5 Most Common Tax Mistakes Made by College Grads

Attention grads: While you may be done with college, you aren't off the hook from major assignments. One of those major assignments is filing your tax return, and this is one assignment deadline that you don't want to miss.

This year, Monday April 18th is the deadline to file your federal taxes. (Residents of Maine and Massachusetts get an extra day!) With time running out, it’s important to file your return correctly the first time around. Be on the lookout for the five most common tax mistakes made by college grads.

1. Not Claiming Education Credits

According to a 2014 study from H&R Block, only two-thirds of Americans eligible for tax breaks for students actually claim them! Within those tax breaks, the American Opportunity Credit and the Lifetime Learning Credit stand out because they can reduce your tax bill by up to $2,500 and $2,000, respectively.

Unlike other tax deductions, the American Opportunity Credit can still get you a refund even when you don't owe any federal income tax. If the American Opportunity Tax Credit brings the amount you owe to zero, you can have 40% of the remaining amount of the credit (up to $1,000) refunded to you.

While the American Opportunity Tax Credit requires you to not have finished the first four years of higher education at the beginning of the tax year, the Lifetime Learning Credit doesn't require students to be working toward a degree. You're eligible to claim this credit as long as you're taking at least one class.

Bonus: If you're taking a sabbatical from your recent graduation and are eligible to be claimed as a dependent by your parents, they can claim these credits in their own return.

File Form 8863 with your federal return to claim the American Opportunity and Lifetime Learning Credits.

2. Not Filing Taxes When Abroad

Talking about sabbaticals, you still need to check with Uncle Sam every year during tax season even when you're abroad. Your worldwide income is subject to U.S. income tax, no matter where you live.

The good news is that when you expect to get a refund or not to owe any federal taxes, you can take advantage of the automatic two-month extension to file your return. However, if you believe that you will owe federal taxes, then file by the regular deadline (April 15 most years) to avoid paying applicable interest charges or penalties.

3. Forgetting About Moving Expenses

Chances are that your first job after graduation will require you to move. No matter whether you move away from your college dorm, parent's home, or own rental, double check how far away your new job location is from your old residence. If the distance is at least 50 miles, then the IRS allows you itemize several moving expenses, including:

  • Transportation and storage of household goods and personal effects within any period of 30 days in a rows after date of move;
  • Insurance for those household goods and personal effects before delivered to your new home;
  • Out-of-pocket expenses for gas and oil or mileage at 23 cents a mile, in case you drive for the move; and
  • Parking fees and tolls.

Use Form 3903 to figure out whether or not you can deduct your moving expenses and what is your allowable moving expense deduction.

4. Withholding Too Much in Taxes

Whether you graduate in the spring, summer, or fall, you would expect to be employed fewer than 245 days (about eight months) during the current calendar year. In that case, you can ask your employer to use the part-year withholding method so that less tax is withheld from each of your paychecks.

IRS Publication 505 states that you must ask your employer in writing to use this method. In your letter, make sure to include these three items:

  • Date of your last day of work for any prior employer during the current calendar year;
  • Statement that you don't expect to be employed more than 245 days during the current calendar year; and
  • Statement that you're using the calendar year as your tax year.

If your employer approves your request, the HR department will use the regular percentage method tables from Publication 15 with adjustments for your part-year employment. This is the best way to maximize those first-year checks. Remember that you don't earn interest on refunds!

5. Miscalculating Student Loan Interest

Mom and Dad are always willing to lend you a helping hand and may have footed your student loan payments until you landed your first post-graduation job. In that case, and as long as you're not claimed as a dependent by your parents, you can deduct up to $2,500 of interest paid on qualifying student loans by them from your income subject to tax every year. Just make sure to let your parents know that they won't be able to deduct those interest payments from their own return.

Even when you're making student loan payments yourself, you can still deduct up to $2,500 of the interest payments. To be eligible to claim this deduction in 2016, your modified adjusted gross income (MAGI) must be less than $80,000 if single, head of household, or qualifying widow(er), or $160,000 if married filing a joint return.

To figure out your student loan interest deduction, check Form 1098-E from the institution that receives interest payments made on your behalf or paid by you. Your interest deduction is gradually reduced when your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if you file a joint return).

Let's imagine that you paid $2,600 on interest for a qualified student loan throughout 2015. Assuming you file your return as single, here's how much you could deduct based on your 2015's MAGI:

  • MAGI is $50,000: You can deduct the full $2,500.
  • MAGI is $70,000: You need to phase out your student loan interest deduction using rules from IRS Publication 970: $2,500 x ($70,00-$65,000)/$15,000 = $833.33. Your eligible student loan interest deduction would be $2,500 - $833.33 = $1,666.67.
  • MAGI is $85,000: You can't deduct any student loan interest payments.

Have you made any of these tax mistakes?

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