Top Tax Tips for Younger Filers
Filing your taxes is kind of like going to the dentist: It may not be fun, but dealing with it is part of being a grownup.
So with Tax Day one short month away, I turned to an expert for advice aimed especially at us younger and newer filers. Kay Bell is a Texas-based journalist who has covered tax tips for Bankrate. com since 1999 (check out their 2008 tax guide here).
She also writes one of the most readable and entertaining tax blogs on the Web: Don't Mess With Taxes.
Here are Kay's and my top tax tips for GenDebt.
1.) Take the easy way out.
Put your technology skills to work. Online filing can be fast and cheap -- even free. "Tax prep software has gotten better every year," says Bell. If you make less than $54,000 per year, you can use the IRS Free File site directly.
Or you can try the free version of the TaxACT program.
You might also be able to get a free version of TurboTax or H&R Block's Tax Cut software. Check with your bank or financial institution to see if they have any deals.
2.) But not too EZ.
Bell says one of the biggest mistakes young filers make is going straight for the one-page 1040EZ form.
"A lot of young people might have student loans, and they can deduct the interest, but not on the 1040EZ," she says. "They need to use a 1040A or the long 1040."
3.) Be a savvy student.
About that student loan interest deduction: Those who earn less than $65,000 a year can take up to $2,500 off their adjusted gross income for the interest (not the principal) paid annually on student loans. This counts for both federal and private student loans. If you're still enrolled in a qualified higher education institution, you can also claim a HOPE tax credit for up to $1,650 for your tuition and fees.
Importantly, Bell notes, these are "above-the-line" deductions, meaning you don't have to itemize them (break them down, rather than taking the standard deduction) to claim them.
4.) Adjusting to the working world? Adjust your income.
Another surprising above-the-line deduction: the expenses for your first big move and first job.
"Let's say you got out of college at Ohio State, and you're moving to take a job offer down in Atlanta," says Bell. "Be sure to keep a record of your U-Haul and moving expenses." All of this can be written off on the 1040 Long Form only.
After your first job, you can deduct job-hunting expenses like resume prep when you look for another position in the same field, but you have to itemize to take these deductions.
5.) Online tools can help the self-employed.
Lots of younger workers are starting out as freelance, permalance, or independent contractors. If you're getting paid on a 1099 instead of a W-2, you need to fill out a Schedule C form to itemize your business expenses.
Here, take your time and be thorough. For example, don't forget home-office expenses -- you can deduct a proportion of your rent, Internet, and utilities if you work from home (although your work area should be exclusively delineated and reserved for work).
Also, you can deduct your premiums if you buy your own health insurance -- which you should!
Online tools can help you keep organized when it comes to all of these deductions, which is extremely important. "People end up cheating themselves," says Bell. "They have a lot of expenses and they're not remembering them, and it's awful hard to reconstruct things."
As a freelance writer, I've been dealing with this since I first filed taxes. This year, I went through my online GCalendar month by month to remember all the dates where I incurred business-related travel or entertainment expenses (e. g., lunch with an interview subject). My Amazon account showed what books I'd bought for research, and my cell phone bills served as a log, allowing me to figure out the percentage of calls that were made to business-related numbers.
Kay also suggests using online mapping tools to reconstruct your mileage if you drove anywhere for work. Of course, you should be able to back up every deduction with a receipt.
Another important thing to remember: If you are a freelancer and taxes are not being taken out of your paychecks, you must file estimated tax payments each quarter. If not, "you're technically in violation of tax law," says Bell. Eep.
An online tool that can help you with this task is the Electronic Federal Tax Payment System.
6.) Get the maximum benefit out of your benefits.
If you read this column, you already know the long-term reasons to fund your tax-sheltered retirement account. If it's a Roth IRA or Roth 401(k), you still have to pay taxes on your contributions (with the advantage of taking the money out tax-free when you retire). But if your employer offers a regular 401(k), those contributions will reduce your tax liability.
Another employer-provided tax benefit that Bell says people often overlook is a flexible spending accountdeductibles -- even over-the-counter medications -- and you can take that amount off your taxable income. for medical expenses. Put, say, $500 into it for your co-pays and dental
7.) Know when to get extra help.
There are certain times when younger filers should seek help from a human being, whether at a storefront chain like H&R Block or Jackson Hewitt, or with a qualified CPA. You may want to do this if you've started your own business, sold some property, or have a large amount of investments, all things that will make your tax filing more complicated. Or, says Bell, "if you're just too danged busy and you're going to be rushed. You never want to get in a rush when you're doing your taxes."
8.) Beware the refund.
Everyone knows that a fat refund is your reward for going through the mind-numbing process of tax filing, right? Well, think again. A "refund" just means you let the government hold on to too much of your income all year, like giving them an interest-free loan.
"If you find you're getting a large refund, go to your human resources office and fill out a new W-4," says Bell. "You want to have just as close to what you're going to owe taken out as possible."
Another refund pitfall: If you walk into a tax-prep chain, watch out for any refund anticipation loans they offer. They'll cost you a bundle in the long run.
9.) Get your stimulus payment.
Finally, this year there's yet another cash incentive to file -- your economic stimulus payment of $300 to $600, scheduled to go out in May and based on your 2007 return. The IRS is encouraging even those whose incomes are too low to need to file to go ahead and do it this year.
While the $150 billion stimulus package is supposed to get Americans to go out and spend their refunds, a better option for many members of Generation Debt is to -- yes - pay off debt or invest the money.