There is a big distinction between paying your taxes and planning your taxes; and knowing the difference can slice a good portion off what you owe the IRS every April. Young professionals should be aware that being a proactive taxpayer, someone who incorporates tax strategies into his or her financial decision-making throughout the year and not just at tax time, can pay off big.
Young professionals are often new to tax preparation and often don’t take full advantage of even some of the basic deductions, which can combine to produce some extra money in your pocket. Not every individual will qualify for a tax break, but every young professional needs to be aware of the opportunities. You may be transitioning from college to a career, buying a home, starting a family or all the above. If that isn’t enough to deal with, our tax situation is changing as well. Don’t stress out, here is a list of some important tax credits and deductions that are common for young professionals.
Got an Education?
Are you pursuing undergraduate or graduate school? Depending on how many classes you are taking, you may be eligible for the American Opportunity Credit, Lifetime Learning Credit, or the Tuition and Fees Deduction. Be aware that you can claim either the tuition and fees deduction or an education credit, but not both. If you took out student loans to pay for college you may be able to deduct up to $2,500 of interest paid. The loans must have been taken out solely to pay for education expenses such as tuition, fees, room and board, books, equipment, and transportation to attend an eligible educational institution.
Got a Job?
If you looked for a job in 2013, your job-hunting expenses may be tax deductible. Here’s the catch: expenses of looking for a new job in your present line of work are tax-deductible, even if you weren’t successful finding that dream job. However, expenses of looking for a job in a new line of work are not deductible. Deductible expenses may include fees paid to employment agencies or recruiters, costs of printing and mailing resumes, career counseling, and transportation costs to job interviews. The expenses are deductible only to the extent they exceed 2 percent of your adjusted gross income and are claimed on Schedule A.
Got a House?
A home loan or mortgage is the most obvious big tax break, but young professionals may not be aware that the interest paid on home improvement loans, home equity loans and lines of credit secured by a home are also deductible; so are loans on vacation homes if they are not rental properties. Property taxes are also deductible on Schedule A.
Got a Car?
If and when you purchase a vehicle, you may be able to deduct the sales tax paid on the purchase. This is claimed on Schedule A. Taxes paid with your vehicle registration are also deductible on the same schedule. You have to separate the taxes paid from the fees.
Got a Retirement Plan?
Retirements are a double benefit. They save money for eventual retirement and contributions can be deducted, the amount varying with the type. The Internal Revenue Service sets the limit on tax-free contributions to an individual retirement plan at $5,500 this year. For a SEP plan, you may contribute up to 25 percent of their net earnings up to $51,000.
Got a Small Business?
It’s simple, starting a business while you have a full- time job can significantly lower your taxes. The more tax deductions your business can legitimately take, the lower its taxable profit will be. Also, in addition to putting more money into your pocket at the end of the year, the tax code provisions that govern deductions can also yield a personal benefit: a nice car to drive at a small cost, or a combination business trip and vacation. It all depends on paying careful attention to IRS rules on just what is and is not deductible. Other deductible items include your cell phone, supplies, gadgets, office expenses, Internet connections etc.
Got a CPA?
Finally, you can deduct what you pay a CPA to prepare your taxes or for consulting if you have a business. A good tax preparer will also find other deductions for you. AT