January 11, 2024

HOL-Life: Part 1

Navigating Tax Benefits Upon Entering the Workforce

 

Welcome to our HOL-Life Series! In this series, we will be focusing on major life events and how best to navigate the tax responsibilities involved. Our Tax Experts will walk you through important milestones in your life, highlighting the various tax benefits and implications associated with these occasions.  

 

Entering the workforce after graduating college is an exciting milestone. Alongside the new job responsibilities, it's crucial to understand the tax implications that come with this transition. Here are some tax benefits and considerations for recent graduates beginning their professional journey.

 

Forms W-2 & W-4

When you start filling out forms for your new job, one you should get is form W-4. This form is so your employer knows how much taxes to withhold from your paycheck. This is based on your filing status, how many dependents you have, and any amounts you’d like to withhold. You should fill this out whenever you have a major life change (e.g., getting married, having a child)

Form W-2 is what you receive in January or February from your employer that shows your total annual wages and taxes withheld from your paycheck. You’ll need this form to prepare your 1040 personal tax form.

 

Understanding Your Tax Bracket

The U.S. tax system operates with progressive tax brackets, meaning the more you make, the more you get taxed. This system is also a marginal tax system, meaning different parts of your income gets taxed at different rates. Your tax bracket is determined by your highest rate of taxable income.

 

Student Loan Interest Deduction

You can claim this deduction if you meet certain criteria including income thresholds and not being claimed as a dependent, among others. It allows eligible individuals to deduct up to $2,500 of the interest paid on qualified student loans from their taxable income, reducing the overall tax burden.

 

Moving Expenses Deduction

The Moving Expenses Deduction applies primarily if you are a member of the Armed Forces on active duty and due to a military order, you, your spouse, or your dependents relocate because of a permanent change of station. If you do qualify, you're eligible to deduct the excess moving expenses that surpass the government's relocation compensation.

 

Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs)

HSAs offer a triple-tax advantage – deposits are tax-deductible, growth is tax-deferred, and spending is tax-free, if that spending is on medical expenses. All contributions to your HSA are tax-deducible, or if made through payroll deductions, are pre-tax which lowers your overall taxable income. In 2024, individuals under individual coverage can contribute up to $4,150, while those under family plans have a maximum contribution limit of $8,300.

For FSAs, you get the benefit of deducting the amount you contributed (up to $3,200) from your taxable income. This money is used for out-of-pocket medical expenses. The money does need to be spent because anything not used will be lost. The IRS does allow employers to let their employees to spend their funds until March 15 of the following year and to rollover up to $640. As these are options for employers, not requirements, be sure to check your company’s policy regarding the plan if you have it.

 

Retirement Plans

Utilizing your company’s retirement plan can benefit you both today with the reduction to your taxable income and in the future by setting you up for retirement. The ones you’re most likely to run into early on in your career are 401(k) plans and IRA plans. These plans invest an amount you choose to contribute from each paycheck and to encourage you to invest for retirement by making what you put in non-taxable income until you start withdrawing from it. The maximum amount you can contribute with tax benefits is $23,000 for 2024, and that changes most years.

 

Tax-Advantaged Savings and Investments

Understanding Roth IRA vs. Traditional IRA:

Roth IRAs are funded with after-tax dollars, grow tax-free, and withdrawals in retirement are tax-free. Traditional IRAs are funded with pre-tax dollars, grow tax-deferred, and withdrawals in retirement are taxed as income. Understanding your current and future tax implications is pivotal in selecting the most suitable retirement plan to optimize your savings and minimize taxes in the long run.

 

529 College Savings Plans:

529 College Savings Plans offer tax-deferred growth on investments, meaning earnings aren't taxed if they're used for qualified educational expenses. Some states provide tax deductions or credits for contributions, and withdrawals for education costs are tax-free, offering significant tax benefits for education savings. If you have leftover 529 funds, you and your parents have four options to avoid paying a 10% penalty and income tax:

  • Save the money for graduate expenses
  • Roll the funds over to a 529 plan for a sibling
  • Switch the beneficiary to another person in the family attending college
  • It can be rolled over into a Roth IRA starting in 2024 if the account has been open at least 15 years

 

Entering the workforce after college is not just about landing a job but also understanding the financial implications, especially regarding taxes. Utilizing tax software or consulting tax professionals can optimize tax strategies, reducing future burdens. Tracking potential deductions and staying updated on changing tax laws ensures compliance and maximizes benefits. By grasping the available benefits and planning ahead, recent graduates can better navigate their tax obligations and optimize their financial well-being.  If you are already a client, please reach out to your current contact and we will discuss this topic further with you. If you are not an existing client, please call 724.934.4880 and we will be happy to discuss your situation further to determine how we can best help.

Article written by Andrew Pierini

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