New Grads: Four Tax Tips to Memorize Before Your New Job Starts
Congratulations, Graduates! Doubly so if you found a job to go to right after you got your voice back from all the shouts of joy. If not, don’t fret, it’s only June. You’ve got a bit more time to job search before the lazy days of summer are in full swing.
If you majored in finance, you may know much of what I’m about to share, for most others, it will give you a good start on understanding a partner you will have for many decades to come, the IRS. Allow me to share four tips with you that will help you get grounded in the little but important details you’ll need to have top-of-mind while getting set up at your new workplace.
1. Get to know your W-4. Allow me to introduce Form W-4. This is the form you will use to adjust the tax (versions exist for both federal and state) your employer will withhold from your paychecks. It’s pretty simple, and it’s what you’ll need to adjust as you move through the next stages of your life, marrying, having children, buying a house, etc. These events would impact how much tax you’ll pay over the course of the year and if you don’t adjust your withholdings via the W4, you might be lending Uncle Sam money and getting no return though the year.
2. Understand your retirement investment options. After the W4, your HR (human resources) contact will ask you to sign up for your 401(k) or 403(b) deductions. Hopefully, you’ll be working for a company that offers a match, as much as a dollar for dollar match of the first 5-10% of your income you deposit. The good news is that any money you put into this account goes in pretax so a dollar to your retirement account may only be 75 cents less in your check.
3. Maybe that last thought went over your head? If so, it’s important to understand your marginal tax rate, the rate you pay on the next dollar of earning or save on that last dollar that went to retirement. The US tax code is progressive. This is not a judgment or approval of our code, it simply means that as your taxable income increases, the amount of tax due on the next dollar of your income is higher at say, $40K than at $20k, and higher still at $100K.
Once you are familiar with how to get from your gross income to your taxable income, including your personal exemption (everybody gets one and it’s $3,650 off the top) and deductions, either itemized or standard ($5,700 single $11,400 filing joint) you will be better prepared to make decisions regarding your finances. You’ll know just how much the mortgage and property tax are really costing you, and when municipal bonds are the better choice.
4. Don’t stop spending like a student. While I still have your attention, a bit of advice and a warning. Until now, you were used to living like a student, don’t flip a switch and spend every dime of your income just because you can. This is the time to start off with good habits, saving 10-15% right off the top. These early dollars you save will have 40 years to grow and you’ll be buying your future self a worry free retirement. Short of a true emergency don’t charge more than you will be able to pay when the bill comes in. Debt is a tool that can be used for good purposes, such as buying a house you’ll live in for a long time, or for purposes not so good, like trying to impress friends or neighbors with a too-big-for-your-budget car.
Even though your formal education may be behind you, you’ll work hard to earn your income and a bit of ongoing interest and reading financial topics will help take control of your financial success. Class of 2010, I wish you well.