May has arrived and our Michigan record-breaking winter is finally behind us! Many college graduates have recently celebrated with commencement ceremonies and are ready to get out into the working world (or at least start looking). If you are a recent college grade, along with job hunting, you should sit down and look over the debt you’ve accumulated to get that hard earned college degree and start some tax planning, so you are ready when you have to start filing your 2014 income taxes next year. The sooner you begin your tax planning, the sooner you may be able to take advantage of tax tips that will help you owe less when you file.
While you were attending college, chances are your parents were claiming you as a dependent on their taxes if you were a full-time student. But now that you have graduated, it makes sense for you to claim an exemption deduction for yourself on your 2014 taxes, and start claiming deductions and credits yourself.
For example, if you actually paid for some or all of your college expenses during the last semester in 2014, you may qualify for potential deductions and credits. The American Opportunity Credit gives you a potential credit of $2,500, of which 40% is refundable. A refundable credit is an added bonus, because, if all of your deductions and credits reduce your tax to zero, you would still get a 40% refund of that allowable credit. This credit is available for the first four years of college. The Lifetime Learning Credit offers up to a $2,000 non-refundable credit, and is available for an unlimited number of years you have qualified educational expenses. Another option is the Tuition and Fees deduction. It is not a credit, but a reduction to your adjusted gross income of up to $4,000. As with the majority of credits and deductions, phase-out limitations apply. For these credits the phase-out begins if your adjusted gross income (AGI) is $80,000 for a single filer and $160,000 if you are married filing a joint income tax return.
Did you accumulate student loans that you are legally responsible to repay? If so, you may be able to deduct up to $2,500 from your AGI if you qualify. For this deduction, the phase-out begins if your AGI is $65,000 for a single filer and $130,000 if you are married filing a joint income tax return.
Speaking about student loans brings me to an interesting subject that has been getting a lot of press lately. The program is commonly referred to as the “Pay As You Earn” program. If you qualify, you may want to take advantage of it, because as with all government programs, they cost too much and it is scheduled to be “reformed” in 2015.
In a nutshell, when you have to start repaying your student loans, which is generally six months after you graduate, and you qualify for this program, your payments are capped at 10% of your income if you are working in the private sector, with the loan being forgiven in 20 years. If you choose to work for the government or a non-profit, the government will forgive these loans after only 10 years. Of course, eligibility is based on what you earn versus what you owe in qualified student loans. So, if you’re in a lower paying private sector or government job long enough, it is possible that a good portion of your student loan debt will not have to be repaid at some point.
Not surprising, the program is going to be paying way more than estimated, and will be tweaked, probably in the President’s 2015 budget proposal. So, if you think you may qualify, go to http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn to read more about it and to apply.
I congratulate all of you college grads for a job well done and hope that you find employment in the field that you studied so hard for – Good luck! But in your spare time, make sure you start to think about ways to lower your taxes and student loan payments.