What 20-somethings should know about taxes
With the tax deadline (April 15) fast approaching, it's time to check up on all of the deductions and credits available to you. If you're a millennial and filing taxes is still a relatively new undertaking, then you might want to consider these strategies, especially if you want to avoid the dreaded tax audit. Here are seven tips to keep in mind before you file your paperwork to Uncle Sam:
1. Coordinate your filing plans with your parents.
If your parents plan to claim you as a dependent, then that affects your own filing status. So make sure to coordinate with them, especially if you're still living with them or otherwise getting support from them, says Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting US, formerly Wolters Kluwer, CCH. The Internal Revenue Service specifies that parents can claim qualifying children who are under age 19 or a full-time student under age 24, as long as they are not earning above a certain income. "If you're living at home because you have no job, then yes, you probably qualify, but if you have a job, then you probably have to file on your own," Luscombe explains.
2. Take relevant education credits.
Student loan interest is eligible for a deduction up to $2,500, says tax expert and former U.S. News contributor Barbara Weltman. She adds that you don't have to itemize your deductions in order to take it, but there are income limits. Other education-related credits include the American Opportunity Tax Credit, which offers a tax credit up to $2,500 for the first four years of college (there are also income limits on eligibility). The Lifetime Learning Credit, which covers courses for academic credit or career development, offers up to $2,000, she says.
3. File electronically.
Weltman urges millennials to file taxes electronically, as 90 percent of taxpayers do, which saves time and can also reduce errors. She adds that the Free File program from the IRS and tax software industry gives those earning below $60,000 access to free tax software. (All taxpayers can file for free through the IRS.gov website with online fillable forms.)
4. If you moved for a job, you might be able to deduct the costs.
Weltman points out that you have to move at least 50 miles from your former location, but if you qualify, then you can write off moving expenses, which include the cost of moving household goods and driving from one location to the other. You don't need to itemize to take this deduction, she says, but you have to work in the new location full time for at least 39 weeks. This deduction applies to new college graduates, too, Weltman says.
5. If you bought a home, deduct your mortgage interest.
For millennials who are homeowners, mortgage interest is often eligible to be a tax deduction, but you'll have to itemize your deductions to claim it, Luscombe says. You can also check IRS.gov to see if other home-related expenses are eligible for credits, like energy-efficiency improvements.
6. If you have children, then an array of deductions and credits might apply.
Parents can qualify for a dependent care credit if both spouses work and pay for child care; you can claim up to $6,000 of child care costs for two or more children. A child tax credit of $1,000 per child is also available, but phases out for higher incomes, Luscombe says. For married taxpayers filing jointly, the phaseout begins at an income of $110,000. For single taxpayers, it begins at $75,000. Parents can also take advantage of tax-advantaged college savings accounts for their children, such as 529 or Coverdell accounts.
7. Remember to update your name if you change it.
Luscombe notes that newlyweds who change their name often forget to inform the Social Security office, which can cause problems with a tax return that appears to list an incorrect name. "That could be a reason for a return to get kicked back to you," Luscombe notes. Making sure all your paperwork is in order before you file can help save you headaches – and IRS inquires – later.
Related: Important tax dates to know.
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