For many recent graduates and young professionals, tax season can be a confusing time. To avoid any unpleasant surprises this year, or maybe even get some extra money in your pocket, here are some tax deduction tips focused specifically on young Americans!
Tax Saving tips!
Like any other generation of taxpayers, young professionals can deduct many of their expenses on their taxes depending on the nature of their job. Although not every individual qualifies for every tax break, you must first be aware of the opportunities in order to take advantage of them. There are many ways to reduce your tax bill legally, whether you’re an employee or self-employed.
This article explains how to take advantage of tax relief. These simple tips and tricks are a great way to get started:
1) Deduct job-hunting expenses
Although the job-hunting expenses to be claimed have changed since 2017, you can still file an amended return for a tax year in which you looked for employment before 2018. The job-hunting deductions you can claim include the cost of resume preparation, travel expenses for interviews, mailing fees and placement agency fees. [1]
In order to qualify for these deductions, you must itemise your deductions. You won’t be able to claim this deduction if you’re looking for your first job.
2) Examine Your Health Expenses
Here’s the good news: if your medical expenses exceed 7.5% of your adjusted gross income, you can receive tax debt relief. These expenses include fees to doctors, dentists, specialists and mental health professionals along with hospital care.[2]
3) Inherit IRA 401(k) account
A 401(k) is a popular way to reduce tax debt. The internal revenue service doesn’t apply tax on direct transfers from your paycheck into a 401(k).
As a beneficiary of a 401(k) plan, you can rollover the account to the Internal Revenue Service. The beneficiary gets the benefit of the tax deduction leaving the tax bill on them. In order to qualify for this break, you must be named as the beneficiary of the 401(k).[3]
4) Contribute to Retirement savings
According to the Internal Revenue Service, you can make tax-free contributions to your retirement plan at $5,000 a year, but if you’re self-employed the limit goes up to $11,000 a year.
As an important note, be sure to establish these plans before set deadlines. Your debt relief amount will depend on the type of plan that you choose. There are various types of retirement plans including;[4]
- Individual Retirement Arrangements (IRAs)
- Roth IRAs
- 401(k) Plans
- SIMPLE IRA Plans
- SEP Plans (Simplified Employee Pension)
- Payroll Deduction IRAs
5) Make your IRA contributions sooner rather than later
If you are a business owner, you can get the benefit of Simplified Employee Pension (SEP) IRA contributions. These contributions are deductible with higher contribution limits.[5]
Note that income eligibility limits apply to Roth IRAs and the deductibility of traditional IRAs, but you can talk to an advisor for help.
6) Deduct expenses even if you don’t itemize
You might think as a first time taxpayer that the standard deduction is enough for you. The standard deduction amounts for 2015 taxes are $6,300 for singles and $12,600 for married couples.
Itemized deductions, however, are those certain types of expenses that you make throughout the year and they are tax-deductible. You can itemize if the total amount of these expenses is greater than the standard deduction amount. Moreover, you can get itemized deductions on various expenses including charitable contributions, medical and dental expenses, state and local income taxes, and home mortgage interest.
If you don’t itemize, there are still other tax deductions known as above-the-line deductions. You can take these tax breaks without itemizing. They actually reduce your taxable income.
Conclusion
Filing taxes can be intimidating to the uninitiated, so you may want to look at getting some help. You can get free tax assistance at the Internal Revenue Service Volunteer Income Tax Assistance if your gross income is less than or equals $54,000.
Besides that, a tax agent can guide you on what you can and can’t claim. You can reach out numerous online tax agents that allow you to do your tax from the comfort of your home. The more you know, the better you set yourself up to take full advantage of the tax system.
References:
- “Can I Deduct Expenses Related to My Job Search? – TaxAct Q&A.” TaxAct Blog. March 15, 2017. https://blog.taxact.com/deduct-job-search-expenses/.
- TurboTax – Taxes, Income Tax. “Can I Claim Medical Expenses on My Taxes?” TurboTax Official Website. https://turbotax.intuit.com/tax-tips/health-care/can-i-claim-medical-expenses-on-my-taxes/L1htkVqq9.
- Mary Randolph, J.D. “Inheriting an IRA or 401(k) Account as a Surviving Spouse.” Www.alllaw.com. March 07, 2019. https://www.alllaw.com/articles/nolo/wills-trusts/inheriting-ira-401k-account-surviving-spouse.html.
- “Retirement Savings Contributions Savers Credit: Internal Revenue Service.” Retirement Savings Contributions Savers Credit | Internal Revenue Service. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit.
- “IRA Contributions: The Earlier, the Better.” Vanguard. October 09, 2020. https://investornews.vanguard/ira-contributions-the-earlier-the-better/.