Tax Tips for Millennials

by Sophia Bera on December 4, 2013

Taxes are not the most exciting thing in the world, so I thought I’d start with this short video on Cats Doing Taxes from one of my favorite non-profits AccountAbility Minnesota.  (BTW: if you search for “funny tax videos” on YouTube, the results stink.  Note to CPAs everywhere: please make a funny tax video that I can insert in my blog posts on tax tips).  Tax planning is a really important part of financial planning.  It’s not thrilling, but knowing a few key tax tips can actually save you money, and since we all like saving money I wanted to share a few of my favorite tax tips for Gen Y.  (Please note: I’m not a CPA or licensed tax professional so you should consult with your tax accountant regarding your specific situation.  This information is meant to be educational only).

Student Loan Interest Deduction

Student loans are a big concern for many millennials, but did you know that if you have student loans you might be eligible for the student loan interest deduction?  Whether you itemize or not, you can deduct the amount you paid in student loan interest, up to $2,500 per year, but this deduction is phased out depending on your income.

Tax Credits and Deductions for Higher Education

If you’re enrolled in college courses, whether for undergrad or a graduate degree, you should be aware that there are two popular tax credits to help pay for higher education: the American Opportunity Credit and the Lifetime Learning Credit.  The American Opportunity Credit replaced the Hope Credit and can now be used for four years instead of two.  The maximum amount of the credit is $2,500 per student per year.  The full credit is available if your modified adjusted gross income (MAGI) is less than $80,000 for those filing as single, and $160,000 for those who are married filing a joint return.

The Lifetime Learning Credit is limited to $2,000 per year but does not have a cap on the number of years you can claim it.  This may be particularly helpful for those who used up the American Opportunity Credit during their undergrad, and now are enrolled in grad school.  Even if you qualify for both, you cannot claim both credits in the same tax year (unless they are going to benefit two different students).  There are income limits on this credit as well.

In addition to the two credits mentioned above, there is also a tax deduction of up to $4,000 in qualified education expenses using the tuition and fees deduction.  If you don’t qualify for one of the tax credits, you should see if you’re eligible for this deduction, but you can’t take this deduction in addition to a tax credit for higher education for the same student in the same year.  Remember, a tax credit is worth more than a tax deduction because a tax credit reduces your tax bill dollar for dollar, whereas a tax deduction reduces your taxable income.

HSA Contributions

If you have a high deductible health insurance plan that allows you to contribute to a Health Savings Account (HSA), then you should try to make a contribution to your HSA before the end of the year.  In 2016, an individual policyholder can contribute a maximum of $3,350, and a family can contribute $6,750.  Next year, the limits increase to $3,400 for individuals, and remain at $6,550 for families.  Why not get the tax break now, and then you can use this money to pay for health care expenses later on?  (Or you could buy a new pair of eyes, like I did!).  Maximizing your company benefits can also result in thousands of dollars in tax savings.

401(k)s and IRAs

Roth IRAs are funded with after tax dollars, which means that when you withdraw the funds in retirement, the withdrawals are tax-free so you don’t get an upfront tax deduction.  However, 401(k)s and traditional IRAs are tax deductible, so any money you contribute results in a tax deduction for the current year which reduces your taxable income.  Take a moment to increase your 401(k) contributions now, so that you receive an even bigger tax break next year.

The Saver’s Tax Credit

Need another incentive to contribute to your retirement accounts?  Depending on your income level, you may qualify for the Saver’s credit by contributing to a retirement account.  Here’s the breakdown for income levels in 2016:

  • Married Filing Joint – less than $61,500
  • Head of Household – less than $46,125
  • Single – less than $30,750

Donations to Charity

If you itemize your tax deductions, you may be able to deduct any donations to qualified charities or non-profit organizations on your tax return.  However, it’s easy to overlook donations of clothes, furniture, or other household goods, so make sure you get a receipt when you drop off your gently used items to a non-profit.  If you have appreciated investments in a taxable account, you can get a double tax break by donating the asset directly to a qualified charity.   If you’re looking for more details on tax deductions for charitable contributions, here are 8 Tips for Deducting Charitable Contributions from the IRS.  In case you missed it, check out my post on Being Grateful, Thankful, and Giving Back, for more tips on donating to charity.