Everyone seems to have income tax on the brain right now. The news is full of stories about people who are getting less of a refund this year than they did last year. Is the reason the changes to the tax code? Or did they just have less tax withheld from their paychecks? Or is it both? The world may never know.
I’m still working on my taxes right now, and things are definitely different from last year. But the basics of filing your federal income tax as a law student are actually pretty much the same. Here is what you need to know:
- The Lifetime Learning Credit still exists, allowing you to reduce your tax liability if you had expenses for tuition and fees in 2018. You will need to complete IRS form 8863 and Schedule 3 to claim this credit.
- Student loan interest can still be claimed as an adjustment to income, reducing your tax liability. You will need to complete Schedule 1 to claim this credit.
- Student loan disbursements that you received DO NOT count as income.
- Scholarships that do not exceed tuition and fees DO NOT count as taxable income.
- If your income for 2018 is less than $66,000 you can e-file for free.
- The 1040 form looks a lot different (shorter) than it did in the past. And the 1040 A and 1040 EZ no longer exist. But how you attack the process of filing really hasn’t changed much.
Filing your income tax can be intimidating. But it’s definitely something that a law student should be able to handle on their own, without having to pay a professional. The online/software programs available to help make it really easy. And if you are getting a refund—that makes it all worthwhile. And if you are NOT getting a refund, all the better. That means that you have not been giving the federal government free use of your money all year!
As some of you already know, I’ve been taking classes through Penn State’s World Campus to lead me (hopefully) to become a Certified Financial Planner. My goal is two-fold. First, I think this education will help me to better help my student population. Second, I think this will lead me to a nice side-gig that I can pursue for a bit of extra income after I retire from Penn State. This semester I’m taking a class in Corporate Finance. At first I had my doubts about how practical this class would be for me. But it turns out I really enjoy it.
Last week we started learning about something I’ve been preaching about for years: the time value of money. A dollar today has a different value than that same dollar a year from now. If you put in into a savings account with a 2.0% interest rate that dollar is worth $1.02 in a year. If that dollar was borrowed from a Grad PLUS Loan with a 7.6% interest rate, the use of the dollar is costing you an additional $0.076 for the privilege of using it for the year. Whether you are saving or borrowing (I know…borrowing is much more likely at this stage in your life) it is important to understand the power of compounding interest.
There is a reason you’ll always hear someone telling you to start saving for retirement at the very beginning of your career. The earlier you start, the longer your money has to grow. The older the dollar, the more time it has to age. That dollar that was worth $1.02 after one year is worth $1.48 after 20 years—and that’s at 2% interest. With a more typical 10% retirement investment return that dollar is worth $6.73 after 20 years. $17.45 after 30 years. $45.26(!) after 40 years. The longer the money has to grow, the more exponentially it is able to grow.
Much like you want your interest to compound for as long as possible when you are saving, you want it to compound for as short a time possible when you are borrowing. Because student loan numbers can be scary, let’s look at a car loan. Let’s assume you are borrowing $15,000 to buy a used car. Your interest rate is 4%, regardless of the repayment term. If you take 7 years to pay it off you will pay $205.03 per month and you’ll pay a total of $2,223 in interest. If you shorten that to 6 years, you will pay $234.68 per month and you’ll pay a total of $1,897 in interest. Shorten it to 5 years, and the payment is $276.25 and the total interest is only $1,575. The shorter the term, the less interest you pay. The same rules apply to your student loans and someday your home mortgage. The shorter the time you take to repay it, the less you will pay in interest.
Next time you make a deposit to your savings account or borrow a little extra loan money, take a moment to think about the time value of money. Every dollar is worth more (or less) than you think!
There was some sort of major sporting event last night that a lot of people were watching on TV. Since my husband and I were uninterested in the game, we decided to cook up a bunch of football food (my best chicken wings ever!) and settle in front of the TV to watch something we are very interested in: documentaries about a music festival.
Both Netflix and Hulu are currently running documentaries about the Fyre Festival. This April 2017 festival was advertised as the ultimate in luxury. An island getaway for beautiful Millennials. Live music, fancy accommodations and food, excursions, and famous people. The ultimate place to see and be seen. It sounded too good to be true. Because it was too good to be true. It was actually a Ponzi scheme that somehow came to an ugly fruition. The more money the festival collected from the unsuspecting ticket holders, the more impossible it became to cancel the festival. Ultimately the festival ended up being canceled after the guests arrived at the island to find FEMA tents with rain-soaked mattresses rather than the promised luxury villas. There was no real food. No real infrastructure. The festival creator Billy McFarland had been spending the next month’s money before it came in to cover last month’s expenses. When he paid the bills at all.
When I watched last night how McFarland had been spending money before he had it, I couldn’t help but think about how people often live on credit card float. It’s a simple enough trap to fall into. You use your credit card to pay for everything (reaping the credit card rewards), and then pay the bill in full at the end of the month. It seems like you are doing everything right. But what you’re really doing is falling behind. You are spending next month’s money on this month’s bills. And once you fall into it, it’s a difficult cycle to break. The easiest way to avoid it is never to fall into it. If you are a credit card reward junkie (like I am) you should make sure you aren’t falling into the float trap by having at least one month’s income in your savings account. If you aren’t able to restrain yourself in that way, it’s best not to go down the float path at all. Limit yourself to cash and debit card—forget about the rewards.
People tend to make some really bad decisions about their money. In the case of the Fyre Festival, Billy McFarland made some really bad decisions about other people’s money (and is now serving six years in federal prison because of it). Don’t be a Billy McFarland. It’s best not to float.