Doing your taxes is certainly not the easiest thing you’re likely to tackle this year. For Millennials, this can be increasingly more difficult. That’s because filing a return may be something brand new and unfamiliar. Additionally, the IRS tax code is hardly a walk in the park for the uninitiated.
That is why it’s so important to be aware of the easy mistakes that can be made when you’re completing your return. It is easy to make one. Yet, it is no picnic dealing with the aftermath. Should you be facing an audit, you could be left trying to explain why you goofed on your taxes. You can be faced with paying stiff fees and penalties to boot.
Fear not Millennials! We’re going to let you in on the ten most common tax mistakes you should be careful to avoid making at tax time. Navigating around these pitfalls can help you save money. It will make sure you take all the deductions to which you are entitled. Plus, it will ensure that you prepare your return properly without having to deal with the IRS exploring your finances.
1. Seeking Professional Help
We all like to think we’re smart and savvy enough to fill out the year’s return by ourselves. However, sometimes you need to realize the extent of your own limitations. Then, admit when you might need a little help.
When it comes to your taxes, it is better to err on the side of caution. Seek out a professional who is well-versed in all of the complexity of the tax laws. That way, you’re not left facing a possible audit simply because you failed to dot all the I’s and cross all your T’s.
Luckily you have a few options when it comes to finding the right type of help to meet your particular tax needs. Many filers hire a certified public accountant (CPA) or even a tax attorney. They can help successfully maneuver through all of the tax credits, exemptions. They can help with the various other loopholes that can all work to your advantage if you know how to utilize them.
Maybe you are thinking that hiring a tax professional may be a little too hard on your wallet. That is especially true if you don’t anticipate getting a refund from the government this year. That is okay. You still have options. One that might be more merciful to your financial situation is in the form of online tax software.
Many of the available tax software choices out there are free or almost free to use. They are based on how complex your particular tax situation might be. Good online tax software can be a useful guide to getting you the most on your refund. It will make filing your return easier than you thought.
These software solutions are up to date and current with all of the latest changes to the tax laws. Using these programs is easy. All that’s necessary is answering questions about your finances and any other major life changes that have taken place over the course of the year.
You provide all of the pertinent data that is being requested of you. Then, the software makes all of the calculations and adjustments for you as you move through the process. When all is said and done, you know immediately whether you’re owed money. You’ll know if you owe money, and how much.
You can also rest assured that your return will be filled out accurately. All of your credits and deductions taken are appropriate to your financial situation. Best of all, filing electronically can also result in your refund getting to you much quicker than if you mail in a paper return. Thus, your money hits your bank account. You do not need to wait for a check to arrive from the mailman.
2. Claiming All Credits and Deductions
If you’re going to go it alone, you better have a pretty good grasp of all the deductions and credits for which you might be eligible. They are based on your income, expenses, and other criteria for claiming any applicable tax breaks. You may have a good accountant. Perhaps you have signed up with one of the leading tax software companies online.
In either case, you will have a much easier time of identifying and claiming all the write-offs that you are entitled to take on your return. Unfortunately, many Millennials fail to recognize all of their deductions and credits when they file.
That could mean missing out on a bigger refund. Therefore, in order to get the most money back from the government, you should be aware of these commonly neglected tax breaks. Many Millennials may not know about when filing their return.
Earned Income Tax Credit
This can be a useful way of lowering how much you owe. It is determined by your annual income, your marital status, and the number of children you have in the home. It was established for giving low-income families a break on their tax liability.
However, eligibility to claim the credit has now been extended to certain filers who meet the qualification requirements. Another reason to see if you qualify is the fact that the credit is refundable. That mean you can still collect the money from it even if you don’t owe anything to the IRS.
You may have donated some clothes, some cash, or perhaps your car to charity. Yet, when tax time comes around you don’t remember to claim what you contributed to these charitable organizations.
That could mean sacrificing some serious dough instead of getting it back on your taxes. You will need proof through receipts or other documentation, in case you get audited. You’ll have to itemize it all on your return.
Lifetime Learning Credit
Getting an education can pay off in more ways than one. With the Lifetime Learning Credit, you could claim up to $2,000 in qualified education-related expenses. This credit applies to anyone who attended undergraduate, graduate, or even trade school courses.
American Opportunity Tax Credit
This is a second tax credit that Millennials can claim. It is based on their education related expenses if they are currently enrolled in a college or university program. It could yield up to $2,500 off your tax bill. However, you can’t take this credit and the Lifetime Learning Credit. You can only apply for one or the other.
Employment Search Deductions
If you spent any time looking for a job over the course of the tax year, you could deduct the expenses incurred during that search. That can be anything from Uber fare to printing resumes. They only qualify if you have already had a job prior or weren’t unemployed for a lengthy period of time. Needless to say, you will have to itemize your expenses for this deduction.
3. Claiming Interest on Loan Payments
You can’t claim the interest payments on any kind of loan. Those that are eligible will be particularly beneficial to Millennials. That is because student loans and mortgages both apply. You have to qualify to claim the deductions on either one of these forms of loans.
In the case of student loan interest, you could end up deducting as much as $2,500. Those requirements dictate the kind of student loan. The income limits of the filer are set at $80,000 for single taxpayers and $160,000 for couples filing jointly. Also, if you make the cut, you won’t have to itemize for this deduction.
This is an area where Millennials sometimes get confused. They can miss out on a very lucrative exemption to lower the amount they owe to the IRS. We’re talking thousands of dollars lost for misrepresenting your status accurately.
In this case, it is not an issue of filing single or head of household or married. Instead, it is about knowing if you can file as an independent or if you are still considered a dependent on someone else’s tax return. This is an easy determination to make if you live with your parents and are taking any sort of financial assistance from them.
That would probably make you a dependent. In that case, you are unable to claim a personal exemption on your return. Your parents will get a tax break instead. Perhaps you are living on your own and no one else may rightfully place you on their tax return. Then, you can file independently and potentially be eligible for the full amount of the exemption.
5. Maximizing Your Flexible Spending Account (FSA)
Millennials who are offered a flexible saving account by their employer should consider if they are using it most effectively. The maximum contribution allowed is $2,550 for the year. That account must be funded from your income before taxes. That can lower the money you would be required to pay taxes on when tax time comes around.
A FSA may be used in order to pay for expense related to health care. It can also be used for any expenses incurred for your dependents. It’s important to remember that you have a finite amount of time in which to use your funds. Otherwise, you could lose that money. That would just be wasteful.
6. Don’t Forget Moving Expenses
We have identified some crucial deductions, exemptions, and credits that Millennials overlook when they are filing their tax returns. But there is one more of the most important deductions to remember when you’re completing your return: The deduction on moving expenses when incurred for work-related reasons.
Writing off those costs can be a big help. That is particularly the case if you had to spend higher than usual amounts of money to move for a new job. Like every credit or deduction offered by the IRS, there are some requirements you’ll need to meet to qualify for writing off your moving expenses.
The IRS considers distances when allowing for this deduction. Let’s say you’ve moved and relocated for a new job. Your new workplace must be no less than 50 miles further away from your old home than your previous employer was located.
You also must be able to prove that you are working full time for your new employer. You may only claim these moving and relocation expenses for the year in which you started working at the new job.
7. Adjusting Your Withholding
Refunds are pretty great, there’s no doubt about it. What if you could keep that money during the year instead of letting Uncle Sam hang onto it? It might be more beneficial to put that income toward something else.
Otherwise, you’re giving it to the government in the form of an interest-free loan. In fact, that’s really what you are doing when you get a refund from your taxes. You’re allowing the government to borrow your hard-earned cash until they have to return it when tax time rolls around.
That’s why you may want to take a fresh look at your withholding for your federal and state allowance on your W-4. Adjusting your withholding so that you receive little to no refund each year could put that money back in your pocket. That can be done instead of having to wait until the end of the year to get it back in one lump sum.
It could be hundreds of dollars each month, depending on your financial situation. Conversely, you want to be careful about withholding too little. If you do, you could end up owing money.
It is certainly better to pay what you owe over the course of twelve months instead of paying one lump sum come tax time. It’s a delicate balance to find that right amount of withholding. However, if you do it right, you’ll be at $0 when all is said and done. Hence, you won’t owe nor be owed.
The implementation of the Affordable Care Act aka Obamacare mandated that all Americans have some form of health insurance coverage. If not, they will pay stiff penalties with their tax return. Now that the new administration has said they plan to repeal the law, the future is uncertain.
However, that has not yet happened. The laws are currently still in place. That means you could be facing fines if you don’t have coverage. This is particularly important for Millennials. That’s because they are the leading demographic that remains largely uninsured.
The extent of your penalties should you fail to have insurance is typically the higher amount of 2% of your household income. The yearly premium costs of a Bronze Plan sold in the insurance marketplace or $325 for each adult. It’s $162.50 for each child younger than 18 years of age. The maximum is $975.
The law provides for a number of exemptions for keeping insurance over the course of the year. The only way to avoid being penalized is by qualifying for one of these exemptions under the law.
9. Spend Wisely
So you are getting a tax refund. Congratulations! It is an exciting thing to get a huge windfall of money. Most of us already have that money allocated toward something even before it’s received. You worked hard for that money. You should be able to spend it how ever you wish. Yet, a majority of the time the money is spent on things that tend to depreciate like expensive toys and clothes.
Millennials enjoy playing with disposable income. What if you stopped for a second and considered what else you could do with this money? Perhaps something that might benefit you later on down the road instead.
It’s a hard sell to try and convince anyone to put off instant gratification in lieu of more fiscally responsible alternatives. However, that’s just what we’re going to attempt here. There are many other ways to spend your tax refund that may be more lucrative later on. Here are just a few of the options we would suggest:
Start an Emergency Fund
You never know when a financial emergency is going to hit. That huge medical bill, a car repair expense, or you end up losing your job for whatever reason. These are all ready to hit you when you least expect. The first thing that’s going to take a hit is your bank account.
This is why it’s a good idea to have a little cushion of cash to fall back on in the event of an emergency. I know your refund is probably burning a hole in your pocket. Though, it makes more sense to put it aside. Don’t touch it unless you absolutely must cover some unanticipated bills.
You plan on retiring one day, right? Well, there’s no time like the present to get started on putting money away for your future. That means investing. There are a wide variety of retirement investment vehicles available that you can start contributing to now. That way you can grow a sizable nest egg for use later on.
If your employer offers a 401(k) and is willing to match your contributions, then you really should be taking advantage of that offer. That is because you could be getting free money from your boss over the course of the year. Now that you have a sizable tax refund you should begin exploring your options. Think about putting that money to work for you.
Start Your Own Business
You may have a certain skill or you want to turn a hobby into a business and are ready to become your own boss. You could use your tax refund as start-up money to get that burgeoning business up and running. Follow your dream. Put that money toward good use to establish your shingle instead of spending it on material items.
10. Pay Down that Debt
This gets its own section because it is particularly important come tax time. Debt can be crippling to your finances, your credit score, and your overall health and well-being. Perhaps the debt that you currently carry comes with high-interest rates. In that case, it makes even more sense to pay it down as fast as possible.
Maybe you receive a sizable refund from the government. You may want to apply that money toward paying down your balances on student or car loans or a mortgage. These things all might be choking your finances each month.
You may also want to explore some options for refinancing at a lower rate. Additionally, you can seek out any forgiveness programs for student loans that might be available to you. You may qualify for a repayment plan. It lets you pay less based on your income.
That’s where a refund can really help out. That is because it will allow you to meet payments that are more manageable each month. The truth is you can deduct the interest on student loans from your taxes. Thus, it’s a far better thing not to have to make those payments at all then be able to apply them to reducing your tax bill. Allocating your refund toward your high-interest debt can help you achieve that.
Our Final Thoughts
It’s easy to make a mistake when you are doing your taxes. This guide should help you dodge some of the more common ones that are committed by Millennials. First and foremost, you want to be aware of what you are allowed to claim for credits and deductions. Get the help you need when it comes to filling out and filing your return.
Studies have shown that millennials are the most risk averse demographic. Therefore, it makes good sense to get someone on your side. They will help you comply with all of the tax laws so you are not dealing with an audit later on.
Be frugal with your refund as well. If you want to spend it on clothing, then buy professional clothes. Apply that money to something that’s going to provide value. It’s better than purchasing some expensive electronic device that is just going to be out of date in six months anyway. These tips should make tax time a little less difficult to bear. Thus, you can get back to living your life the way you want.