Tax Breaks Recent Grads Overlook

Recent college graduates, overloaded with debt, tend to skimp in any way possible. Yet many overlook features in the tax code that offer substantial savings. Here are a few:

Student-loan interest deduction: As graduates start earning and paying off debt, they can slash their taxable income by up to $2,500 for interest paid on both federal and private student loans, says the Internal Revenue Service.

Most borrowers who are single filers and have adjusted gross income of less than $60,000 are eligible for the full deduction. Those with AGI between $60,000 and $75,000 are eligible for a reduced one.

Lifetime learning credit: This is worth up to $2,000 for those paying qualified expenses for postsecondary education, or paying them for an eligible student. You need to have been in school at least part of the relevant year to claim it.

The credit is a “nonrefundable” dollar-for-dollar reduction of one’s tax bill, says the IRS. If the tax owed is less than $2,000, for example, the credit will reduce the sum to zero but won’t refund the difference. The amount of the credit phases out at an AGI of $53,000 to $63,000.

Students who graduated in May this year, or are still in college, also could be eligible for the American Opportunity Tax Credit—a $2,500 nonrefundable credit available for the first four years of postsecondary education.

Moving-expenses deduction: Reasonable moving expenses covered by the deduction include packing and traveling costs, but not meals or costs related to car maintenance or depreciation.

Eligible expenses are those incurred six months before or after the first day of work, says the IRS. The employee also must work full time for at least 39 weeks during the first 12 months after arriving in the general area of the new workplace.

Tax-smart saving strategies: The first place many young workers should start saving is in their employer-sponsored 401(k) plan. Contributions are pretax, meaning that taxes aren’t paid until the funds are withdrawn. Many companies match part of your contributions.