Have you ever cried over taxes? Don’t worry if so — you’re not alone. A Cash App Taxes survey earlier this year revealed that 38% of millennials have cried over the stress of filing their income taxes or planned to when filing. But is that stress really unavoidable?
Read More: Trump Wants To Eliminate Income Taxes: Here’s What That Would Mean for the Economy and Your Wallet
For You: 7 Reasons a Financial Advisor Can Grow Your Wealth in 2024
If you’re a millennial, adjusting your tax strategy now could pay significant dividends in the long run. These six tactics are a great place to start. Adopting them could reduce your stress when doing taxes and save you money for years to come.
Maximize Your Tax Credits
First, make sure you’re taking full advantage of the tax credits you’re eligible for. Unlike deductions, credits reduce your tax liability directly. This means you can use them to reduce your tax bill even if you claim the standard deduction.
Some popular credits for millennials include the Child Tax Credit and the American Opportunity Tax Credit (up to $2,500 per student for educational expenses).
One key goal in creating your tax strategy is ensuring you pay only what you owe. Understanding and using the tax credits available to you is a significant part of that.
Check Out: Average Monthly Expenses by Age: Which Group Is Spending the Most?
Consider an Itemized vs. Standard Deduction
When paying income taxes, you also get to choose between a standard deduction and an itemized one. The standard deduction reduces your income by a fixed amount. The itemized deduction lets you add up all of the tax deductions you qualify for instead of taking the standard deduction.
The better option will depend on your financial situation. Some taxpayers, such as married individuals filing separately, can’t claim the standard deduction.
If you’re eligible for both, you should calculate your itemized deductions to see if they exceed the standard deduction. If so, take the itemized deduction. If not, go with a standard deduction instead.
Don’t Forget To Deduct Student Loan Interest
Millennials have an average student loan balance of $32,800. Many members of the generation carry significantly more student debt. The good news is that you can at least deduct interest payments from your gross income — up to a point.
The federal government lets students with debt write off $2,500 in interest payments annually. That may not feel like a lot, but it’s something. Plus, it may impact some of your other tax strategies.
For instance, a $2,500 write-off could influence whether the standard or itemized deduction is a better option in your situation. This is a good example of how one tax strategy change can lead to another. That’s why it’s important to reevaluate your tax situation every so often.
Calculate Retirement Taxes Now
Even if you’re a younger millennial, it’s never too early to consider what your tax obligations will be like in retirement. The strategy you decide on could impact your ideal way to save.
For example, Roth and traditional IRAs get taxed differently. If you save for retirement with a traditional IRA, you’ll pay taxes when you’re ready to withdraw in retirement. With a Roth IRA, you’ll pay taxes when making contributions instead of withdrawals.
This seemingly minor distinction can have a huge impact on your finances in retirement. The better IRA for you will likely depend on whether you expect to be in a higher income bracket now or in retirement.
Choose the Right Account Types for Your Goals
Another element in preparing for taxes is storing your wealth in the right types of accounts. For instance, where should you save your down payment money if you want to buy your first home?
You may be tempted to invest those funds in the stock market. The S&P 500 returns an average of 10.52% annually. However, this would create new tax liabilities for you when you sell the shares you buy.
A high-interest savings account may pay you less as you save for your home. But it would simplify your income tax situation by saving you from capital gains taxes. Plus, you’d avoid market risk.
Look Into Health Savings Accounts
As you get older, you’ll need more and more medical care. Paying for that is often challenging, but health savings accounts (HSAs) offer a tax-friendly solution.
An HSA is a tax-advantaged account you can use to save for future medical expenses. When you need the money for a covered reason, you’ll be able to use it without incurring a tax liability.
Also, any money you contribute to an HSA will be deducted from your adjusted gross income that year. This reduces your tax bill by decreasing the amount you’re being taxed on by the IRS.
Do Millennials Need Tax Preparation Assistance?
There are many resources available online to help younger taxpayers learn about their opportunities and obligations. From the IRS website to articles like this, you can certainly learn how to optimize your taxes on your own.
However, these general tips don’t take your specific financial situation into account. If you have special circumstances, it could make sense to work with an expert.
Tax preparers can help you understand credits, deductions and what you’ll owe. They can work with you to evaluate different strategies and figure out which is best. But not everyone needs these services. It really depends on your financial situation and goals.
More From GOBankingRates
- 9 Moves For Building Lasting Wealth: What Smart Americans Are Doing Right
- 3 Best Florida Cities To Buy Property in the Next 5 Years, According To Real Estate Agents
- The Average Consumer Has $6,329 in Credit Card Debt. Here's One Smart Way to Get Out
- 4 Car Models That Will Have Massive Price Drops in October 2024
This article originally appeared on GOBankingRates.com: The 6 Best Tax Planning Strategies for Millennials To Start Now
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
