- Keep good records – Whether going to a tax professional or going it alone, holding on to pay stubs, investment documents, and receipts for anything you want to write off makes the whole process much easier. Find out exactly which documents to keep, and how long to keep all those documents.
- Whom do you owe? – If your parents usually do your taxes or you've moved to a new state, make sure you don't double pay. If you moved mid-year you may want to check in with an accountant to make sure you're not leaving anyone out (or paying something you don't have to).
- Do it yourself – The good thing about being a recent college grad is that your taxes are straightforward. Unless you own a house or have dependents, doing your own taxes will be relatively easy. Buy tax preparation software to grease the wheels.
- Hire a pro – If your life is a little more complicated (home, business, moving, student loans, marriage, children, etc.), it may be more prudent to hire a professional. Just make sure you have the right documents, and let the professional find all the tax loopholes for you.
- Deductions are your friend – Recent college grads can take advantage of a number of tax deductibles, such as moving after graduation and job training. Keep a look out for any deductions you could apply for; they're easy to miss.
The American Institute of Certified Public Accountants, through an elaborate propaganda program, has society brainwashed. From the moment we’re born, we are convinced that doing our taxes is some sort of horrific experience—the equivalent to simultaneously
receiving a prostate check and taking the Bar Exam.
After years of odd jobs and part-time work, this past year I finally earned enough to warrant filing a return. Waking early one recent Sunday, determined to get this hellish monkey off my back, I hunkered down at my computer—armed with H&R Block TaxCut and a fifth of Beefeater Gin—ready for the worst. To my great surprise, after a scant 90 minutes I had finished both my state and federal returns, was printing receipts for my records, and was turning on the television just in time to catch the tail end of CBS’s Sunday Morning. Here are my stats for the morning: $96 owed to the Feds; $67 owed to me by the State of California; $30 for TaxCut; 90 minutes of my time; and one shot of Beefeater (in celebration of a job well done). The whole experience was really just a simple inconvenience—hardly the paperwork hellstorm I was expecting. Then again, as a recent college graduate, my tax situation was far from complicated—I only had one source of income, no defendants, and I've never given a red cent to charity in my life.
Ultimately, tackling taxes comes down to a difficult choice between cost savings and being sure to get it right, so consider the following before making the wrong one.
Doing Them Yourself
It turns out there is an advantage to being just out of college, making relatively little loot, having few investments, and not owning a home—your taxes are very straightforward. At this “worry-free” stage in your life, all you likely have to keep track of is your primary salary and maybe a small amount of income from savings and investment accounts. That said, there are all sort of deductions that you may or may be eligible for, so it's well worth your time to do a little research to see what savings you can make. But let's start from the beginning.
Once you have your W-2 from work and various 1099 forms from your banks (you should receive them by the first week in February at the latest), you are missing only one thing—tax preparation software. Sure, you could do your taxes without one of these godsends, but you could also move back into a cave and hunt mastodons with nothing but a shank. Both TaxCut and TurboTax provide error checking, accuracy guarantees, and let you file both your federal and state returns (depending on the edition). For around $30, you have everything you need. These programs are often thrown in free with the purchase of Quicken or Microsoft Money (two very useful pieces of personal finance software). Here’s a review of the top three tax preparation software programs.
The act of actually doing your taxes is virtually the same as filling out an on-line survey, or opening any on-line account—fill in some blanks, mother’s maiden name, rinse and repeat. To be extra savvy, sign up for electronic fund transfer with the IRS–this will greatly expedite the time it takes to receive your return. In addition, there is no chance of your payment getting lost in the mail.
The place where it gets tricky is figuring out which deductions you can claim. See if you can get a checklist of tax deductions from your parents' account or check out the latest edition of Master Tax Guide so that you're aware of things to look out for.
Need additional help? Libraries, community centers and college business departments often hold free tax help sessions, and many Web Sites offer free advice, as well as fee-based Q&A sessions.
And if all of that seems a bit too intimidating, read on to the next page to learn about how you can hire a professional to walk your through your first tax season.
Figuring Out Whom You Owe
For recent grads cutting ties with their parents’ tax return and moving to new states, the question of whom you owe (and who is going to pay it) can be a tricky one. First and foremost, have a discussion with your parents to make sure they are not still claiming you as a dependent. You don’t want to double-file, and they won’t receive the W-2 forms from your employer if you have started working. Next, think about where you have lived and worked in the past year. You will always have to pay Federal taxes, so that’s a given. However, you also have to pay the state where you are a resident, as well as the state where you work (if they are the same, then clearly you only have to file once). If you’ve moved around a lot, you may want to check in with an accountant or tax pro to make sure you’re not leaving anyone out or double paying anything that’s unnecessary.
Hire a Professional
Taxes are a lot like illness. Once it gets complex, it’s best to call in a professional. Continuing with this analogy, the situation I described on the last page would be a minor headache—with TaxCut serving as an Advil. On the other hand, owning a home, running your own business, or doing a lot of freelance work would be a 103-degree fever coupled with the dry heaves and a loss of sphincter control—see a professional as soon as possible. And be sure to bring along these documents. Despite what you’ve seen in films, it is not wise to show up in an accountant’s office with a shopping bag full of random receipts.
It’s not that you couldn’t do the taxes yourself, it’s just that you don’t have the “expertise” to take advantage of all potential tax loopholes. For instance, if you’re doing freelance work from home, you can deduct a portion of your rent (note: you need to get a 1099 Misc form from any entity you receive over $600 in a year). If you’re running your own business, you can deduct virtually everything: meals out (discussing business), gasoline expenses (doesn’t count for commuting), advertising, you name it. It takes a shrewd tax professional to catch all of these, and in so doing, they will more than make up for their fee.
As recent grads, there are two deductions we can take that lessen the sting of paying for our education. Assuming you earn less than $65,000, you can deduct up to $2,500 in student-loan interest,. And if you move a significant distance for a new job after graduation, the relocation expenses may be deductible. Good tax preparers should be well-versed in all of these tricks. However, you need to be sure to maintain a paper trail (e.g., check, receipt, e-mail) for anything you pay for that may be deductible.
Some other deductions to keep in mind (be sure to save the receipts):
- Charitable contributions, including Alumni Associations
- Business travel
- Mortgage payments (for the .0003 percent of us that already own a home).
- Hybrid vehicle
- Job training/education
- Dependent (coordinate with parents to make sure they’re no longer claiming us)
You should expect to pay about $75-200 for tax preparation, but this fee will depend on how complex your return is. The best part of getting all your information to an accountant is that your return is guaranteed to be filed on time. Missing the April 15th deadline results in a 5% penalty every month you are late (with a max of 25%). And even though we’re recent grads, a lack of funds is not a good reason to miss the deadline – the IRS will allow you to set up a monthly payment plan.
Where to Find a Tax Preparer
H&R Block is a good bet—their people are affordable and reliable, they offer the flexibility to work online, on the phone, or in-person, and they should teach you all the tricks you need to go DIY with confidence next time. However, you can also check the Yellow Pages for tax preparers, or just hand everything off to your parents’ accountant if you’re really lucky.