The goal of tax planning is to arrange your financial affairs to minimize your taxes and in doing so keep more money in your pocket. And that’s what we all want, right? As a Millennial, time is one of your most valuable assets when it comes to any financial, retirement or tax planning. And the best part is you don’t have to be a tax expert to start your own tax plan. By following some simple guidelines and being aware of changes during your life, you generally can do a pretty good job yourself. This article offers helpful pointers for those of you starting down the path of your career, first home, marriage and family planning.
During this phase of your life you will start to make more money as the years pass because of inflation, your work experience, and education level. In addition, there are events that can happen that you may be able to take a tax advantage of. Here is a list of some of them that you shouldn’t miss:
Buying a Home
If you took out a loan to buy a home, most likely you may be able to deduct the mortgage interest and real estate taxes you paid on it. Mortgage companies will issue you a Form 1098 (Mortgage Interest Statement) for the year which reports the interest you paid. It may also include property taxes if you set up your mortgage payments to include taxes. Also, if you paid points when you had purchased your home, this may be added to the interest as a deduction. Keep in mind that home insurance is not tax deductible.
When buying a home, consider putting at least 20% down on your home mortgage to avoid paying private mortgage insurance. However, if you don’t, you may be able to deduct the private mortgage insurance premiums as a deduction on your tax return.
Being married generally helps your tax situation. If you are planning to get married in the beginning of next year, you might want to consider getting married before the end of this year instead. You can file jointly with your spouse even if you were only married on the last day of the year.
Starting a Family
Child tax credits of up to $1,000 can be claimed for each child under age 17, plus additional exemptions built into your tax return that will reduce you tax. If you (and your spouse if married) are both working or going to college full time, you can get a credit for expenses you paid for day care for children under age 13. The day care credit can be as much as $3,000, or $6,000 for two or more children. If you are planning on adopting a child, you can get a credit for the expenses you paid related to adopting your child.
Paying Off the College Loan
If you are paying off student loans, the maximum deduction is $2,500. The deduction phases out for incomes over $60,000 (or $120,000 for joint filers). Keep in mind that a student claimed as a dependent on someone else’s return cannot deduct student loan interest.
Energy credits — You can get a credit for home improvement items you buy that meet or exceed the Energy Star program requirements. Improvements like exterior windows, doors, and skylights may qualify. A lifetime limit of $500 applies to the credit, and only $200 of the lifetime limit can be used for exterior windows. For both solar electric generating property and solar water heating property, you can get an additional 30% credit, up to $2,000 max credit, for each.
Retirement Saver’s Credit — If your income is under $27,750 (55,500 for joint filers), you may qualify for credit of up to 50% for money you put into an IRA/Roth IRA.
Electric car credit — Get up to a $7,500 credit on a qualified electric car purchase. Electric vehicles like the Nissan Leaf, Chevy Volt, and Smart for Two currently qualify for the credit.
Adjust your Withholdings
Due to the various tax deductions and credits you could receive during this time, it is not uncommon for you to see huge refunds year to year. You might want to consider reducing how much tax is taken from your paychecks by meeting with your employer and updating your Form W-4. This way you can keep more of your money during the year instead of giving Uncle Sam an interest-free loan.
Term Life Insurance
Consider term life insurance to protect your family financially. Without it many families cannot adequately take care of their families when a spouse dies. If you or your spouse dies, expenses such as mortgages, utilities, and household bills are harder to make without life insurance. Unlike other life insurances policies such as “whole life” or “universal life,” term life insurance is usually the most affordable and provides a payout to your beneficiaries only if you die. Insurance premiums are not tax deductible; however, payouts are generally not taxable. Here are some pointers when shopping for term life insurance:
1. Evaluate to make sure the insurance company is financially strong with an A++ or A+ rating. A good site to start your research is AMBest.com.
2. To make sure you are adequately insured, the benefit “payout” amount should be at least 10 times your annual income.
3. Buy one policy instead of having multiple policies. For example, you generally will get more coverage per dollar by having one $500,000 policy instead of two $250,000 policies.
4. If both you and your spouse work, each of you should each have life insurance to replace your respective incomes. Even if your spouse doesn’t work, your spouse should still have life insurance.
5. Look at the guarantee on premiums. Many term insurance plans have terms where rates do not change over a certain amount of years (5, 10, 15, 20, etc…). If you are just starting a family, you might consider a 20 year term to have peace of mind that your spouse and kids will be taken care of financially in the event of your death.
6. Consider purchasing life insurance online. Compared to buying insurance through a commissioned sales person, buying online could save you some money. There are many websites that sell life insurance online.
Like this and want more tax advice? As part of a series of tax planning strategies, we’ve broken down tax advice for specific age groups: Generation Y and Millennials, GenX’ers, those at the “Top of the Hill,” Baby Boomers and the Silver Foxes at or nearing retirement.
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Vincent Mangiapane, EA
Federal Analyst, Taxbrain