Tax Planning Around College Graduation
Did your child just graduate college? You may want to make them aware of a few tax strategies to take advantage of during the “half year.” The “half year” refers to the time after graduation and before the end of the calendar year, where a graduate typically works 6 months or less full time. Because their income in that year will likely be much less the following years, here are 3 tax strategies to consider;
- Roth 401(k) or Roth IRA – Given that their marginal tax bracket may be the smallest it will ever be in their career, they should consider making after-tax contributions to a Roth 401(k) or Roth IRA if allowed.
- Realize capital gains – If your child was gifted investments or even invested on their own, this year may be the time to sell those investments and realize the capital gain. Depending on their income and tax status, it is possible that their federal capital gains tax would be 0% on the sale. There are exceptions to this – mainly the Kiddie Tax – so be sure to consult a tax advisor.
- American Opportunity Tax Credit – The AOTC can provide up to a $2,500 credit on your taxes for qualified education expenses. With phase-outs for the credit starting at $80,000 for single filers and $160,000 for married, your child may be the only one who can claim it. However, they can only claim if it they are not claimed as a dependent on someone else’s tax return.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.
References:
https://www.irs.gov/taxtopics/tc553