Millennials of all ages can agree on one issue -- paying taxes for the first time is a startling wake up call. The sting of watching money disappear each paycheck rarely dissipates, and often gets worse as raises and new career moves push people into higher tax brackets. So what's a taxpaying millennial to do?
These five moves can lower taxable income in 2015 and help keep more money in millennial bank accounts and wallets.
1. Check with your employer.
In 2015, all company-employed individuals should make a New Year's resolution to speak with an employer or human resources representative to ensure they're taking advantage of benefits to reduce taxable income.
A 401(k) is often the go-to taxable income reducer for people of all generations. In 2015, millennials can contribute a maximum of $18,000 to a 401(k). However, contributing to a Roth 401(k) will not help reduce taxable income. Money put into a Roth account is taxed now, so retirees can withdraw the money with no need to pay Uncle Sam again.
Fortunately, a 401(k), or similar retirement plan, isn't the only way a job can help reduce taxable income.
"Read your benefits package, and you'll likely find ways to reduce your taxable income through commuter benefits, flexible spending accounts, health savings accounts and paying for medical, dental and vision premiums using pretax dollars," advises Sophia Bera, a certified financial planner and founder of Gen Y Planning.
2. Max out an individual retirement account.
Millennials fortunate enough to have some extra cash to stash away for retirement after contributing to a 401(k) can reduce taxable income by maxing out a traditional IRA.
However, not all millennials will be eligible to contribute and receive the tax deduction in 2015.
According to IRS regulations, singles and heads of households who are covered by workplace retirement plans and make an adjusted gross income between $61,000 and $71,000 will no longer be eligible for an IRA tax deduction. Married millenninals and those earning six-figure incomes should consult IRS guidelines to see if they will be eligible for a tax deduction on IRA contributions in 2015.
3. Take advantage of relevant tax credits.
Unfortunately, there are no specific tax credits for being a millennial, but anyone paying taxes can take advantage of tax credits.
Carrie Smith, financial expert and founder of CarefulCents.com, points out an easy way for self-employed millennials to lower their taxable incomes. Self-employed individuals who work from home, even part-time, can deduct home office equipment, office supplies and other items relevant to running a personal business. Just remember -- if the IRS does an audit, these items need to be itemized and proven as an expense.
Bera and Smith also encourage millennials to see if they're eligible for the earned-income tax credit and the saver's credit.
The earned-income tax credit is specifically for individuals or families in lower income tax brackets. "If you're 25 years of age, or older, and have lower than average income, you could qualify for an extra bonus credit -- even if you're married," Smith says.
The income ranges change each year, but those eligible in 2014 include individuals earning less than $14,590 or $20,020 for those married filing jointly with no qualifying children.
The saver's credit is earmarked for low-to-moderate income earners who save for retirement. This credit can help millennials (or any taxpayer) offset part of the first $2,000 ($4,000 for married filing jointly) voluntarily contributed to an IRA, 401(k) or similar workplace retirement programs. Those looking to take advantage of this credit must be 18 years or older, not a full-time student and not claimed as a dependent on another taxpayer's return.
In 2015, singles can receive the credit if their income is $30,500 or less. Heads of household must earn $45,750 or less to receive the credit, and married couples must earn $61,000 or less.
4. Pay interest on your student loans.
Millennials are notoriously burdened with student loans. Fortunately, some millennials may see a small silver lining on their debt come tax time thanks to the student loan interest deduction.
There is a catch.
"Making payments to the principal balance on a student loan won't reduce taxable income. The deduction is when you make payments on the interest paid on the student loan," Smith says.
And like all tax deductions and credits, eligibility depends on income.
To qualify, the modified adjusted gross income for singles must be under $65,000 and under $130,000 for married couples. "This deduction can reduce your income by up to $2,500," Bera explains.
5. Get insured.
Insurance and affordable health care has been at the forefront of political discussions for millennials as they matured into taxpaying adults. So it shouldn't be a surprise health care now plays a role in taxes. While being insured doesn't serve as a way to reduce taxes, it does keep people from paying more money to the government.
"If you don't have health insurance coverage by the end of the 2014 tax year, you'll have to pay a penalty fee that will be assessed on your tax return," Smith explains.
In 2014, the penalty will be either 1 percent of a taxpayer's annual household income or $95 per person, with a maximum of $285 per family. An uninsured taxpayer will owe whichever penalty is higher.
"It may not seem like a large amount right now, but as the years go on and 2015 rolls around, those amount double," Smith emphasizes.
In fact, in 2015 an uninsured family would either owe 2 percent of yearly household income or $325 per person ($162.50 per child under 18), with a maximum penalty of $975.
Every year, taxes are due April 15. Millennials can prepare well in advance to ensure they won't owe the IRS taxes or penalty fees. Lest you forget, it was the IRS who ended up taking down Al Capone. It isn't an agency to trifle with!
Erin Lowry writes about personal finance and manages social media for MagnifyMoney.com, a site dedicated to helping consumers save money by finding simple, transparent financial products. She is also the founder of the personal finance blog Broke Millennial.
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