Did your son or daughter recently graduate from a college or university in the past year or two? If so, take a look at some of the planning opportunities listed below that may benefit your child as they transition from student to employee
- Recent graduates that expect to work no more than 245 calendar days, or eight months, can ask their employers to withhold income taxes based upon a partial-year method. Because the typical student will generally graduate in May, most graduating students only work a partial year when they begin their first “real job”. However, when taxpayers complete their Form W-4 (About Form W-4, Employee’s Withholding Certificate | Internal Revenue Service (irs.gov) instructing their employer how to withhold taxes, the W-4 assumes a full year of employment. To qualify for this method, employees must submit a letter to their employer noting the date that any prior job in the year ended, stating that employment in this year is expected to be no more than 245 days, and stating that they will use the calendar year and not fiscal year. Although your child’s tax will not change when they file their tax return, claiming the partial-year method for withholding taxes will result in less taxes being withheld from their pay throughout the year, and leave a larger net paycheck in their bank account each pay period.
- Take advantage of the student loan interest deduction. Although the student loan interest deduction, a tax deduction up to $2,500 per year sounds great, few taxpayers actually qualify for this deduction because of the low-income threshold needed to qualify for the tax deduction. Single taxpayers (that cannot be claimed as a dependent on another tax return) are allowed to claim the full $2,500 tax deduction if their income is less than $80,000. The allowed deduction gradually phases out based upon income, and a taxpayer no longer qualifies for this tax deduction once their income exceeds $95,000. Therefore, while your recent grad’s income is low, he or she should be paying their school loans to take advantage of this tax deduction.
- Take advantage of funding a Roth IRA ($7,000 contribution amount for 2024). Similar to the student loan interest deduction, taxpayers are allowed to contribute to a Roth IRA if their income is below a certain threshold. And the allowed Roth IRA funding ratably phases out at a higher income level. For 2024, single taxpayers are allowed to fully fund a Roth IRA if their income is less than $146,000 and phases out as their income increases. Once a taxpayer’s income is $161,000, they can no longer fund a Roth IRA. And the funding of the Roth IRA can be gifted to children by parents – but the Roth IRA must be set up in the name of the child.
- Consider helping your child purchase a qualified electric vehicle (EV) the year after they graduate college. (Generally, if your child graduates college in May, they are still your dependent. Dependents do not qualify for this tax credit, so you may need to wait until the year after graduation for this significant tax incentive.) Over the past year, the average cost of an EV has decreased by approximately 20%. Though still expensive, EVs have become more affordable. And the tax credit for many of these vehicles is as high as $7,500 for a new EV purchased. To qualify for this tax credit when a new EV is purchased, the single taxpayer’s income must be $150,000 or lower. Used EVs also qualify for a tax credit up to $4,000. To qualify for a used EV purchase tax credit, single taxpayers must have income no higher than $75,000. Please note that there are a few other limitations that must be met in order to qualify for the tax credit beyond the income threshold noted above. Given the lower income levels of grads that are only a few years out of school and employed at an entry level position, most likely your child will be under the income threshold to qualify for this significant tax credit. Find out which EV’s qualify for this tax credit at: Federal Tax Credits for Plug-in Electric and Fuel Cell Electric Vehicles Purchased in 2023 or After (fueleconomy.gov)
- And if purchasing an EV, then taxpayers may consider installing a charging station in their home too. The EV charger tax credit allows taxpayers to claim a tax credit on their tax return equal to 30% of the installation and equipment costs when putting an EV charging station in their home. This tax credit is capped at $1,000. Learn more at: About Form 8911, Alternative Fuel Vehicle Refueling Property Credit | Internal Revenue Service (irs.gov).
- Delay making the final semester tuition payment until January in the year your child graduates from college, if delaying payment is allowed by the school. Although you may have missed this opportunity for your recent 2024 grad, make note of this tax saving tip for your children graduating in the coming years. Payment of tuition expenses qualify for the American Opportunity Tax Credit (AOTC). This education tax credit is capped at $2,500 per eligible student and allowed to be claimed for the first 4 years of higher education. Single taxpayers who have income of $80,000 or less qualify to claim this tax credit. And your child can claim this tax credit even if the tuition was paid by parents or by student loans. You report the AOC on IRS Form 8863 (About Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits) | Internal Revenue Service (irs.gov)).
- Beginning in 2023, as part of the SECURE 2.0 Act, employers are allowed to adopt a policy where they will match funds into an employee’s 401K plan when the employee is making student loan payments from their earnings. This new policy allows employees the benefit of accumulating retirement savings funded by their employer while the employee makes payments toward their student loans. This newly enacted employer sponsored benefit is a great option for younger employees facing large student loan payments that may not be able to simultaneously afford contributing from their salary to the employer retirement plan while they are focused on making their student loan payments. Employees must be making Qualified Student Loan Payments (QSLP). Employees must provide specific information about the school loan and confirmation of the QSLP to qualify for this employer benefit. If your child is making student loan payments, he or she should check with their company HR about whether this employee benefit is being offered.
- Take advantage of Employer-Provided Education Assistance if your child is continuing their education while working. Employers are allowed to offer their employees a tuition assistance policy where the employer will reimburse employees up to $5,250 per year, tax-free, for college costs such as tuition, books and fees. Both under-graduate and graduate level classes will qualify for this plan. Currently and through December 31, 2025, these employer sponsored programs can also be used to pay for an employee’s qualified student loan principal and interest payments. If your child is making student loan payments or taking college classes while employed, he or she should inquire of their employer’s HR about whether a college education assistance program is being offered as an employee benefit. Learn more at: IRS Issues FAQs Regarding Education Assistance Programs – Including Student Loan Repayment Made By 12/31/25 – Schwartz & Schwartz PC (schwartzaccountants.com)
- Leftover 529 plan funds can be transferred to a Roth IRA. Beginning in 2024 excess funds held in a 529 college savings plan will be eligible to be rolled over to a Roth IRA for the beneficiary. Thus, if there are funds remaining in your child’s 529 plan when he or she graduated college and completed their education, your child may be able to use a portion of the remaining 529 plan balance to fund a Roth IRA. Specific rules apply – review our website blog from last year discussing this new tax and financial planning opportunity: https://schwartzaccountants.com/2023/06/plan-ahead-to-use-529-contributions-to-fund-a-roth-ira-for-your-child/.
- And one final planning tip for young grads. Encourage your working son or daughter to enroll in the company 401k/403b plan as soon as they are eligible. And as an additional benefit, many employer plans will provide a company match for participating employees already contributing to the company sponsored retirement plan. And don’t forget that time is the key ingredient to building a retirement nest egg thanks to how compounded growth works within an investment portfolio.
Don’t wait until it’s too late to start saving for retirement. Good habits start early!