I remember getting my first paycheck after graduation. After years of working part-time andhaving to move back in with my mother for graduate school, I was officially independent. I was anauditor for Ernst & Young and that paycheck was more money than I had ever seen in one lump sum.
To celebrate, I took my friends out and picked up the bar bill. Then next morning I woke uphung over and broke.
So while that never happened again, the tendency for young employees to blow their paycheckson frivolous stuff is clearly there.
And while you should enjoy your newfound, hard-earned money, you should also try to be smartwith it.
Because with that new paycheck comes responsibility -- like your very own tax return.
Not only will you need to file a tax return in April, but you should actually consider doing some year-end tax-planning. That involves keeping tabs on your recent moves, so you have money to pick up bar tabs for your friends.
Get Credit for College
First, start gathering all your paperwork related to your college tuition, and make sure you have the proper documentation come tax time. Otherwise you still have time to call your college for details.
Now start evaluating what credits you may be able to take. While the Hope and Lifetime Learning credits are available for a portion of your tuition bill, there are income limitations on those credits. So if your parents' adjusted gross income, or AGI, was too high, they didn't even qualify for them.
The amount of the credits begins to phase out once a married couple's AGI hits $87,000. The credits are eliminated when AGI reaches $107,000.
Both the parents and the student can't record this credit, so if your parents can't benefit, you might as well. The tuition, after all, is in your name, even if you were lucky enough to have your parents pick up the bill.
You can get the full credit if your AGI is $43,000 or lower, but once it goes over $53,000 as a single person you're done. So talk to your parents and see if you can take those credits in 2006.
Or maybe you decided to go back to grad school already. The Lifetime Learning Credit applies to graduate and professional degree courses as well. It equals 20% of the first $10,000 of the tuition and fees paid during the year. It maxes out at $2,000. So if you paid for some grad courses, you may qualify for this credit. Big note: You can't claim both the Hope and the Lifetime Learning credits in the same year.
And while 2005 was the last year for the tuition and fees deduction, which allowed you to deduct up to $4,000 of qualified higher-education expenses (i.e. tuition and fees), rumors abound that Congress is going to extend it for 2006. So stay tuned. We'll keep you posted.
And finally, if you're still paying off student loans, don't forget you can deduct up to $2,500 in qualified student-loan interest.
Movin' On Up
If you had to move more than 50 miles from your home for your cool new job and weren't reimbursed for your moving expenses, you may be able to deduct them on your 2006 tax return. You just have to meet a few quirky IRS rules.
The first rule says that your "new job must be at least 50 miles farther from your old homethan your old job was." Huh? That means if your old job was three miles from your old home,your new job must be at least 53 miles from your old home.
But what if you didn't have a former job? Well, then the new job must be least 50 miles fromyour former residence. Now "residence" refers to your principal residence, which could be your dorm room or parents' home.
If you moved back in with your folks before starting your new job, your parents' home will be your "former principal residence," notes Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals. But if you went from your dorm room in NYC right to your hot new job down in D.C., your dorm would count as your "principal residence."
The next rule says you must work at the new location for at least 39 weeks during the first 12 months.
Assuming you qualify, you can then deduct the cost of moving yourself and your belongings from location A to location B. Bear in mind that only the un-reimbursed costs associated with the actual move are deductible. If you took trips back and forth to your new location to scout out housing prospects, local bars or open a bank account, forget deducting the costs of those trips.
The good news is that moving expenses are reported on line 29 of your Form 1040, and there'sno limitation on the amount you can deduct. So tally all your out-of-pocket costs and keep your receipts.
A Few More Tax Tips
Unless you're uber-ambitious and already bought an apartment, odds are good you won't beitemizing your deductions on your tax return. With that, there's little tax incentive to make charitable contributions. So consider pushing your donations off until next year, especially if you're planning on buying that deluxe apartment in the sky next year, suggests Scharin. At least that way you'll get more of a tax benefit from your contributions.
Remind your parents that since you're in a lower tax bracket, they can gift assets to you andtake advantage of your lower capital-gains tax. You're probably only paying 5% at this early pointin your career, as opposed to your folks' 15% cap-gains rate. You've got to get that done before theyear's end, if they want it to count for 2006
And finally, consider opening a Roth IRA. Since you're in a lower tax bracket now, you can makeafter-tax contributions without feeling much pain. In addition, a single person can open a Roth ifhis AGI is $95,000 or less. A full $4,000 contribution for the year is allowed.
So start thinking about some tax planning. While that first paycheck makes you want to get outand party, the first check you write to Uncle Sam will make you want to puke.
Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;
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