Even for people who know very little about the complicated world of taxes, most people know enough that they want to pay as little as possible. The basic formula is pretty simple: the less people pay in taxes, the more money they will have for other expenses such as rent, food and other discretionary spending. This is especially true for young Americans. With that in mind, what methods and tools are available for youth looking at options for tax relief?
Definition Of Tax Relief & How It Affects The Youth
Tax relief refers to an article of the tax law that provides for a reduction in tax payments for a section of taxpayers. [i] They may be universal tax cuts or relief targeted at specific programs that benefit the taxpayers. It may also be put in place to achieve a particular government goal.
Tax reliefs are government-oriented and take different forms depending on the degree of diversity. They include taxation for driving mileage, an exemption for transit passengers, or corporate relief amongst many other types [ii]. The Hiring Incentives to Restore Employment (HIRE) of the United States focuses on youth. It provides tax relief from social security taxes for employed and unemployed youths.
Consequences Of NOT Utilizing Tax Relief Strategies
Failure to utilize tax relief costs many youths in several ways. One will be that they may miss out on the student education loan interest. They will also not benefit from the rate relief applied to that particular class of taxpayers. Employers fail to utilize the cost-sharing mechanism by governments in covering employment costs for youth.
Common Tax Relief Strategies For Young Americans
Some tax relief strategies that the American youth can tap into include;
1) Consider a Roth 401(k)
The Roth 401 (k) is funded with after-tax dollars compared to traditional tax-deferred funds with pre-tax dollars. This is an advantage as it saves one from retirement taxes. By taking the tax hit early in life, you assume you will be in a higher bracket in the early retirement years. This is reasonable for young people starting their first employment[iii].
A Roth account also enables a beneficiary to roll over the account to an Individual Retirement Account. This enables them to stretch payouts and tax bills over their lifetime. To qualify, one must be named as a beneficiary of the 401 (k) account.
2) Above the line deductions strategy
These are the deductions that lower the Adjusted Gross Income, which is paid as taxes. The deductions are educator expenses that allow cutting of classroom expenses. They are located above the line in the 1040 form, where Adjusted Gross Income is placed. They also cover moving expenses related to a new job, business expenses by performing artists, and education loan interests.
3) Itemizing strategy
Young taxpayers think that itemizing is only for old, established, and wealthier workers. In reality, many deductions phase out as income levels go up. Youths should look at the potential itemized deductions in the Internal Revenue Service form, Schedule A. If they add up to more than the standard deduction amount, take advantage of it. The categories include medical and dental expenses, state and local taxes, and certain job-related expenses.
4) Using Roth IRA to save for a first home
A Roth Individual Retirement Account is a tool useful when saving for a first house. All contributions can come out of a Roth any time, free of tax and penalties. With savings up to $10,000, one can withdraw it penalty-free for the purchase of a house. A Roth account accumulates 8% interest every year, increasing the amount after a couple of years. This means that with a contribution of $5000 every year, after 5 years, it accumulates roughly $31,680[iv].
5) Utilize the Health Tax Break option
Youths should be aggressive if their employers offer medical reimbursement accounts, often called the flex plan. These plans allow for diversion of salary to an account that can be tapped to pay medical bills. This avoids income and social security taxes and can save up to 20% to 35% of the income. The maximum that can be contributed to the health care flex plan is $2500.
The objectives of tax reliefs vary from reducing administrative burdens to encouraging activities that benefit the youth. As a result, youth should always be on the lookout for tax exemptions that they can benefit from. In order to find the most pertinent information, Americans should also be conscious of the online scams and wrong information about tax relief [v]. Always perform independent research to verify potential new opportunities.
[i] 2020. Oecd.Org. http://www.oecd.org/investment/toolkit/policyareas/41890309.pdf.
[iii] “5 Tax Breaks Young People Should Take Advantage Of”. 2020. Theweek.Com. https://theweek.com/articles/677982/5-tax-breaks-young-people-should-take-advantage.
[iv] 2020. Kiplinger.Com. https://www.kiplinger.com/article/taxes/t055-c000-s001-tax-savings-for-young-people.html.
[v] 2020. Wsipp.Wa.Gov. http://www.wsipp.wa.gov/ReportFile/858.