Getting Your First Job

Now that you've entered the full-time workforce, you'll enjoy getting steady paychecks, and so will your partner: Uncle Sam.

Becoming a wage earner means becoming a taxpayer, too. You'll owe federal income taxes at rates that range between 0 percent (on up to $8,025 of taxable income in 2008 if you're single) to 35 percent (for amounts over $357,700). Those income levels increase to $8,350 and $372,950, respectively, in 2009. Social Security and Medicare taxes will claim 7.65 percent of your first $102,000 of salary in 2008, starting from dollar one, breaking six figures for the first time.

In 2009, that wage base amount rises to an estimated $106,800. The 1.45 percent part of the tax that pays for Medicare continues no matter how high your earnings. State income taxes depend on where you live. But taxpaying is not all a one-way street. There are ways to save on taxes, too.

Unfortunately, you can't deduct the cost of looking for your first job. When you change jobs, though, expenses such as the cost of printing resumes and traveling to job interviews is deductible, as long as you're looking for a job in the same line of work.

Such costs are "miscellaneous expenses," which means they are deductible, if you itemize, to the extent they exceed 2 percent of your Adjusted Gross Income (AGI).

You can deduct the cost of job-related moving expenses even if it's for your first job and even if you claim the standard deduction rather than itemizing. The key is that your new job must be at least 50 miles away from your former home.

In addition to the cost of moving your household goods, if you drive your own car you can write off 19 cents per mile if you moved between January 1 and June 30, 2008, or 27 cents per mile if you moved between July 1 and December 31, 2008. (The unusual mid-year boost in the deductible mileage allowance reflects the spike in gasoline prices. The mileage allowance for 2009 may be different).

This is something most workers—whether on their first job or 20th—fail to do. We know that because nearly 100 million taxpayers get tax refunds every year, proof positive they had too much withheld from their pay.

When you start a job, you'll be asked to fill out a Form W-4. That little piece of paper controls how much federal income tax will be taken out of each check for the IRS. The amount is based on your salary and the number of "allowances" you claim on the W-4. Take the time to read the instructions carefully to be sure you claim as many allowances as possible. That will hold withholding down to the legal minimum.

If you're starting a job in mid-year (as college grads often do), consider asking your boss to use the "part-year method" for figuring withholding for the rest of the year. This method basically sets withholding based on how much you'll actually earn rather than on 12 times your monthly salary. That can put more money in your paycheck when you're starting out (when you can probably really use the dough).

If your company offers a 401(k) retirement savings plan, don't hesitate to join. And don’t be surprised if your company automatically enrolls you. More and more employers are doing it in an effort to get American workers to save for retirement from their first day on the job.

Many firms match part of an employee's contributions – typically 50 cents on the dollar for the first 6 percent of pay. Contribute at least enough to capture the full company match; otherwise, you're leaving free money on the table. If you join a traditional 401(k), pre-tax salary goes into the plan. If you're in the 25 percent tax bracket, that means your take home pay will drop by just $750 for each $1,000 you contribute to the plan. If your firm matches 50 percent, that means you'll have $1,500 in the plan for an out-of-pocket cost of just $750. Where else can you get a guaranteed 100 percent return on your investment?

If your company offers the Roth 401(k), you may be better off choosing this option. With the Roth 401 (k), after-tax money goes into the plan, so a $1,000 contribution really costs $1,000. The advantage? As with a Roth IRA, all withdrawals from the Roth 401(k) can be tax-free in retirement, while payouts from the traditional 401(k) are fully-taxable. You’ll benefit from decades of tax-free growth and tax-free withdrawals.

Depending on your income, contributions to a 401(k) might earn you a special tax credit, too. The retirement saver's credit is worth from $200 to $1,000 for qualifying taxpayers based on claiming a 10 percent to 50 percent credit on up to $2,000 that you sock away in a retirement plan. That credit, which reduces your tax bill dollar-for-dollar, is in addition to other tax savings that may apply to your retirement plan contributions. You can qualify for this credit on your 2008 return if your income is under $26,500 if you're single, or if income on a joint return with your spouse is under $53,000.

Be aggressive if your employer offers a medical reimbursement account—sometimes called a flex plan. These plans let you divert part of your salary to an account which you then tap to pay medical bills.

The advantage? You avoid both income and Social Security tax on money run through the account. Paying medical bills with pre-tax money can save you 20 percent to 35 percent or more compared with spending after-tax money.

If you're paying for child care while you work, also take advantage of a child care reimbursement account if your company offers one. It works the same way as the medical plan, allowing you to use up to $5,000 of tax-free money to pay for child care. If you're in the 25 percent bracket, you'd have to earn more than $7,400 to have $5,000 left after federal income and Social Security taxes to pay your care provider.

Fringe benefits often deliver double benefits. Not only does your employer foot all or part of the cost, but the value of most of these benefits comes to you tax-free. Even when the value is included in your taxable income, you come out ahead. If you're in the 25 percent bracket, for example, paying tax on the value of a $1,000 fringe benefit costs you just $250, while you'd have to earn $1,333 in order to have $1,000 left to pay for the item if you bought it with after-tax dollars.

Among the tax-free fringes you may be offered:

• Medical insurance
• Group term life insurance
• Free parking, up to $220 a month in 2008, increasing to $230 in 2009
• Transit passes, up to $115 a month in 2008 and up to $120 a month in 2009
• Starting in 2009, employees who commute by bicycle are eligible for $20 a month in employer-provided fringe benefits tax-free
• Company car—the value of business use can be tax-free; the value of personal use is taxable
• Child care expenses, up to $5,000 a year
• Employee discounts on your company's goods and services
• Adoption benefits

The chance to buy company stock at a discount can be a great benefit. But the tax rules are extremely complex and different rules apply to different kinds of options. For Incentive Stock Options (ISOs), for example, no tax is due under the regular tax rules in the year you exercise the options to buy stock.

But, if you're hit by the Alternative Minimum Tax (and exercising ISOs might make you a target), tax is due on the difference between what you pay for the stock and its value at the time you acquire it. No tax is due when you are granted nonqualified stock options, but when you exercise the options to buy stock, you are taxed under the regular tax rules on the difference between the purchase price and the stock's value. If options are part of your employment package, make sure you understand the tax ins-and-outs so you get the most out of what's offered.

HSAs are a relatively new form of medical plan that is being offered by more and more employers. They involve teaming a high, out-of-pocket deductible insurance plan with a tax-free savings account. If you choose such a plan, your employer can make tax-free deposits to your HSA account and you can withdraw money tax-free to pay your unreimbursed medical bills.

TurboTax makes it easy to understand your taxes and tax situation when you get your first job.

Updated for tax year 2008