By Melody Roberson, Associate
As many millennials graduate from college and enter the professional world, it is important that they acknowledge their new friends over at the Internal Revenue Service (IRS). Since the IRS was probably not part of most children’s vocabulary growing up, it’s critical that young professionals start to understand the tax scene and how the decisions they make now can impact their finances in the future.
Whether you recently graduated from college, or you are in the early part of your career, here are some tips to help preserve your take-home pay and set you up for financial success moving forward:
Start Contributing to Your 401(k)
It’s important to contribute to a 401(k) account and the key is to start right away. There are many tax-efficient ways to invest within the 401(k) or Individual Retirement Account (IRA) offered by your employer. One way that young people can benefit is by taking advantage of the Retirement Savings Contributions Credit (Saver’s Credit). This is a tax credit can be taken for making eligible contributions to your retirement plan.
A Roth IRA is another interesting retirement savings account to keep in mind. You can fund a Roth IRA with after-tax dollars and it allows your money to grow tax-free. You can then later withdraw your contributions tax-free. Consider a Roth IRA to save for your first home. Under certain conditions, you can withdraw your contributions to apply directly towards a down payment on a home.
Learn More, Earn More
Continue your education! Today, graduate school can be extremely expensive—particularly for young professionals. While taking out student loans can be risky due to high interest rates, what many people don’t realize is that the interest on student loans is eligible for a tax deduction. There’s also the misconception that if your parents paid for the student loans, then you can’t deduct the interest – but that’s wrong. As long as they don’t claim you as a dependent, you can claim that payment on your taxes.
There are also education credits available to students. The American Opportunity Tax Credit offers up to $2,500 for the first four years of college. Likewise, the Lifetime Learning Credit offers up to $2,000 for academic credit or career development. This credit can help save additional money since it can include expenses not incurred towards getting a degree and there’s no limit on the number of years the Lifetime Learning Credit can be claimed for each student.
Moving Deductions
If you moved away from home for a new job after college, you might be able to deduct the costs. This does not require itemizing your deductions. You can write off moving expenses—just make sure to double check that you meet the distance and time tests. This deduction serves as a great opportunity for recent graduates who take a new job out of college that is more than 50 miles away. It’s also an above-the-line deduction that will reduce your adjusted gross income.
Keep Records
Document everything. Many millennials are under the impression that they don’t need to itemize their expenses yet. However, that is not the case. It is important to keep track of things like charitable contributions, high state income taxes, and out-of-pocket job expenses in case you are able to take advantage of a higher deduction than the standard.
Looking Forward
Keep in mind that certain milestones in your life can affect your taxes. For example, if you get married, remember to update your name with Social Security. If you buy a home, you can deduct your mortgage interest from your year-end taxes. If you have kids, there is an array of deductions and credits that could apply, including the earned income credit, the child tax credit, and the child care credit.
By staying informed from the start, young professionals can ensure that they’re taking advantage of various tax deductions as well as protecting their current and future earnings.
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The information contained in the Knowledge Center is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. In no event will CST or its partners, employees or agents, be liable to you or anyone else for any decision made or action taken in reliance on the information in this Knowledge Center or for any consequential, special or similar damages, even if advised of the possibility of such damages.