Maybe you’ve had a paper route, baby-sat, or worked at a fast-food restaurant while you were growing up and pursuing your education. Now you’ve landed a full-time job or are in the market for one. What tax issues should you be aware of?
When you are a part-timer or student, your earnings may have been so low that you were exempt from income tax withholding. No more. Now you must tell your employer how much to withholding from your paycheck to cover your federal and, where applicable, state income tax for the year.
Your withholding is based on the information you provide on Form W-4. Usually, the human resources department of the company or the person who hired you will ask you to fill it out. The form tells your employer to what to withhold, based on your filing status (e.g., single), level of earnings, and personal tax write-offs. You can opt for the basic withholding for your filing status, or you can increase or decrease this by adding/subtracting withholding allowances.
If you work for a large corporation, you may be offered a menu of benefits and given the choice of selecting the ones you want (smaller firms usually do not have many choices, if any). How do you make a choice? Obviously, select the benefits most meaningful to your personal situation, keeping the following in mind:
Health. Opt for health coverage unless you have it through another source (e.g., through a spouse’s insurance). Usually, the company pays some or all of the cost of health insurance, but even if you have to pay all of the cost, don’t go without it.
You may be offered the opportunity to contribute to a flexible spending account for medical costs. This lets you pay for things not covered by insurance (e.g., out-of-pocket costs, such as insurance deductibles and over-the-counter medications). The portion of your salary put into this account is not taxed to you. But you must use it or lose it; if you don’t spend what’s in the account by the end of the year (or within a grace period if applicable), you cannot recoup the money).
Retirement. Contribute to a company’s 401(k) plan if you are allowed to do so. Even though retirement may seem like light years away, the earlier to start to save, the easier it is to accumulate a sizable nest egg. If you are struggling to pay your bills and don’t think you can afford to contribute, at least try to contribute an amount that entitles you to matching employer contributions. These employer contributions are “free money” that should not be passed up. If you are automatically enrolled in the company’s plan, do not opt to get out of it if at all possible.
Transportation. Commuting to work is a nondeductible personal expense. If your employer offers monthly transit passes or free parking, this may be an attractive benefit to you. The company may pay for the cost, in which case you are not taxed on this benefit. Or the company may enable you to pay for it with pretax dollars-an advisable strategy.
Other benefits. If your employer offers education assistance, you may be able to exclude up to $5,250 in benefits, even if the courses do not relate to your job (an unlimited amount if the courses do relate). Check with the company to determine what grade you need to obtain to qualify.
If you are saddled with debt from your education, you may be able to deduct interest payments up to $2,500 each year. This deduction is allowed, whether you claim the standard deduction or itemize your personal expenses. However, it cannot be claimed once your income exceeds a set limit.
Nearly 100,000 refund checks could not be delivered in 2011 because of incorrect addresses. The average amount of each check is $1,547. If you have not yet received an expected refund check, contact the IRS or go to “Where’s My Refund?” (www.irs.gov).
Source: IR-2011-113, Nov. 30, 2011View all factoids