Let me make filing taxes less terrifying for you
Just a short time ago, you were juggling term papers and playing beer pong. You listened placidly while your parents snarled during tax season. Now it’s YOUR turn to freak out about a mountain of paperwork and a storm of numbers.
First, take a deep breath.
“For most of us, filing taxes can feel overwhelming,” says Joe O’Boyle, a Certified Financial Planner professional with Voya Financial in Beverly Hills, California.
The best way to simplify and gain a deeper understanding is think about your taxes as a way to tell your income and expense story for the last year. The government wants to know how much you made, and if there were any expenses that you had that would change how much tax you have to pay.
Two things you’ll be thinking about: tax credits and tax deductions.
“A tax credit reduces how much you pay in taxes on a dollar for dollar basis,” O’Boyle explains. “A $2,000 tax credit saves you $2,000 in taxes.”
A tax deduction, on the other hand, lowers your taxable income and is equal to the percentage of your marginal tax bracket. So, a $2,000 tax deduction would save you $500 in taxes if you have a 25% marginal tax rate, O’Boyle explains.
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O’Boyle encourages people to get organized. As a painless, easy first step, gather all your pay statements: W-2s and 1099s.
Next, think of things you paid for. Take saving for retirement. The government wants you to do that. And they’ll give you a tax break to the tune of the amount you put into a qualified plan, such as a 401(k) or a 403(b), if you work for a nonprofit. Traditional IRAs count, too.
But there are other expenses you might have that could mean you pay less tax.
O’Boyle points out that many millennials work via the gig economy as independent contractors or freelancers. If that’s how you make money, you receive a 1099 statement for earnings. If you do that as sole proprietor, you can offset that income by showing the government the expenses you had in order to make that money. You do that using a Schedule C form.
There’s good news for people who report expenses on Schedule C even though it adds another form. You can contribute pre-tax dollars to a SEP IRA, as much as $53,000.
Even if that’s way beyond what you can set aside for retirement, you can still save for retirement, pre-tax, through an IRA.
Up to $1,000 less. Boom!
You have a valuable incentive in the saver’s credit to start putting away money now. This is designed for people who are 18 or older, not a full-time student, and earn low to moderate incomes. It seems too good to be true, but it’s a legal way to double-dip on shaving taxes off what you save for retirement.
“The saver’s credit can reduce your tax bill by up to $1,000 when you make contributions to your employer-sponsored retirement plan or IRA,” O’Boyle says.
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Got student loans?
You can lower your tax bill by deducting the interest on your student loans up to $2,500.
Did you move?
“If you moved for a new job or your employer changed locations, you may be eligible for a deduction on your return,” O’Boyle says.
As long as your new job is more than 50 miles from your home than your previous job location, the IRS lets you claim a deduction for moving expenses. This might include driving fees, shipping, storage or even the cost of hiring movers to help you ship out — the expenses should be reasonable and necessary to the move.
No need to sob and scream
Last, there’s no need to itemize deductions (dreaded tax word you don’t have to worry about yet). Check out the form here. Rejoice that you don’t have to deal with this.
However, to get the moving expenses deduction, you will have to use Form 3903, which has very few boxes to fill out. Not a scary form at all.
Take a deep breath. As long as you’ve got a calculator, your income statements and any expenses, you’ve got this.
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