Author Topic: Tax question (went from university to new job this year)  (Read 4285 times)

zedsdead

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Tax question (went from university to new job this year)
« on: February 02, 2014, 12:24:01 PM »
Hi

I have been following mustachian advice for awhile now and it has been such a great thing to come to terms with my financial situation and have sensible plans for spending and savings.  Awesome!

This is my situation.  I just finished school at the end of last summer.   Then I started a new job on Sept 1, 2013 with a substantially higher income than I ever made while in school (duh).   Here's what I did with my new income:

1.  Kept monthly spending budget as close as possible to student budget (basically went from no choice mustachian living to making it a choice)
2.  Put match amount into 401k
3.  Put the rest towards my student loan debt

OK, now to my question!

Prior to this new job, I just used some free online site (I think it was HR block) to do my taxes, very easy, I never had much income to report, no investments etc. So it was simple and I usually got back every dime of what i paid in (since I made so little, my education credits were greater than my withholdings).

I just got my W-2 from the job I started in Sept, and the Federal income tax withheld (box 2) is 16,100.  Now there is more money on the line, I have some 401k investments, paying back loans, etc.  Things are getting more complicated and I want to make sure I do everything I can to get back as much of that 16k  as possible. 

I am curious from more experienced mustachians than myself are there some tax breaks/credits I should be looking into?  Is it worth paying for a tax service instead of doing it for free online?

I did not buy a new house, have a baby, no electric car or anything like that. I still have the same old 2000 car I had 6 years ago.   I think the biggest thing would be university credits (hope credit) since I was a full time student for the majority of last year, my student loan debt, and my 401k contributions.  Not sure if there are other things I should be looking into.

 
« Last Edit: February 02, 2014, 12:40:45 PM by zedsdead »

marylanddollarbydollar

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Re: Tax question (went from university to new job this year)
« Reply #1 on: February 02, 2014, 02:58:04 PM »
I hope someone else will post as well... But I can't think of anything off the top of my head.  I mean, your health benefit payments aren't taxed, and have the effect of lowering your total income (Line 22 of the 1040 long form), but that's not really what you're asking.

In situations like this, I'll just head into the local library (or go to irs.gov), grab a copy of the 1040 long form and 1040 booklet for free and just go down the list, and see if anything in the Adjusted Gross Income or Tax and Credits sections apply to me.  The benefit here is that the 1040 form lists out everything you can deduct and credit, aside from your itemized deductions (those will be in the equally free Schedule A booklet).  If you have questions about whether a deduction or credit applies to you, just flip through the 1040 booklet, and figure it out using the nifty little tables.  As an aside, unless you had a load of medical bills, state income or sales tax payments, or charitable contributions, I don't see any glaring itemized deductions that would beat out the standard deduction.  That said, if you plan to itemize, I'd flip through the Schedule A form and booklet to make sure to shake that savings tree as hardly as I could. 

I found this online, but I didn't see anything overly helpful: http://taxes.about.com/b/2012/05/15/tax-breaks-for-new-graduates.htm

Also, congrats on the job... I won't pry, but if you paid $16,100 in federal income tax, you're either making a load of money in gross salary, you're paying out way too much in your withholding, or, both.  If you haven't already, maybe check out the irs.gov withholding calculator to see whether, moving forward into the 2014 reporting year, you should be claiming more exemptions on your W2?   

mlipps

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Re: Tax question (went from university to new job this year)
« Reply #2 on: February 02, 2014, 03:10:28 PM »
Sounds like the only things that you would probably need to worry about are education credits & student loan interest deduction. Start here: http://www.irs.gov/uac/Tax-Benefits-for-Education:-Information-Center

Your taxes will likely increase in complexity over time, but if you start now, you can keep up with them.

zedsdead

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Re: Tax question (went from university to new job this year)
« Reply #3 on: February 02, 2014, 08:48:51 PM »
OK thanks everyone.  Those suggestions are helpful and I will look more carefully at all the documented credits.

I hope I am overpaying.  Haven't had time to look at a withholding calculator yet but that 16k withholding is not including my other W-2 (from where I worked prior to my new job) and my wife's W-2 for the entire year.  I have not gotten those W-2s yet, but when we factor all that in, it should easily be over 20k withholding.

From the link that mlipps posted it looks like I can get:  $2,500 american opportunity credit x 2 (both my wife and myself were full-time students last year) = $5,000 credit

And we can both deduct our student loan interest (up to 5k total) and tuition + fees from my gross income, which should whittle it down by about 8k. 

Dang...so that's it huh.   Looks like I am not going to be seeing as much of that $20k as I hoped.  Now I know why ppl bitch about taxes so much :P

mlipps

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Re: Tax question (went from university to new job this year)
« Reply #4 on: February 02, 2014, 09:03:31 PM »
OK thanks everyone.  Those suggestions are helpful and I will look more carefully at all the documented credits.

I hope I am overpaying.  Haven't had time to look at a withholding calculator yet but that 16k withholding is not including my other W-2 (from where I worked prior to my new job) and my wife's W-2 for the entire year.  I have not gotten those W-2s yet, but when we factor all that in, it should easily be over 20k withholding.

From the link that mlipps posted it looks like I can get:  $2,500 american opportunity credit x 2 (both my wife and myself were full-time students last year) = $5,000 credit

And we can both deduct our student loan interest (up to 5k total) and tuition + fees from my gross income, which should whittle it down by about 8k. 

Dang...so that's it huh.   Looks like I am not going to be seeing as much of that $20k as I hoped.  Now I know why ppl bitch about taxes so much :P

You can't take the American Opp. Credit & the Tuition & Fees deduction for the same student. Also, I think the student loan deduction is limited to $2,500/return, although I'm having trouble finding that spelled out clearly.

zedsdead

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Re: Tax question (went from university to new job this year)
« Reply #5 on: February 02, 2014, 09:33:34 PM »
OK thanks everyone.  Those suggestions are helpful and I will look more carefully at all the documented credits.

I hope I am overpaying.  Haven't had time to look at a withholding calculator yet but that 16k withholding is not including my other W-2 (from where I worked prior to my new job) and my wife's W-2 for the entire year.  I have not gotten those W-2s yet, but when we factor all that in, it should easily be over 20k withholding.

From the link that mlipps posted it looks like I can get:  $2,500 american opportunity credit x 2 (both my wife and myself were full-time students last year) = $5,000 credit

And we can both deduct our student loan interest (up to 5k total) and tuition + fees from my gross income, which should whittle it down by about 8k. 

Dang...so that's it huh.   Looks like I am not going to be seeing as much of that $20k as I hoped.  Now I know why ppl bitch about taxes so much :P

You can't take the American Opp. Credit & the Tuition & Fees deduction for the same student. Also, I think the student loan deduction is limited to $2,500/return, although I'm having trouble finding that spelled out clearly.

Good to know.  That's why I like the online tax apps so I can try different numbers and it will tell me if I am doing something illegal :) 

So the Opp Credit is the way to go for both of us I think.   The tuition and fess deduction would be about ~5-8k total, and I think we would end up getting more from the credit than the deduction. 

I discovered something else, you can claim IRA contributions even up to April 14, 2014 If I am reading this correctly.  Just want to confirm, If I open an IRA now, dump $5,500 into it, I can deduct it on my 2013 return? 

Not sure if I want to do this or not, but I could swing this from our emergency fund, then put it back from the return.   Though I would have to wait until I get all the W-2s and can actually work out the numbers to figure out if this makes sense.
« Last Edit: February 03, 2014, 12:03:53 AM by zedsdead »

mlipps

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Re: Tax question (went from university to new job this year)
« Reply #6 on: February 03, 2014, 06:01:40 AM »
Yep, IRA will work just as you said. The IRS will also take you  at your word so you can take the deduction, get your refund, then make the contribution. And it's $5,5000/person.

jat9449

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Re: Tax question (went from university to new job this year)
« Reply #7 on: February 03, 2014, 10:20:30 AM »
Yep, IRA will work just as you said. The IRS will also take you  at your word so you can take the deduction, get your refund, then make the contribution. And it's $5,5000/person.

Do you know if the refund has to be automatically deposited into your IRA? Can you take the deduction, get your refund (into say your checking account), and then make the contribution? So long as it is there before April 14?

From various reading, I was under the impression you HAD to use form 8888 (allocation of refund). If it's not absolutely necessary, I would love to deposit the refund in savings and then make the contribution just to avoid any confusion over 2013 contribution vs. 2014 contribution.

bacchi

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Re: Tax question (went from university to new job this year)
« Reply #8 on: February 03, 2014, 12:10:28 PM »
Do you know if the refund has to be automatically deposited into your IRA? Can you take the deduction, get your refund (into say your checking account), and then make the contribution? So long as it is there before April 14?

Yes, you can do this.

If you haven't overpaid taxes, there's a fair chance you're making too much to contribute to a Roth.


seattlecyclone

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Re: Tax question (went from university to new job this year)
« Reply #9 on: February 03, 2014, 12:25:53 PM »
You probably overpaid from your withholding last year because the basic withholding formulas work on the assumption that you'll earn the same amount each pay period throughout the year. In your case, your income was much higher the last few months of the year because you were a student for the first portion of the year. You should be seeing a pretty big refund just because of that, and then adding the education credits should give you even more back.

Definitely look into whether you should adjust your withholding for this year, but don't take the fact that you're getting a big refund for last year as evidence that you should adjust your withholding for this year. With a more steady income from month to month, you will probably find that your current withholding is actually just about right.

zedsdead

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Re: Tax question (went from university to new job this year)
« Reply #10 on: February 04, 2014, 09:55:02 PM »
You probably overpaid from your withholding last year because the basic withholding formulas work on the assumption that you'll earn the same amount each pay period throughout the year. In your case, your income was much higher the last few months of the year because you were a student for the first portion of the year. You should be seeing a pretty big refund just because of that, and then adding the education credits should give you even more back.

Definitely look into whether you should adjust your withholding for this year, but don't take the fact that you're getting a big refund for last year as evidence that you should adjust your withholding for this year. With a more steady income from month to month, you will probably find that your current withholding is actually just about right.

Yup, this is exactly what happened.  It looks like the withholding per month would have been pretty close had I been making the amount I made for the last 4 months for the entire year.  But, because I was a university student with low income for the first eight months I ended up overpaying.  So now that I have all the W-2s and ran everything through a tax program, it looks like about $8k refund.   

I noticed another fact, I was paying more in taxes per month for the last four months than I was making per month (~$1,500) for the first eight! 

I guess I should not complain, I am lucky to have a good job and good health, but still...it's going to take some getting used to paying this much in taxes each year!  I better get to some serious hiking in a few national forests this summer to get my money's worth :)

Thanks for the pointers everyone!  I'll have to read up and make sure to start planning from day 1 to minimize my M/AGI in upcoming years.