This piece is the ninth in a series of “Ask an Alum” columns that will be periodically published online through a partnership between Elon University’s Young Alumni Council and The Pendulum.
Congratulations on successfully navigating through your youth, graduating (or preparing to graduate) from college and landing your first “Big Kid” job. Are you pumped about your new salary? Excited about all of your commission potential?
Before you go out and buy that new PS4, there is something I want to tell you: Freedom isn’t free, and unfortunately, it costs more than a buc-o-five. I’m talking about taxes. “I enjoy handing over my hard earned money,” said no one ever. Reducing your tax burden to the legal limit should be your primary objective.
People generally fear what they don’t understand. So, it’s no surprise that the United States Tax Code fits that notion like a glove. I’m not going to lie to you, the tax process is complicated. But, without getting overly detailed, computing your tax liability can be broken down into a basic formula:
Income -Adjustments Adjusted gross income -Deductions) -Exemptions) Taxable income x Applicable tax rate Tax liability -Credits and payments Tax due or refund
You don’t need to be a subject matter expert. However, you have a vested interest, so understand the basics. They go a long way in reducing your personal share of tribute for the annual reaping. You may not always get a refund, but taking an interest in your personal finances is a non-negotiable for success.
Do yourself a favor and think about how your upcoming life post-Elon may impact your personal income taxes. Going to postgraduate school? Graduating with student loans? If you are going back to school, certain qualified education expenses can be claimed to recover a tax credit (reference above). The American Opportunity Credit and the Lifetime Learning Credit are the two I’d look into. For those with loans, a percentage of your pending student loan payments will be interest. $2,500 of that interest may be allowable as an “above the line” adjustment (reference above). Again, you don’t need to quote U.S. Tax Code, but you should start asking questions about what affects you.
The first question I’d ask would be about IRAs and a 401(k). We can all agree that Social Security is in trouble, and unfortunately, the current forecast calls for heavy contributions from the youth with a murky chance of future benefits. Retirement vehicles can be strategic for tax planning while offering a great way to plan for the looming risks associated with getting older. Remember, consulting an expert is always better than ending up with an unanswered question.
Planning for taxes or your retirement takes careful consideration because the future is uncertain. In both cases, the early bird does in fact get the worm. When you finally retire at age 67 and you find yourself sipping a piña colada on the shores of the Maldives, you will look back and be proud of your younger self. Early on you realized that Benjamin Franklin was spot on when he said, “The only things certain in life are death and taxes.” To be an “adult” means to plan accordingly for both.
Since graduating from Elon, William Black ’08 has been living in Charlotte, N.C. He is currently working for Rexam PLC.