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Dispelling 4 Tax Myths for Recent Grads

Mitch Fox



Recently started your first job? About to? Congratulations!

Among the myriad things you will experience and learn about for the first time, paying taxes could easily be the most unpleasant. Ignoring them, however, is an even worse idea than those last-minute cram sessions that are so recently a thing of your past. With taxes, procrastination can cost you real money.

Let’s look at four common tax myths and why you should ignore them.

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“I can let my parents handle my taxes”

While you may be able to con your parents into actually filing your taxes for you for a few years, tax illiteracy can hurt you for two big reasons.

First, not understanding the basics of taxes (and if you’re just graduating, you’re probably only affected by the most basic of tax rules) can lead to bad decision making that will cost you in extra money forked over to the IRS each year. One example is the notion that making charitable donations reduces your taxes — they can, but only if you “itemize” your taxes rather than taking the “standard deduction,” something you will probably do in your first year in the workforce.

The second reason you shouldn’t shirk responsibility for your own taxes is that the process of filing taxes forces you to review your financial state of affairs. How much did you end up earning this year? How much did you manage to put away towards retirement or savings? As they say, with knowledge comes power — in this case, to figure out what’s happening and how to improve it.

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“You don’t want to earn too much, or you’ll end up in the next tax bracket”

Let’s just say this up front: tax brackets can be confusing. While it is true to say that people who earn more income can end up paying tax in a higher bracket, it’s not true (for most purposes) to say that you should avoid getting “bumped into a higher bracket.” That’s because tax brackets are progressive.

Think about it this way: As you earn income through the year, you’re walking down a street picking up dollar bills with every step you take. As you’re walking, you come across a sign that says “each step costs you 10 cents.” You gladly keep going — I mean, you still get to keep $.90 of every one of those dollars. Quickly, you come to another sign asking for $.15, and eventually another asking for $.25. If you kept going down this street, earning more and more income, you’d pass signs asking for $.28, $.33, $.35, and $.396. At that last one, you’d probably think, “Who the heck came up with that number??” (Yeah, Congress does some weird stuff).

Passing one of those signs is the equivalent of moving up in tax bracket. The thing is: Even if it’s a bummer to pay more taxes for every dollar you pick up, you wouldn’t just arbitrarily stop right before you get to the next sign just because you didn’t want to pay the higher tax, would you? The same goes for accepting that pay raise or bonus that pushes you a bit past the next tax bracket.

“You just set your tax “withholding allowances” when you start your job”

When you start your job, you’re typically presented with a Form W4. It sets a number of “allowances” — for you individually, your spouse (if you have one), and kids (if you have any) — to calculate how much tax to withhold from your paycheck (which is then sent to the IRS on your behalf).

The thing is, the right amount to withhold from your paycheck will evolve with time. It’s also important is to realize that the form W4 is your order form to your employer for tax withholding, and not something that has to be 100 percent accurate like your tax return. You can and should change it to achieve the outcome you desire, even if it requires inflating or reducing your number of allowances. It’s common, for instance, for people to reduce their allowances to set aside a little extra for savings for themselves to get a larger refund at the end of the year — it’s the automatic savings plan for those who can’t manage to save any other way.

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“Employee benefits are mostly for older people”

If you’ve just graduated, you might not be thinking much about the value of things like health insurance, health savings accounts, commuter benefits, and the like. You should.

Would you be excited to be able to buy a new computer, phone, or clothing at a 10 to 30 percent discount? What about a new pair of eyeglasses, or even just your daily bus fare? By taking advantage of pre-tax employer benefits, you avoid paying income taxes on the money you would have to earn to buy these things otherwise.  Depending on your annual income, the amount of that perk can easily range from 10 to 30 percent.

Welcome the to workforce, comrade. Exciting adventures await — just make sure to heed the tax man.

Mitchell Fox is a Tax Nerd and the Co-Founder of GoodApril, the first online tax planning solution for consumers. GoodApril offers a free “Tax Checkup” service to help you identify actions you can take to reduce your taxes. You can follow Mitch and GoodApril on Twitter at @mitchellwfox and @goodapril.

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