This is a sponsored post written by me on behalf of Block Advisors. All opinions are 100% mine.
I’ve only met one person who legitimately gets excited about doing their taxes. This guy still does his taxes using paper forms and he would even go so far as say he “enjoys” doing his taxes.
I loathe it.
There are so many different rules, deadlines, exceptions, and documents to keep track of. This is not fun. I repeat: taxes are not fun!
Now that I’ve stated the obvious I want to look at taxes from a “glass half full” perspective. The big positive of taxes for millennials is that there are a number of tax advantages that they can take advantage of.
Being able to take advantage of tax breaks was one of the reasons I gave for year-round tax planning.
Today I want to go over some of the opportunities to save money on taxes. You may be surprised just how much opportunity there is to lower your tax bill.
1) 401k Savings
You can lower your taxable income by contributing to a 401k retirement account. For both 2015 and 2016 individuals can contribute up to $18,000 towards their 401k accounts pre-tax.
This can result in a big tax savings for millennials, especially if we are talking about a married couple who both max out their respective 401ks.
2) IRA Savings
Let’s not forget about IRAs, the other retirement account that can result in tax savings. For 2015 and 2016 individuals can contribute up to $5,500 to their IRA accounts.
Keep in mind that you will have to choose between a Roth and a traditional IRA. A Roth IRA does not lower your taxable income, but you do not have to pay taxes on withdrawals during retirement. A traditional IRA does lower your taxable income similar to a 401k account.
Keep in mind that you can contribute to a traditional IRA for prior year taxes all the way up until April 18, 2016 (for 2015 tax year).
3) HSA Savings
Anyone who regularly reads Young Adult Money knows that we LOVE Health Savings Accounts, or HSAs. In fact I even wrote a whole post about Why an HSA is the Absolute Best Retirement Account.
HSAs are great because they offer multiple tax advantages. They act similar to a traditional IRA in the sense that contributions are pre-tax, but they have more benefits than an HSA because you can pay for qualified medical expenses tax free. Meaning, for some medical costs you can both contribute to the account tax free and withdraw from the account tax free. Even better: HSAs never “expire” so they could theoretically be used for medical costs when you are in your 60s or 70s.
The 2015 the contribution limit was $3,350 for an individual and $6,650 for a couple or family. 2016 limits are $3,350 for an individual and $6,750 for a couple or family.
4) Student Loan Interest Deduction
Student loans can be a terrible drag on your finances, especially in your 20s and 30s when you are just starting your career. Since we are looking on the bright side with this post there are two areas where student loans are beneficial: motivating you to make more money (as described in my new book Hustle Away Debt) and the student loan interest deduction.
You can deduct up to $2,500 worth of student loan interest on your taxes. While many, myself included, think this should be a lot higher, it’s just one more way to lower your taxable income and save money on taxes.
5) Education Tax Credits
If you are in college or graduate courses there are some additional tax benefits available to you. First, there is the Lifetime Learning tax credit. This tax credit is for payments made to post-secondary institutions. It can include the cost of tuition, fees and even books and supplies if they were a condition of enrollment and were purchased directly from the school. The maximum credit is 20% of costs up to $10,000, or in simpler terms: $2,000.
The second credit is the American Opportunity tax credit. This credit can be claimed for tuition, fees, and other education costs. The credit maxes out at $2,500. As with most tax deductions and credits, there are some complexity and requirements to this tax credit, so check with a tax professional at Block Advisors to see if you qualify.
6) Charitable contributions
Another area to take advantage of tax savings is charitable contributions. If you give money to a qualified charity you can write-off your contribution. All you need to do is verify that the charity is qualified for tax-deductible contributions and keep good records of your contributions.
Get a tax receipt for any contribution you make to a charitable contribution. If you do not have a tax receipt, reach out to the organization or organizations that you donated to and ask for a year-end tax summary. Most nonprofits are happy to help you out – after all, they rely on charitable contributions from people like you.
How to Best Take Advantage of Tax Savings
The interesting thing about taxes is that most people really only think about them once a year. As you read through some of these tax savings you probably realized that it can take planning and execution throughout the year to fully take advantage of tax savings opportunities.
Many of these tax savings also have limits, restrictions, and rules that may impact your ability to take advantage of them. If you really want to save as much money as possible on your tax bill consider talking to one of the tax professionals at Block Advisors. They are available year-round for your tax questions and can help you put together a plan to maximize your tax savings.
Were you aware of all these tax savings opportunities? Do you need to make a better plan for saving money on taxes? What is your favorite tax benefit?
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My dad still uses the paper forms…not sure he enjoys doing taxes though. I took a tax course once and do somewhat enjoy trying to figure ways to reduce the amount I pay. Plus, I don’t mind doing taxes that much since I use the H&R Block Tax Cut software, it makes it a lot easier. I have friends who pay a good amount of money to a CPA to do their taxes and they only have W-2 and some stocks. As my taxes get more complicated, I would consider consulting an accountant or tax advisor though.
It stinks how low the phase out is on student loan interest. But otherwise I do or have taken advantage of all of these.
ferventfinance Very true (as well as other phase outs). It sucks even more when you live in a high cost of living area….I know most people wouldn’t go for it and it probably wouldn’t work but it’s a little unfair that the phase out is the same all over the country.
For charitable contributions, I think the savings only apply if you you are doing an itemized deduction instead of a standard deduction. (Correctme if I’m wrong.) Most millenials are probably doing standard deductions when they first start working because it’s higher.
The student loan interest deductions helped me this year. I would have owed a lot more money if it wasn’t for that.
Jason @ The Butler Journal Good to hear, Jason! Again, I just wish you were able to deduct more and it didn’t have a cap.
Aliyyah Very true, and that’s a good point. But there are millennials out there who are doing an itemized deduction and even if you weren’t I would argue it’s good practice to track it.
Andrew LivingRichCheaply ferventfinance Great points. Politicians are all talk when it comes to the student loan issue. If you really wanted to provide relief you would allow everyone to deduct it with no cap.
Andrew LivingRichCheaply Tax software is great for most people, but you’re right once taxes get a little too complicated it’s easier to justify consulting an advisor. =
jdonovanart Thanks for sharing! I hope this article helps at least one of them get a deduction they otherwise wouldn’t have received.
Yep, all of these are pretty useful. I do my own taxes, so I knew about them. The only caveat is that the charitable giving is only deductible if you itemize. Even some homeowners (including myself) don’t have enough to itemize.
I have used HSA for a very long time. It has helped me reduce my tax liability for the year. The best thing about HSA is that in the event of medical emergencies, I really don’t use my emergency funds because I have the money in HSA that I can use. Basically, my HSA is my emergency fund for medical-related stuff.
Yes! This post sums it up so nicely! As a CPA who handles taxes all day, I’m always shocked that individuals don’t understand how much in taxes they pay vs how much they could pay.
The real benefit comes when you start to combine these tax saving strategies. The best combo that has helped me in recent years has been to put extra cash into my 401k INSTEAD of my student loan debt. This combo helps me save ~30% on income taxes & I get to deduct the student loan interest. The alternative is saving only ~5% on interest, so it was a no brainer for me.
Great tips! I always do the 401K, HSA, non-deductible IRA and any deduction that is available.
I use TurboTax, and file my business taxes and personal taxes. That helps save money too.
DistilledDollar That’s a huge savings, and I agree that most people don’t think in these terms. People love travel hacking but tax hacking may be a much more profitable thing to spend time on!