Many young taxpayers miss out on tax-saving opportunities because they just aren’t aware of them. Here are some tax credits and deductions that you shouldn’t overlook.
(Please note: I’m not a certified public accountant or licensed tax professional, so you should consult with your tax accountant regarding your specific situation. This information is meant to be educational only.)
1. Student loan interest deduction. Education borrowing is a big concern for many millennials. But do you know that, if you carry such debt, you might be eligible for the student loan interest deduction?
Whether you itemize or not, you can deduct the amount you paid in student loan interest, up to $2,500 per year. This deduction has income limits, so check the eligibility requirements on the website of the Internal Revenue Service.
2. Tax credits and deductions for higher education. If you’re in college, whether for undergrad or a graduate degree, you should be aware that there are two popular programs to help pay for it: the American Opportunity Credit and the Lifetime Learning Credit.
The American Opportunity Tax Credit provides a tax break up to $2,500 per year. The credit is available for four years. The income limits for 2015 are $80,000 if you are single and $160,000 if you are married.
The Lifetime Learning Credit is good for up to $2,000 per year and it does not have a cap on the number of years you can claim it. For those who used up the American Opportunity Credit during their undergrad career, the Lifetime Learning Credit is useful for grad school. (You cannot claim both credits in the same tax year.)
In addition to the two credits, there is also a tax deduction of up to $4,000 in qualified education expenses. A tax credit is worth more than a deduction because the former cuts your tax bill dollar for dollar, whereas the latter only reduces your taxable income. But if you are not eligible for the tax credits, you should look into this deduction.
Keep in mind you can’t take a deduction in addition to a tax credit for higher education for the same student in the same year.
3. Health savings account contribution deduction. If you have an HSA, any money you contribute gets you a tax deduction and reduces your taxable income. The contribution limits are $3,350 for an individual policyholder and $6,650 for family in 2015. That’s an increase from $3,300 and $6,550 in 2014.
4. 401(k)s and individual retirement accounts. Your company-sponsored 401(k)s and traditional IRAs are tax-deductible. For 2014, the 401(k) max was $17,500, and it goes up to $18,000 for 2015. The IRA contribution limit remains at $5,500. Take a moment to increase your 401(k) contributions so that you receive a bigger tax break.
You fund your Roth IRAs with after-tax dollars, so you don’t get an upfront tax deduction. But when you withdraw the funds in retirement, they are tax-free.
5. The saver’s tax credit. Need another incentive to save for retirement? Depending on your income level, you may qualify for the saver’s credit by contributing to a retirement account. Income thresholds are changing, so make sure you check to see if you qualify.
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Sophia Bera, CFP, is the founder of Gen Y Planning and is the top Google search for “Financial Planner for Millennials.” She works virtually with people in their 20s and 30s across the country as she builds a location independent practice. She is a contributor for the AOL Daily Finance website and has been quoted on various websites and publications including Forbes, Business Insider, Yahoo, Money Magazine, InvestmentNews, Financial Advisor magazine and The Huffington Post. Sophia is a sought-after speaker and presenter and in her free time enjoys performing as an actor/singer and traveling the world. Follow her on Twitter @sophiabera or sign up for the Gen Y Planning Newsletter to stay up to date on financial articles geared toward Millennials. Oh, and she’s not your father’s financial planner.
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