7 Essential Tax Tips for Young Professionals
Whether you’ve been filing taxes for 5 years or 15, it never seems to get any easier. Maybe it’s because a whole year goes by between each tax season—plenty of time to forget everything you learned about W-2s, deductions, and tax credits the year before (not to mention your e-file password).
Meanwhile, the older you get, the more complicated your tax situation tends to be. As you earn more income and achieve new financial milestones, you face questions like what expenses are itemized tax deductions, what’s considered income for tax purposes, and if you can write off interest payments on your student loans.
Life is too short for a formal education in tax code—getting a handle on a few of the basics can help you maximize your tax refund (or at least minimize what you owe). Here’s a roundup of sage tax advice for young professionals from financial experts to make your tax return a breeze—or just less terrible than usual.
1. Know the deadline.
Everyone knows Tax Day is April 15th, so it may surprise you to learn that this year, taxes are actually due on Tuesday, April 18th, instead.
Why the delay? “Traditionally, Tax Day is April 15 unless that date falls on a Saturday or a Sunday, in which case the due date for federal income tax returns gets pushed ahead to the next business day,” writes Kelly Phillips Erb at Forbes. “In some years, the District of Columbia observes Emancipation Day on the same day as Tax Day, which affects the nation’s tax filing deadline – so the deadline gets moved.”
Since Emancipation Day falls on a Sunday this year, its observation gets moved to Monday, April 17th, and Tax Day moves ahead to Tuesday, April 18th. So you have a couple extra days to file your return.
2. File early anyway.
However, it’s probably best not to use this later deadline as an excuse to procrastinate. According to personal finance guru Dave Ramsey, the earlier you start preparing your taxes, the more time you have to get it right—for example, tracking down missing receipts so you can claim all the deductions you’re eligible for. If you’re up against the deadline, you may be tempted to let them go.
He points out that filing early can also help protect you from identity theft, since the IRS will accept the first return they receive and kick out any subsequent returns filed. Before you dismiss this as an unlikely possibility, consider that the Federal Trade Commission reports that tax return-related identity theft incidents have gone from 15% to 43% of all identity theft complaints in just three years. If you are the victim of tax return identity theft, getting it sorted out can be a huge headache and will obviously delay your refund (if you have one coming to you). Save yourself the potential stress by getting your tax filing over with ASAP.
3. Itemize if you can.
There comes a point in every young professional’s life when you start to question whether the standard deduction is enough for you. For the 2016 tax year, the standard deduction amounts are $6,300 for singles and married couples filing separately, $9,300 for Heads of Households, and $12,600 for married couples filing jointly.
Some of the expenses you pay throughout the year can be deducted from your income. If these ‘deductible’ expenses add up to more than the standard deduction, you should itemize. Charitable contributions (but not contributions to political parties or candidates) are generally deductible. If you own a home, both your mortgage interest and property tax are deductible. State and local taxes are also deductible, a quick look at your W-2 will show you how much you’ve paid, but don’t forget to add in any estimated state tax payments you made and payments you made when you filed 2015’s state tax return in 2016.
Medical expenses that are not covered by health insurance are deductible, but only to the extent they exceed 10% of your adjusted gross income. So if you have $8,000 of copays, deductibles, and uncovered medical expenses, and you made $70,000, you could deduct $1,000. (10% of $70,000 = $7,000, and $8,000 – $7,000 = $1,000)
Schedule A of the federal tax return lists everything, but a great way to weigh the standard vs. itemized option is to use a tax deduction calculator, or tax software that lets you input expenses and tells you if they exceed your standard deduction.
4. Don’t forget these most-missed tax deductions.
Stacey Leasca at Elite Daily wanted to know how millennials can maximize their tax refunds, so she turned to Lisa Green-Lewis, a CPA and tax expert with TurboTax, to find out which deductions young professionals tend to miss.
“A lot of (millennials) go through a lot of life changes, and those life changes can be worth big tax deductions,” Green-Lewis told Elite Daily, who points out that job search expenses and expenses related to moving for a job more than 50 miles further from home than your previous job could both potentially be deductible.
And if you’re paying interest on student loans, don’t forget that up to $2,500 of interest may reduce your taxable income. Technically, student loan interest is an adjustment to your gross income rather than a deduction, so it is subtracted even if you take the standard deduction. However, you can only claim the adjustment if you make less than $80,000 year as a single filer ($160,000 for married joint filers) and no one else claims you as a dependent on their return. “I always recommend that parents and students discuss who’s going to get this deduction,” says Green-Lewis. “If the parent is claiming the child as a dependent, then they would get the education benefits.”
5. Get a tax credit—if you can.
There are a number of tax credits that you might be eligible for. Credits are better than deductions because deductions reduce the income on which you are taxed, but credits are subtracted directly from the tax you owe.
Rebecca Lake outlined a few of them in a recent article for SmartAsset. First and foremost? The Retirement Saver’s Credit, which incentivizes people to put money into a retirement account. The caveat is that you can’t make more than $30,750 as a single filer to qualify, but as Lake points out, “When you’re still in your 20s or your early 30s, you’re probably not making a lot of money. If you’re under the credit’s income threshold, you can pad your retirement account and reduce your tax liability at the same time.”
Lake also highlights the Earned Income Credit, which is “perfect for millennials who aren’t bringing in big bucks,” and the Lifetime Learning Credit for those who are paying out-of-pocket to earn a degree.
6. If you have a side gig, you have a business.
If you’re one of the growing number of independent contractors whose income is more 1099 than W-2, you probably already know your taxes have taken a turn for the complicated. “If you work for others on assignment or by the hour and not as an employee, you are probably a gig worker,” says Jean Murray at About Money. “That means you own your own business. That’s both good news and not-so-good news.”
Murray tries to keep the not-so-good news at bay by providing “gig workers” with simple tax rules, like keeping business and personal expenses separate, maintaining excellent records of business expenses and getting help from a good tax professional.
And, whatever you do, don’t forget to withhold and pay your own taxes on a quarterly basis. “Since full-time employees have their federal income tax (including Medicare and Social Security) automatically deducted from their salaries, independent contractors must do this for themselves,” says William Craig at Forbes. Skipping this step can lead to penalties and getting hit with a big tax bill you can’t afford come Tax Day.
7. Don’t forget to make your IRA contribution.
You have until April 18, 2017 to make a contribution to an IRA account for 2016. Traditional IRAs and Simplified Employee Pension (SEP) IRA contributions are deductible, Roth IRA contributions are not. Contribution limits for Traditional and Roth IRAs are $5,500 if you are under age 50 and $6,500 if you are 50 or older. SEPs have much higher contribution limits, but are only for people who have their own business – perfect for those gig workers we just discussed. Income eligibility limits apply to Roth IRAs and the deductibility of traditional IRAs. They’re complicated, but SoFi’s IRA Calculator can help you choose the right account for you—and you can open an account with SoFi Invest and contribute with a few clicks. You can also learn more here or make an appointment with an advisor to get some help.
Where to find tax help
Filing taxes can be overwhelming, complicated, and even scary at times, so don’t be afraid to ask for help if you need it. The IRS offers free Volunteer Income Tax Assistance (VITA) for people who make $54,000 or less. Also check out the Free File Alliance, which provides free tax-filing software options for individuals. Many of these programs offer some guidance, which may be all you need to get your taxes filed—and off your plate for another glorious year.
Editor’s Note: This is an updated version of a post we originally published in May 2016. We welcome new comments and questions below.
SoFi Wealth, LLC does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.