All states allow you to collect a security deposit when a tenant moves in and hold it until the tenant leaves.  The general purpose of a security deposit is to assure that a tenant pays rent when due and keeps the rental unit in good condition.  Rent you collect in advance for the first month is not considered part of the security deposit.

State laws typically control the amount you can charge and how and when you must return security deposits.  When a tenant moves out, you will have a set amount of time (usually from 14 to 30 days, depending on the state) to either return the tenant’s entire deposit or provide an itemized statement of deductions and refund any deposit balance. (tip from crossett r.e.: also provide copies of invoices, receipts, etc.)
 
Although state laws vary, you can generally withhold all or part of the deposit to pay for: unpaid rent/repairing damage to the premises “except for ordinary wear and tear” caused by the tenant, family member, or a guest, cleaning necessary to restore the rental unit to the level of cleanliness at the beginning of the tenancy (tip from crossett r.e.-take a video or photos of unit prior to renting provide a move in-move out form is also a good idea) (taking into consideration “ordinary wear and tear”) or restoring or replacing rental unit property taken by the tenant.

States typically also allow you to use a deposit to cover the tenant’sobligations under the lease or rental agreement, which may includepayment of utility charges. You don’t necessarily need to wait until a tenant moves out to tap into their security deposit.  You may, for example, use some to the tenant’s security deposit during the tenancy-for example, because the tenant broke something and did not fix it or pay for it.  In this case, you should require the tenant to replenish the security deposit.

CAUTION: An inconsistent security deposit policy is an invitation to a lawsuit.  Even if your motives are good---for example, you require a smaller deposit from a student tenant---you risk a charge of illegal discrimination by other tenants who did not get the same break.