No matter the time of year, it’s never too early to start working on your tax strategy. For 20-somethings who are struggling to get a grip on their finances, the whole process can seem overwhelming. And if you’re not sure what you’re doing, it’s easy to overlook a key tax deduction or credit that could be worth big bucks when it’s time to file. A financial advisor can help you figure out what to do with your taxes. There are certain things millennials need to keep in mind when prepping their returns. Let’s break down the most important.
Add Up Your Deductions
The Trump tax plan made itemizing tax deductions less beneficial for many taxpayers. But there are still many deductions available, and if you qualify, they can make a significant difference on your tax refund.
When you claim a standard deduction, it allows you to deduct a set amount of money from your taxes. And when you claim itemized deductions, you lower your income from a list of qualifying expenses that were approved by the IRS. You can only claim the option that lowers your tax bill the most.
The standard deduction in 2021 for joint tax filers is $25,100, for single tax filers it is $12,550, and for heads of households it is $18,800.
Itemized deductions are products, services, or contributions that have been approved by the IRS. These include medical and dental expenses, mortgage loan points and interest, investment interest, charitable donations, among others.
You Can Always Deduct Student Loan Interest
You many not be ready to pay off your student loans yet, but claiming the student loan interest is a good incentive to start making more that the minimum monthly payment. For tax year 2020, which you will file by April 15, 2021, you can write off up to $2,500 of paid interest. The student loan interest deduction is an above-the-line tax break that you can claim on Form 1040 or Form 1040A regardless of whether you itemize your deductions or take the standard deduction.
Maximize Your Credits
A tax credit is designed to offset the amount of tax you owe, rather than reducing your taxable income. There are several credits that millennials can take advantage of, starting with those for education expenses. For example, the American Opportunity Credit is worth up to $2,500 for current students and recent grads who paid some or all of their higher education expenses. And if you’re going back to school for a graduate degree, the Lifetime Learning Credit is good for an additional $2,000. Keep in mind, though, that you won’t be able to claim more than one credit for the same expenses in the same year. The kinds of expenses you can use for either credit are generally limited to tuition, fees, books, equipment or room and board.
Get the Most out of Tax-Advantaged Accounts
For the most part, millennials seem to be on top of things when it comes to saving for retirement. If you’re not participating in your employer’s 401(k) plan or stocking money away into an IRA, you’re shortchanging your nest egg and missing out on some tax advantages. Funding a retirement account with pre-tax dollars lowers your taxable income, which means you won’t owe as much when the filing deadline rolls around.
If your insurance plan offers one, you might also want to think about funding a Health Savings Account. For 2014, you could put up to $3,300 in your HSA if you file single, or up to $6,550 if you’ve got a family account. Any amount you put in is deductible and you don’t have to itemize to score this tax break.
Between paying down student loans and finding their footing in the workforce, millennials have a lot on their plates. If you’re a part of the 18-to-35 crowd, taking the time to get a better understanding of your tax situation is vital to maximizing your savings, both in the short- and long-term.
Everyone has to pay taxes. But having a good tax strategy will help reduce your tax liability and prepare for a much dreaded tax bill. Knowing what you can deduct, which credits you can qualify for, and which tax-advantage accounts you can benefit from the most could be worth big bucks when you file.
Tax Planning Tips
- For help with taxes and any other financial questions, consider working with a financial advisor. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
- Use SmartAsset’s tax return calculator to see how much you will owe or be owed based on your personal finances, and you can start to plan from there.
- If you plan to itemize, make sure to keep all your receipts at least a few years after you file. It isn’t uncommon for the IRS to look at returns from three to six years prior to the return they are actually auditing. And depending on which deductions you take, like the home office deduction, your return may be more likely to trigger an audit.
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