Tax time fills most people with dread, but millennials tend to worry more than most. According to a survey from NerdWallet and Harris Poll, 80 percent of millennials have concerns about making an error or overpaying, compared to 60 percent of those aged 55 and older. These fears can cause unnecessary stress during year-end tax planning.
While nothing will free you from the burden of paying taxes each year, there are year-end tax strategies that can reduce what you owe and help you avoid making costly errors. Here are ten things every millennial should consider as they prepare for tax time.
1. Check Your Filing Status
When you begin a new job, you complete a form called a W-4, which sets up payroll to deduct a certain amount from your paycheck for taxes. Often the most complicated part of the new-hire paperwork is the section where you’re asked to claim a number of allowances. The more allowances you claim, the less will be withheld from each paycheck, which could lead to a tax debt at the end of the year. Part of your end of year tax planning should be to review your W-4 information to see if your life circumstances have changed any of the information.
2. Know Your Deductions
Taxpayers can offset the taxes they pay each year by deducting certain qualifying expenses. Expert year-end tax tips include being aware of the expenses you may be able to deduct, including charitable contributions, health insurance premiums, and babysitting costs. If you’re self-employed or own your own business, those deductions increase. Even if you have a full-time job and work as a freelancer on the side, you’ll likely be able to deduct any expenses related to that side gig.
3. Save for Retirement
It’s never too early to begin saving for retirement. This is especially true since the money you put into your retirement savings account could help you save on the taxes you’re paying now. When you contribute to plans like a 401(k), the money is pulled out of your paycheck pre-tax, which means you’re setting aside a portion of your annual salary that you won’t pay taxes on until retirement. As you’re calculating your year-end tax deductions, keep this in mind, since it can help offset some of the money you're paying in taxes each year while also encouraging you to set money aside for later.
4. Claim Tuition Costs
If you’re still in school, don’t forget the American Opportunity Tax Credit (AOTC), which issues up to $2,500 per year per student for higher education. To qualify, you must be in school at least half-time for at least one academic period during the tax year. During year-end tax planning, make sure you have the documents necessary to prove you were in school during the tax period in case you are audited. Otherwise, you’ll be required to pay back the credit with interest.
5. Write Off Student Loan Costs
If you’re among the 13 percent of Americans with student loan debt, calculating your interest should be one of your year-end tax strategies. If you qualify, you can claim up to $2,500 in student loan interest each year. To do so, the loan must have been taken out solely for the purpose of paying for education expenses, including tuition, room and board, books and supplies, and other necessary costs.
6. Save Your Tax Refund
If you’re fortunate enough to get a refund each year, your end of year tax planning should include how you will use that money. Instead of spending it on a vacation or a new big-screen TV, use it to pay down your debt or start an emergency fund. If you’re debt free or your emergency savings is fully funded, put it toward your retirement account or invest it in a CD that will earn interest until you need it.
7. Deduct Job Search Costs
Many people don’t realize that taxpayers can deduct job search expenses that exceed two percent of their adjusted gross income for the year. If you traveled for a job interview, you can deduct travel costs, as well as lodging and parking expenses. Even if your job search is local, you can deduct expenses like career coaches, printing, and postage. For someone who is out of work for a significant period of time during a tax year, some of the best year-end tax tips will include taking advantage of this deduction.
8. File on Time
It can be easy to procrastinate year-end tax planning, especially if you aren’t a number cruncher by nature. While filing late isn’t the end of the world, you’ll incur penalties and interest that you won’t suffer if you simply pay on time. Since these penalties can significantly boost your tax bill, paying by mid-April means you’ll keep your bill as low as possible. If you can’t send your payment on time, try to send the majority of the taxes you estimate that you’ll owe while also filing an extension to allow you to pay late legally.
9. Buy a Home
As you’re calculating your taxes owed, you’ll probably notice that homeowners have the option of deducting the mortgage interest they pay month after month. If you’re still renting, you’re missing out on this tax savings. One of your year-end tax strategies should be to consider the benefits purchasing a home might bring and meet with a lender to see if you qualify to go from renter to homeowner.
10. Invest in a Tax Preparer
You don’t have to prepare and manage your taxes alone. Qualified tax preparers can often save consumers money by identifying deductions they might have missed. If you prefer to do it yourself, consider meeting with a tax preparer to double check your work. You’ll likely find a professional can offer significant help with your end of year tax planning, in addition to ensuring you get the maximum refund.
There are so many year-end tax tips; it can be difficult to decipher the information that is best for you. Plan in advance and make sure you maximize your year-end tax deductions to ensure you’re paying in as little as possible while also setting money aside for your future.
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