Tax Tips for Millennials
Hopefully you looked at our end-of-year tax moves story to minimize your tax burden for tax year 2015. You’ll be getting your W-2 forms and 1099s in a few weeks, though, and when you do, you can get to work reaping the benefits of your smart tax moves from 2015. But it’s not too early to start getting your paperwork together and getting ready to document your tax deductible expenditures from last year – and plan to maximize tax deductions for 2016 as well.
Your hard work is going to benefit you in several ways:
You can increase your deductions, mimimizing the amount of income exposed to taxation.
You can increase your tax refund, if you have one coming – providing you more cash in your pocket.
If you’re paying off student loans, doing a good job on your taxes may help you lower the amount of income considered in your income-based repayment plan. This is because IBR, PAYE, and the new REPAYE program all define your monthly payment as a fraction of your discretionary income, which is your adjusted gross income (AGR) minus 150 percent of the poverty guideline amount in your state for your family size.
Your AGR is your gross income minus deductions and exemptions. So the more deductions you can identify and claim, the more you can lower your AGR, and the more you can lower your monthly student loan payment under an income-based repayment program.
Max your IRA contribution.
Most of you will be able to contribute up to $5,500 to an IRA for 2015, provided you get your contribution in by April 15, 2016. To take a tax deduction for the current year, you need to use a traditional IRA and meet certain income requirements. You can also choose to contribute to a Roth IRA, which doesn’t earn a tax deduction for this year, but it does allow for tax-free growth.
Either one is a smart move for the vast majority of you.
Increase your workplace retirement contributions
If you are eligible for a workplace retirement plan such as a 401(k), 403(b) or SIMPLE IRA, increase your contribution as much as you can. Your contributions are taken out of your paycheck pre-tax, and set aside. If your employer provides a match, this is a no-brainer. It is nearly always appropriate for younger workers to increase their 401(k) contributions at least to the extent of the employer matching contribution – even if debt is significant.
Furthermore, every dollar you contribute to one of these plans via salary deferral reduces your AGI, and that translates directly to a reduced payment obligation under federal student loan income-based repayment plans.
Enroll in an income-based student-loan repayment plan
If you qualify, consider enrolling in an income-based repayment option. This in and of itself can help you increase the amount of cash flow available to contribute to IRAs, retirement plans and make other tax deductible investments and purchases. You can also direct the extra cash to other important financial priorities such as paying life insurance or disability premiums, establishing an emergency fund, or paying down higher interest debt.
Student loan debt is usually at a lower interest rate than consumer debt. So it’s no problem deferring student loan payments if it helps you increase payments on credit cards, car loans and the like.
Track and Deduct Moving Expenses
If you physically relocated your primary residence to take a job that was more than 50 miles away from your old residence, you can deduct moving expenses.
This includes the cost of packing and shipping your belongings to the new home. Did you ship or rail load your car? You can deduct that, too. Did you drive your car? You can deduct 23 cents per mile that you drove for moving purposes (or medical purposes, for that matter) during 2015. You can also deduct any hotel/lodging costs along the way, and any tolls you pay. Meals are not normally deductible, except those you pay for in the course of actually doing your business.
If you’re planning a move in 2016, you don’t get as good a mileage rate. You can only deduct 19 cents per mile for 2016.
Enroll in your workplace FSA
Do you have recurring medical expenses? You want to get your teeth cleaned? Buy a new pair of eyeglasses? If your workplace has an FSA, or flexible spending account, go ahead and enroll in it. Just as with your 401(k), every dollar you can contribute reduces your AGI and with it your income based student loan repayment option. You contribute to your FSA pre-tax, and you can use the money you set aside to for qualified medical services tax-free. If you’re in, say, a 25 percent effective tax bracket, this is like buying your medical services and prescription drugs for 75 cents on the dollar.
Actually, since FSAs aren’t subject to Social Security tax, it’s an even better deal!