Managing receipts and claiming deductions are considered boring by almost everyone — least of whom Generation X, who may be the first-timers when it comes to filing taxes or experiencing alterations in their finances.
Though mistakes might sometimes be inevitable, it’s not a reasonable defense in case the tax department comes through your door. Take a look at these 8 common mistakes Millennials tend to make when organizing and filing taxes.
1. Avoiding a Tax Professional (If There Is A Need)
Essentially, not everyone requires a CPA or any other professional to file taxes. In fact, if your taxes are easy to understand, then you can file them yourself without any difficulty. But if you are not able to handle your taxes, then not employing a tax professional or a CPA could be one of the key mistakes you can make. These professionals carry expertise in surpassing legal loopholes, tax credits, and exemptions, and they will work to help you in your particular situation and obtain you the highest return.
A simple rule of thumb:
Challenging taxes? Seek expert guidance. Make your best efforts to avoid costly mistakes.
2. Spending the Tax Reimbursements
It is common that before people have even got their tax refunds, they’ve already decided that how they’re going to spend that money. More often, it is on an asset like a car, clothes, or electronics, which falls under the category of depreciating assets. If tax season is exciting to you only because of this reason, then you must avoid spending your refund. Even though this is not what people want to hear, but it is vital that you should be good at finding financially constructive uses for this money such as tackling tax debt, investing, making absolute necessary purchases.
3. Permitting High-Interest Debt to Hang Around
It is not good to avail a high-interest debt in the first place, but if there is such a situation, then carrying it for a longer time period can work like a leech, making you dry to the bone. High-interest debt can be of car loans, student loans, or a mortgage and you should use your tax refund to knock them out fast.
This just relies on your personal financial situation. Your first step is to see if you qualify for different ways to lessen your interest rate and/or monthly payments, including a student loan forgiveness program, mortgage refinancing, etc. If you stand no chance then paying the debt off quickly might make more sense. Simply, put your refund in savings, plan monthly withdrawals, then take small portions of this amount and add to your regular payments every month. Implement this strategy for your debt that you want to repay asap.
4. Ignoring Retirement Accounts to Shrink Your Tax Bracket
Taxes are considered as one of the major obstacles regular people come face to face when trying to build wealth. For instance, a yearly investment for years ends up in half if it is subjected to a tax bracket with maximum percentage deduction. It is important to see the benefits of investing to the max inside of tax-advantaged accounts like 401Ks and 403Bs so that you can minimize your tax bracket.
5. Not Claiming Capital Losses
It doesn’t matter whether you invest within your retirement accounts, or trade on investing platforms, if your capital losses offset your capital profits, then you can claim the difference as a tax deduction. Let’s say you want to trade penny stocks – and it is not like penny stocks are a bad investment, but maybe you lost $2,500 with no other capital gains this year from other investments. Your $2,500 loss on risky stocks can get eligible for deduction from your other income. In fact, you can actually deduct up to $3,000 of Capital losses in any tax year. Anything exceeding $3,000 can carry over to the next tax year.
6. Not Claiming Mortgage or Student Loan Interest Payments
Both student loan and mortgage interest payments are usually tax deductible, but within specific limits. In case you qualify for these deductions, never leave them unclaimed. Otherwise, this could lead to costing you thousands of dollars at the time tax filing.
7. Not Utilizing an FSA for Childcare Expenses
Many employers offer the benefit of FSA, and if your employer does that, then there is no excuse to not take advantage of that opportunity. The money saved in Flexible Spending Accounts is tax-advantaged, which can be further used for the fulfillment of costs associated with health and dependent care expenditures. The amount saved inside your FSA is acquired from your pre-tax income, which reduces your yearly income by the subsequent amount. But, there are these set time limits on making the use FSA funds so, you need to ensure that you don’t lose the saved money.
8. Not Taking Advantage of the Cost of Moving
When it comes to Millennials, they move more as compared to other groups. And a myriad of them move because of the career opportunities. How many of you are aware of the fact that if you change residences due to work, then you can claim the moving expense as a tax deduction? The IRS confirms that if you fulfill certain requirements, then your work-related move costs may get qualify for tax-deduction.
Can you relate to one of these tax-time mistakes? Share them with us in the comment section.