Thanks, good article. Most college students don't have the time (or interest) to spend on this, but their parents do.
1. Plan your final tuition payment. If your parents make more than $160,000, their right to use the American Opportunity Tax Credit is phased out (and eliminated at $180,000). Strategy: See if the college will let you pay at least $4,000 of your senior year tuition in January. You pay that part of the bill and use it to get a $2,500 credit against your 2014 taxes.
The rule is that the student can claim the credit if he/she pays the tuition and is not claimed as a dependent on the parents’ return. There is no rule that tracks where the $4,000 came from. It could be a gift.
I wonder if the rule specifically says "tuition" or "qualified educational expenses". I need to go look this up again because our daughter's tuition/fees have been paid by scholarship. I've been laundering the family college fund through a 529 account to pay for room/board, which when I did the research (in 2010) was a qualified expense.
2. Figure out your 401(k) early—maybe even before your first day on the job. Your payroll department can process an irregular deduction schedule (e.g., extra for the first three months) but it won’t deduct more than a certain percentage of each paycheck, such as 50% or 80%.
Accelerating your contributions won’t help with the company match. Also note that if you have more than one employer, the total of your voluntary salary deferrals can’t exceed $17,500 in any one year.
The military's Thrift Savings Plan does not match contributions (yet) but the federal TSP does. I know that the military TSP will deduct as high as 92% of your salary (the other 8% is reserved for FICA) for the TSP, and then automatically stop the deductions when the contribution limit is reached. This is how our daughter will max her TSP as soon as she starts getting active-duty pay.
3. Do a Roth. With this 401(k) option, you get no deduction for the contribution but withdrawals are tax-free. There is some room for debate about whether Roth is the better choice for workers whose careers are well underway. But it screams out as the smart move or a part-year worker.
Say you land a $100,000 job and start July 1. Your 2014 income will be $50,000. What with your standard deduction and personal exemption, the first $47,000 will be taxed at a 15% rate or less. The deduction, in other words, wouldn’t do you much good. But having that $256,000 tax-free in 2068 is going to do you a lot of good.
This is a good strategy for anyone who has lower earnings. There's not much tax to pay so it might make more sense to put the money into a Roth 401(k). The military's Roth TSP is a very good tax-reduction strategy for junior servicemembers.
