Young taxpayers should plan these moves throughout the year to reduce their taxable income and earn more tax deductions. Here are the areas where you should look for tax savings:
Tax Savings For: Work | Car and Home | Family Planning | Inheritance | Retirement Savings
Give yourself a raise.
If you got a big tax refund this year, it meant that you're having too much tax taken out of your paycheck every payday. Filing a new W-4 form with your employer (talk to your payroll office) will insure that you get more of your money when you earn it. If you're just average, you deserve about $225 a month extra.
Switch to a Roth 401(K).
If your employer offers the new breed of 401(k), seriously consider opting for it. Unlike the regular 401(k), you don't get a tax break when your money goes into a Roth, but younger workers are often in lower tax brackets ... so the break isn't so impressive anyway. Also unlike a regular 401(k), money coming out of a Roth 401(k) in retirement will be tax-free... at a time you may well be in a higher bracket).
Tally job-hunting expenses.
If you count yourself among the millions of Americans who are unemployed, make sure you keep track of your job-hunting costs. As long as you're looking for a new position in the same line of work (your first job doesn't qualify), you can deduct job-hunting costs including travel expenses such as the cost of food, lodging and transportation, if your search takes you away from home overnight. Such costs are miscellaneous expenses, deductible to the extent all such costs exceed 2% of your adjusted gross income.
Keep track of the cost of moving to a new job.
If the new job is at least 50 miles farther from your old home than your old job was, you can deduct the cost of the move . . . even if you don't itemize expenses. If it's your first job, the mileage test is met if the new job is at least 50 miles away from your old home. You can deduct the cost of moving yourself and your belongings. If you drive your own car, you can deduct 23.5 cents per mile for a 2014 move, plus parking and tolls.
Go for a health tax break.
Be aggressive if your employer offers a medical reimbursement account — sometimes called a flex plan. These plans let you divert part of your salary to an account which you can then tap to pay medical bills. The advantage? You avoid both income and Social Security tax on the money, and that can save you 20% to 35% or more compared with spending after-tax money. The maximum you can contribute to a health care flex plan is $2,500.
Use a Roth IRA to save for your first home.
A Roth IRA can be a powerful tool when you're saving for your first home. All contributions can come out of a Roth at any time, tax- and penalty-free. And, after the account has been opened for five years, up to $10,000 of earnings can be withdrawn tax- and penalty-free for the purchase of your first home. Say $5,000 goes into a Roth each year for five years for a total contribution of $25,000. Assuming the account earns an average of 8% a year, at the end of five years, the Roth would hold about $31,680 — all of which could be withdrawn tax- and penalty-free for a down payment.
Deduct interest paid by Mom and Dad.
Until recently, parents had a good reason not to help their children pay off student loans. If the parents were not liable for the debt, then no one got to deduct the interest. Now, however, when parents pay, it's treated as if they gave the money to the real debtor, who then paid off the loan. The child gets the tax deduction, as long as the parents can't claim him or her as a dependent, even if he or she doesn't itemize.
Time your wedding.
If you're planning a wedding near year-end, put the romance aside for a moment to consider the tax consequences. The tax law still includes a "marriage penalty" that forces some pairs to pay more combined tax as a married couple than as singles. For others, tying the knot saves on taxes. Consider whether Uncle Sam would prefer a December or January ceremony. And, whether you have one job between you or two or more, revise withholding at work to reflect the tax bill you'll owe as a couple.
Roll over an inherited 401(k).
A recent change in the rules allows a beneficiary of a 401(k) plan to roll over the account into an IRA and stretch payouts (and the tax bill on them) over his or her lifetime. This can be a tremendous advantage over the old rules that generally required such accounts be cashed out, and all taxes paid, within five years. To qualify for this break, you must be named as the beneficiary of the 401(k). If the account goes to the owner’s estate and then to you, the old five-year rule applies.
Make your IRA contributions sooner rather than later.
The sooner your money is in the account, the sooner it begins to earn tax-deferred or, if you use a Roth IRA, tax-free returns. Over a long career, this can make an enormous difference.
Grab a 50% credit for saving.
One of the most generous tax credits available effectively rebates up to 50% of what low-income workers sock away for retirement. If your income is below $25,000 on a single return or $50,000 on a joint return, you can get a credit of between 10% and 50% of up to $2,000 you stash in an IRA or company retirement plan.
Deduct expenses even if you don't itemize.
Taxpayers who claim the standard deduction often complain that itemizers get the better deal. But that's not true. The only reason to claim the no-questions-asked standard deduction is if it's bigger than the total of all the costs you could deduct if you itemized. And, you can deduct a lot of things even if you don't itemize, including student loan interest, certain expenses for reservists and performing artists, contributions to health savings accounts and contributions to IRAs.