss these tax credits
As a young professional, it’s time to start thinking about adult responsibilities like saving for retirement. Thankfully, these adult-like expenses come with various tax credits that could help you save money.
Saver’s credit: Putting money away in a retirement account could help you qualify for a saver’s credit. This is available to lower-income individuals as a way to help incentivize saving for the future.
The total credit amount depends on your filing status, adjusted gross income, tax liability and the type of retirement account you’re contributing to.
Continuing education credit: Even though you recently graduated, you may be entitled to a credit for any continuing education expenses you incur. This can be related to organization fees, subscriptions, and charges for online classes and other certifications.
There are several different education credits, so be sure to check with your tax professional to see which one fits you best.
Earned income credit: The earned income credit (or EIC for short) is perfect for recent graduates and young professionals; it’s available to any single individual with no kids who’s over the age of 25 and earning less than $20,330 (in 2016).
The income limit goes up if you’re married or have qualifying children. Since it reduces the total amount of taxes you owe, you could even receive a refund based on this credit alone.
4. Report all side-hustle income
There’s an ever-growing trend of making money on the side of a day job. This new “gig economy” trend means you could have multiple income streams outside of your day job, all of which need to be tallied and reported on your income tax return.
Whether you’re selling vintage goods on eBay, or crafting things on Etsy, if your sales total $400 or more you’re required to report the income and expenses on a Schedule C, along with your personal tax return. In some cases, you may have a small profit or a bit of a loss, but you don’t want the IRS to see your sales and penalize you for underreporting your income.
5. File an extension if you need more time
If you need more time to get your finances and taxes in order, don’t stress. You still have options if you can’t make the tax filing deadline.
The longer you wait to file your taxes, the more penalties that will stack up on your account. Trust me, the IRS is the last organization you want to be in debt to, so don’t wait to take action.
There are several different kinds of penalties you could incur, from filing your taxes late to underpaying your balance owed. Both a late-filing fee and a late-payment penalty could force you to pay 5-25 percent of your tax liability for each penalty. You could also be subject to other fines and interest on your balance. So don’t continue to put off dealing with your taxes.
Request a tax extension
Form 4868 is what you’ll need to request an automatic tax return filing extension. So head over to the IRS website and download the form.
There are two methods available for filing a tax extension. You can file online for free using the IRS e-file system or print and mail in the form to the IRS directly. Either way, it may be a good idea to hire a professional to help versus trying to DIY a tax extension request.
Pay any taxes due
Just because you file an extension doesn’t mean you get an extension on any tax you owe the IRS. You’re still required to pay your taxes by the April 18th deadline (for 2016) even if you file an extension for your tax return. Otherwise, you’ll be hit with penalties and fees for late payment.
Perform an estimate of what your taxes will be, or ask an accountant to do this for you, and send a check to the IRS to cover your upcoming tax bill. It may not be the most accurate method, but it will keep you from paying a large number of fees and penalties.
If you’re unable to pay your entire tax bill, the IRS offers several payment options based on your budget needs. You can request a short extension of 60-120 days to give yourself enough time to come up with the funds. Or take advantage of an installment agreement if you need more time. This will allow you to pay a set amount each month until the tax bill is paid in full.
Whether you’re a recent grad or young professional who just started in the workforce, you can use these last-minute tax savings tips to get a jump on your tax savings.