Remember what it was like back when you got your first big paycheck from your new job. Imagine how that felt, right? Exciting. Now, some years later, we’re entering our 30s and 40s and are slowly learning about how to optimize the money from that paycheck and reduce the taxes we pay.
It’s no secret that the cards have been stacked against us. Not only did we largely enter the workforce shortly after the 2008 recession, we’ve also struggled to find jobs that provide benefits and are one of the most affected groups during the economic crisis spurred by the pandemic.
If you’re tired of paying over a quarter or even a half of your paycheck in taxes, this article is for you. We'll start by looking at what deductions might apply for millennials filing taxes in 2021 and beyond, then go over different types of exemptions. Let’s get started!
Wanna skip the talk about taxes and head straight to the good stuff? Download the Wealth Stack app today to start learning how to invest as a beginner. It’ll be great for when you’ve got thousands of dollars lying around after saving on taxes.
Deductions that may Apply Specifically for Millennials in 2021
The pandemic has led to monetary stress; there’s no doubt about that. But it’s been especially difficult for millennials. Therefore, it makes sense that the entire generation is starting to focus on the various ways in which they can reduce the taxes they pay each yet. The following concepts include highly valued tax deductions that can help millennials decrease their tax liability.
Ready to invest in yourself without worrying about taxes first? Download the Wealth Stack app today to start learning how to invest like a pro. Then, invest straight from the app.
The earned income tax credit has to do with the reduction of taxes owed by individuals with fewer earnings. The IRS residents who can be qualified for EITC services. You can qualify for more discounts if you have children or are experiencing particularly difficult hardships. To see if you qualify, check out the IRS EITC Assistant tool.
The AOTC is given to first-year university scholars. This means that millennials (anybody, really, but remember we’re talking specifically about tax tips for millennials!) pursuing a degree and who are earning less than $80,000 a year can qualify for this tax credit. What’s it worth? You can get a maximum annual credit of $2,500 per eligible student.
If you take care of your siblings or a dependent at home, you could be entitled to a credit of $3,000 for one dependent and $6,000 for multiple dependents. To qualify for this care credit, you have to show the amount of expenses that are straightly connected to catering for the sibling or dependent. If you qualify for the credit, complete Form 2441, Child and Dependent Care Expenses.
Do you contribute to a retirement account? You’re probably entitled to a saver’s credit. To qualify, you cannot be a full-time scholar, and you can’t be claimed as a dependent on anybody else’s tax return. Moreover, to qualify, you should be making below $84,000 if married and $32,000 if you file your taxes as single.
Despite many millennials having health insurance, they are still forced to pay for some medical services out of pocket. Such medical expenses include psychiatrist programs, dental repairs, treatment for drug abuse, and optic services. However, millennials can reduce some of the expenses if the sum spent on them is above 7.5% of their annual gross income. Read more about that here.
Some millennials own homes, either bought or inherited. At age 30, in fact, 42% of millennials are homeowners. Energy-efficient homeowners can qualify for the residential energy credit. The credit offers access to many services such as insulation, water heaters—biomass stoves, roofs, windows, doors, and qualifying solar electric possessions.
Most millennials struggle paying back student loans. In fact, 14.8 million millennials have student loan debt, more than any other generation. If you’re one of those nearly 15 million millennials struggling to pay back loans, you can apply for a student loan interest deduction. To qualify, you have to have paid interest on those loans, though. You can claim the deductions as an adjustment to your revenue instead of a categorized deduction.
Here’s how to deduct student loan interest paid on your taxes next year.
Millennials who have an HSA health savings account can qualify for tax deductions for contributing towards their HSA. As well, it helps to know that contributions made to their HSA are not taxed. The contribution minimums differ depending on the individuals’ high-deductible well-being plan, age, and the day they qualify for such deductions.
How to Enjoy Tax Advantages from Investing in Retirement Accounts
Another tax tip for millennials is to ensure that they’re investing in retirement accounts. Accounts like IRAs and 401(k)s allow you to put money away that’s tax advantaged.
Learn more about IRAs here in our Guide to Understanding Roth IRAs.
If you already have a 401(k) or an IRA, the best thing to do would be to maximize your contribution to the 401(k) first. This helps to lower your taxable income. Then, you’ll want to contribute to, ideally, a Roth IRA. Why a Roth IRA? Contributions to a Roth IRA (unlike a traditional IRA) are funded with after-tax money where they’ll grow tax-free.
Learn more about the differences between these accounts in our guide on Traditional 401(k) vs. Roth 401(k).
Once you reach the age of 59 ½, you’ll be able to withdraw from the account tax-free and penalty-free. Note that, while you can withdraw from the account before that age, you’ll be liable to pay some penalty fees.
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How to Invest Your Tax Savings
If you qualify for some of the deductions mentioned above then you might be wondering, “What am I gonna do with all of these savings?” Turn around and invest it! However, don’t invest in just anything. Actually learn how to invest.
Make sure you’re making the right decision and perhaps speak with an investment advisor who will let you know how your withdrawal will affect your investments.
Want to learn more about retirement account options and other ways to grow your wealth long-term? Download the Wealth Stack app today to start learning how to invest like a pro. Then, invest straight from the app!