Being a young adult can be stressful. If they’re still in school, they may be working hard to graduate with top honors. If they’ve already graduated, they’re just starting out in their careers and learning the ropes of the real world. They’re out on their own—possibly for the first time in their lives—and now have to navigate being an adult.
One of the adult experiences they may dread is filing their taxes. However, it doesn’t have to be a stressful experience. Here’s some good news: There are plenty of deductions that could help students lower their tax bill whether they’re in school or just graduated.
Here are some of the tax credits and tax deductions that they may be eligible to claim on their tax return this year. Note that some of these tax credits require taxpayers to itemize their deductions. Taxes can get complicated. If you have any outstanding questions or concerns about your specific situation, consider consulting with a tax professional.
Smart Tax Deductions for Young Adults
1. American Opportunity Tax Credit
If someone is still in school, they might qualify for The American Opportunity Tax Credit (AOTC). The AOTC allows people to take a student tax credit of up to $2,500 for tuition, fees, and course materials they paid for during the taxable year for an undergraduate education.
In addition, 40% of the credit, or up to $1,000, is refundable, which means that someone can receive it even if they happen not to owe any taxes for the year. To qualify, the taxpayer or their dependent needs to be pursuing a degree and enrolled half-time at the very least. A taxpayer can only take advantage of this for four years, no matter how long it takes the student to finish the degree.
2. Lifetime Learning Credit
Unlike the AOTC, the Lifetime Learning Credit is available to vocational, graduate, and non-degree or vocational students, too. A taxpayer can claim 20% of the first $10,000 in tuition and fees they paid for the year 2021. There is a maximum of $2,000 allowed.
3. Student Loan Interest
Students and parents of students paying for a child’s education through student loans can use the student loan interest tax benefit for education. With this deduction, they can deduct up to $2,500 in interest they paid for the year.
4. Tuition
Students who laid out money for tuition for themselves, their spouse, or their dependent could take advantage of a tuition deduction on their tax return. The maximum deduction is $4,000 if a single filer makes less than $65,000 per year, and $2,000 if they make up to $80,000 per year.
5. Supplies
School supplies are qualified education expenses for taxes. The $2,000 or $4,000 deduction applies to supplies a student needed to purchase for themselves, a spouse, or a dependent in order to fulfill their education requirements. Supplies could include a computer, notebooks, furniture, pencils, pens, and more.
6. Books
The average cost of books is $1,240 per year. Taxpayers may be able to deduct this cost from their return if they covered books for themselves, their spouse, or their dependent. Again, they could use the $2,000 or $4,000 deductible.
7. Moving Expenses
Perhaps instead of going to college, a young adult enrolled in the military instead. If they are a Member of Active Forces on active duty and had to move due to a military order, then they could take a deduction for themselves, their spouse, and their dependents. On Form 3903 , active members of the military can claim expenses related to a military move like transportation and storage of household goods and personal effects and travel (including lodging) from the old home to the new home. They cannot include the cost of meals.
The IRS has an interactive tool to help taxpayers determine whether or not their moving expenses may qualify for a moving deduction.
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8. Self-Employment Tax
If a young adult chose to go into business for themselves after graduating, then they can deduct one-half of their self-employment tax, which is 12.4% for Social Security and 2.9% for Medicare. They can do this when figuring their adjusted gross income on Form 1040 or Form 1040-SR.
9. Home Office
Someone who works at home, whether they’re working at their job remotely or after hours, or they are self-employed, can take a deduction for their home office. Someone can deduct expenses that keep their home office running such as utilities, insurance, and general repairs, but they cannot deduct unrelated expenses like a gardening bill or the paint they used for a room that is not their office. There is a simplified method for this deduction as well as a regular one. With the simple one, taxpayers can deduct $5 per square foot of the home used for business, with a 300-square-foot maximum (see both methods on the IRS’ website ).
10. Standard Mileage Rate
If a young adult is using their car for business purposes, then they may be able to deduct their standard mileage rate, which is 57.5 cents (0.575) per mile for 2020. They need to keep in mind, however, that if they use the standard mileage rate, they cannot use the car expenses deduction as well. They cannot deduct lease payments, gasoline, car depreciation, vehicle registration fees, oil, or insurance.
11. Car Expenses
When a young adult does not use the standard mileage rate, then they can deduct car expenses from their taxes. If they use the vehicle for personal and business expenses, then they need to split the deductions.
12. Meals While Traveling
When traveling for business, young adults who are entrepreneurs or self-employed can take a 50% deduction for their unreimbursed business meals. They can either take a standard meal allowance through the IRS or keep records of their actual costs for their meals and take those deductions.
13. Other Travel Expenses
The IRS also allows taxpayers to deduct some travel expenses. If young adults own their own business or are otherwise traveling for professional purposes, they could deduct things like travel by airplane, car, or train, fares for taxis to and from the airport to the hotel, the shipping of baggage, dry cleaning, and laundry, and business calls made on the trip.
14. Business Interest
If a young entrepreneur took out a business loan to get their startup running, then they can deduct the interest they paid. If they utilized the loan proceeds for more than one type of expense, then they need to allocate the interest based on how they used the loan’s proceeds.
15. 401(k)Deduction for Employed People
If a young adult has a job that’s providing them with a 401(k), then they can take a certain amount of deductions from their tax return.
Individuals may also qualify for a deduction for their IRA contributions as well. If they file as single or head of household, for instance, and their modified adjusted gross income is $66,000 or less, then they can take the full deduction up to the amount of their contribution limit.
16. IRA Deduction for Self-Employed People
If someone does not have a job that provides a 401(k), they may be eligible to deduct their contributions to a traditional IRA. If they are single or head of their household, they can take a full deduction up to the amount of their contribution limit no matter what their modified AGI is for 2020.
17. Employee Pay
A young entrepreneur who has hired employees may be able to deduct their income from the tax return. The pay could be in cash, services, or property and include wages, salaries, commissions, bonuses, and other forms of compensation like vacation time as well as fringe benefits.
18. Educator Expenses
A young graduate who is working as a teacher is able to deduct up to $250 of the expenses they put towards things they used in the classroom, such as books, courses, and computer equipment. If they teach a course in physical education or health, then-athletic supplies would count towards the deduction as well.
19. Health Savings Account
If a taxpayer chose to use a tax-deductible Health Savings Account (HSA) for their healthcare expenses in 2020, then they can contribute up to $3,550 for self-only coverage. An HSA can earn interest or other earnings, and they won’t be taxed.
20. 401(k) Contributions
The IRS will not tax the money that goes from a paycheck into a 401(k). However, there is a limit of $19,500 in 2020, subject to cost-of-living adjustments. This is for traditional and safe harbor plans.
21. SIMPLE 401(k) Contributions
If a young adult has a SIMPLE 401(k) , then they can contribute up to $13,500 from their paychecks in 2020 and still reap the tax benefits.
22. Home Mortgage Interest
During coronavirus, there has been a housing boom across the United States. Some young adults may have capitalized on it and purchased their first home. If so, they may qualify for the home mortgage interest deduction, which allows them to deduct home mortgage interest on the first $750,000 of their debt.
23. State and Local Tax Deduction
Under federal rules, taxpayers can deduct up to $10,000 for state and local taxes if they are single or married filing jointly.
24. Charitable Contributions
If young adults donated to a charity in 2020, then they can take a deduction on their return. Just remember that federal law limits cash contributions to just 60% of the federal AGI for the year. It’s always best to keep receipts and records of charitable contributions in order to take the deduction.
Generally, only taxpayers who itemize their deductions qualify to deduct charitable donations. However, for tax year 2020 , individuals who do not itemize may deduct up to $300 in charitable contributions.
25. Medical Expenses
Healthcare is very expensive, but the IRS allows taxpayers to deduct the amount of total medical expenses that exceed 7.5% of the AGI. Medical expenses include payments for diagnosing, preventing, and mitigating disease.
26. Residential Energy Credit
If a young adult was lucky enough to purchase a home and they invested in solar panels or other forms of renewable energy, then they can claim a credit for 10% of the costs.
The Takeaway
Making smart use of tax deductions can help maximize a tax refund or minimize tax liability, depending on your personal circumstances. Knowing how to navigate your taxes can be tricky, and if there’s any doubt or confusion, it can be helpful to consult with a professional.
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