Tax time is here! More accurately, tax time is always here.If you’re looking to maximize your savings and minimize your tax bill (legally), there are important things you need to understand and do today, so you can minimize your tax bill on April 15th.Here are a few of the most common tax deductions that young people might miss on their tax forms.
Do you have a small business or a thriving freelance side hustle? If you’re self-employed in any capacity, you can legally deduct all legitimate business expenses. That includes:Optimizing your business expenses is critical for minimizing your taxes. As a self-employed person, you have to pay 15.3% of your profits toward Social Security and Medicaid. Plus, you have to pay Federal, state, and city taxes on that profit. Every dollar you can legally claim as an expense will save you anywhere from $0.15 to $0.50 or more in taxes.But the key to saving this money is tracking the expenses throughout the year. Use an app or bookkeeping software to track expenses and income. Keeping your business finances organized also has the added advantage of making it easier to estimate your quarterly taxes as a freelancer.By the way, if you’re completely self-employed you may be able to claim your health insurance premiums as an adjustment to income (it lowers your expenses). Be sure to talk with an accountant to understand all the costs that may be deductible.
In 2019, a single person can claim a standard deduction of $12,200, and a married couple (filing jointly) can claim a standard deduction of $24,400. Most people will claim the standard deduction, but if you’re a high-income earner, a homeowner, a major giver, or someone with outsized medical expenses, itemizing deductions may be the right move for you.Here are a few of the major itemized deductions you can take:
If you contribute money to a traditional IRA, or a workplace retirement plan such as a 401(k), 403(b), 457, or a self-employment plan (Individual 401(k) or SEP-IRA), these contributions can be made with pre-tax dollars. When you withdraw the money, you’ll have to pay income tax on them, but in the meantime, these contributions can help lower your tax bill.When you combine the tax savings with the possibility of employer matches, retirement contributions become the ultimate in wealth-building tax deductions. If you’re self-employed, be sure to open your retirement account before the end of the year. You can contribute to it until the April 15th tax filing deadline.Make sure you also keep up with the contribution limits:
Do you have student loans? If you’re paying interest on them, you may qualify for an “above-the-line” deduction of up to $2,500. An above-the-line deduction means you don’t have to itemize your deductions to qualify for this. You simply claim the deduction on your tax form (Form 1098-E), and your taxable income is lowered.
What’s better than a legal tax deduction? A legal tax credit.In the eyes of the law, deductions reduce your income, thereby reducing the amount of tax you have to pay on the income.Tax credits are even better. When you claim a tax credit you have a straight-up reduction to the amount of income tax you owe. Perhaps you owed $3,000 in income tax, but you can claim a $500 tax credit. In that case, your total tax burden falls to $2,500.
The Earned Income Tax Credit is a “refundable” tax credit that helps working Americans who have low income lower their tax burden or even boost their income (essentially through a negative tax).The maximum credit amount is:In years when you have a low income (for example, the first few years of college or when you’re starting a business) you may qualify for this credit.A quick note on income: This is your adjusted gross income. So if you’re a super saver who contributes a ton of money to retirement accounts, you may qualify for this tax credit even if you’re earning a decent salary.
If you qualify for the credit, be sure to claim it on your tax form. Most tax software services allow you to claim the EITC using the free version of the software.
Are you an independent adult paying your way through your first four years of higher education? If so, look out for the American opportunity tax credit. You need a Form 1098-T from your educational institution to claim the credit.This credit allows you to claim a tax credit (meaning every dollar you owe in tax is offset by this expense) for 100% of the first $2,000 of qualified education expenses you paid for each eligible student. You can also offset up to 25% of the next $2,000 of qualified education expenses you paid for an eligible student.If you don’t qualify for this credit, your parents probably will, so let them know about it.
Going back to school? If so, you may qualify for the lifetime learning credit. This credit allows you to have a dollar-for-dollar credit for up to $2,000 of educational expenses per year.You can claim this credit if your modified adjusted gross income is less than $57,000 (filing as a single person). If you earn between $57,000 and $67,000, you will qualify for a partial credit. For married couples filing jointly, the required income is less than $114,000 with a phase-out credit between $114,000 and $134,000.
If you’re a lower-income earner who contributes to a retirement plan (including a Roth IRA, a traditional IRA, or any workplace plan), you could get a credit worth 50%, 20%, or 10% of your contribution up to $2,000 worth of contribution (so a maximum credit of $1,000). (Double the numbers for married couples who file a joint return.)This is another one of those amazing credits for super savers who have a moderate gross income, but sock away a ton in retirement accounts.As long as you’re not a full-time student, over 18, and can’t be claimed as a dependent (and of course, you make retirement contributions), this credit can be yours.
If you qualify for one or more of these deductions, you can take steps to claim the deduction at tax time. Here are the steps to take.
It is up to you to keep track of any deductions you qualify for.I recommend using a bookkeeping software program or an app to track your income and expenses associated with self-employment income. Be sure to upload pictures of your receipts so you don’t have to keep a literal shoe box with your expenses.I also recommend keeping a “tax file” where you can store receipts from medical expenses, educational expenses, and debt repayments. Come tax time, it should be fairly easy to figure out your deductions.
Tax software makes it easy to claim deductions when you’re filing taxes. There is no reason to use pen and paper when you can use free or low-cost software to file your taxes.
Not everyone needs advice from a CPA. When you have a simple financial life, you can figure out tax deductions and credits on your own.But as your financial and personal life become more complex, you may start to see the value in paying for professional advice. In particular, if you have multiple sources of income (rental properties, self-employment, traditional employment, etc.), and a higher income, professional advice can be well worth the price you pay.
When you know about the tax code, you can work to arrange your finances to minimize your taxable income. These deductions and credits are 100% legal, so make a point to see whether you qualify.