Taxpertise for the graduate

Dear Bonnie: I just graduated from UC Berkeley and am starting a job here at a local winery. I haven’t really had a serious job before. I worked part time here and there while I was school. But it’s different now and I’m going to be making a lot of money – well for me it’s a lot of money. I wonder what I need to know about taxes and how to keep from paying too much. Is there a lot of stuff I can write off?  And what are my odds of getting audited? Thanks, Stan

Dear Stan: Taxes will become a big part of your life now that you have graduated and entered the real world. I can’t offer an entire course in the space of this little column, but please go to the IRS web site, irs.gov, and check out Publication 17. Read the section on taxable income so you know what else besides your wages you are expected to report and pay taxes on. By scouting the entire site, you can find tax tips that might help you. Educate yourself on this important topic.

Here are some highlights of things you should know:

You’ve heard about being able to write off donations, medical expenses, and vehicle registration fees among other items. You can do this only if you have enough to itemize deductions. The IRS gives you a standard deduction of $5,700 if you’re single, which allows a blanket credit for these items. No receipts required. In order to itemize deductions, you must have more to write off than the amount allowed for a standard deduction and you’ll need to keep receipts. All kinds of rules apply, so again, go to Publication 17 and check it out.

At your new winery job, you will have to fill out a Form W4. On this form you tell your boss how much tax to withhold. Complete the worksheet to determine how many allowances to take.  Basically, it boils down to this: the greater the number of allowances you declare, the less they take out in taxes. So if you indicate zero, the maximum amount will be withheld. Don’t mark down a hundred for a fatter paycheck either or you will have an expensive and mind-numbing surprise on April 15.

If your parents provided more than 50 percent of your support and you made very little money during the first half of this year while you were still in school at Berkeley, you may qualify as their dependent. If you worked part of the year, you may still be required to file a tax return. If so, when you file, remember to check the applicable box on line 5 of Form 1040-EZ to indicate that you are being claimed as a dependent on someone else’s return.

If you are no longer a dependent on your parent’s tax return and you are not married, you will probably use the filing status of “Single.” My nephew has roommates and the lease is in his name so he is in charge of collecting rent and remitting it to the landlord—but this doesn’t mean he can file as “Head of Household” (which is a more advantageous filing status). You may select “Head of Household” if you have dependent children. It can get complicated, so if you are in a situation where you are providing more than 50 percent of someone’s support, check with a tax pro to determine your correct filing status. Or read up on the subject in Publication 17.

Do not forget to deduct student loan interest and take education credits on next year’s income tax return, but be sure to check with your parents first if they paid all or part of your tuition. After all, the credits are only allowed to be taken by one party. If you worked part of the year and took a job in another city, you may be able to deduct moving expenses. There is a publication on the IRS website dealing with the rules involved in deducting moving expenses. Check that out.

File your taxes for free. There is no need to go to a tax professional if all you have is one or two Forms W2 to declare. Go online to irs.gov and select “Free File” on the right ruler bar, this will take you to a Web site where calculation of your taxes and electronic filing is offered for free (certain income limitations apply).  But don’t forget about California. Go to ftb.ca.gov; the IRS does not automatically file your state income tax for you.

If you move, make sure your employer and the IRS has your new address and file Form 8822 with the IRS. Also let any other sources of tax documents in on your new location, you want the personnel department to get that W2 to you without delay. You also want to make sure you get 1099s from the following places: your bank for interest earned on your accounts, your broker for dividends earned and reports of stock sales, as well as UC showing how much you paid in tuition, or from the student loan folks to show how much you paid in student-loan interest. The documents are mailed by January 31 of each tax year.

Set up a file folder to collect tax documents each year and be sure to store a copy of the tax return in the file along with receipts for all deductions in the event of an audit. Start each year with a new folder. As you progress through life, you will likely find your tax situation becoming more complicated and your tax filings can become more of a headache. If you start each year with a clean file, organizing for taxes will be much easier. As tax-related events occur throughout the year, you can file the necessary receipts and documents in the file. When it comes time to prepare your tax return, the data gathering has been done.

Speaking of audits – don’t be scared of being audited. If, for example, all you are declaring is your wages and a little bank interest or dividends, you will NOT be audited. The IRS has this information already because both your boss and the bank sent it copies of what they provided to you. The IRS matches its numbers with what you declared on your tax return. If it matches, end of story. If it doesn’t, you will receive a letter outlining the corrections and requesting more money or promising a refund depending on which way you erred. The folks who are audited are usually the ones who have numbers to report from their own records, such as income and expenses for a business or a rental property. The IRS might come in to check out the receipts to determine the validity of those numbers. If you rely on more than just the tax documents you get in the mail to compile your tax return, make sure you keep all of your receipts and any other pertinent data to justify the income you declared and the deductions you claimed.

Congratulations, Stan on your graduation. And congratulations to all graduates out there! You made it! Just remember that taxes will now be a big part of your financial life. If you are not inclined toward numbers, get a professional to help you. If you plan to become self-employed, definitely get professional help. Learn as much as you can on the subject so that you can get through this life with more money in your pocket and without overpaying the taxman.