(This is a guest article by Ashley*)
Twenty-somethings have plenty of ways to save on their taxes, but the unfortunate thing about this age group is that many seem to be very nonchalant about giving money away to the tax-man. They either think that taxes are absolutely unavoidable or they are too preoccupied to figure out how to squeeze some extra out of their hard-earned paychecks.
The following tips highlight that this doesn’t have to be the case. Twenty-somethings can qualify for several tax breaks and getting them is not as hard as you would think.
Deduct Interest On Your Student Debt
Many individuals in their twenties still have student loans. You can deduct the interest you have on student loans as long as the loan is qualified, you are not filing separately if married, and your modified adjusted gross income is not greater than $70,000 ($145,000 if married). Also, you cannot be claimed as a dependent on your parents or anyone else’s tax return.
Buy a Hybrid and Save on Taxes
Several hybrids are still eligible for this tax credit and it expires on December 2010. If you need to buy a car, consider getting one that is low on fuel-consumption so you can claim this credit and save some money. The list of eligible cars can be found here.
Where You Save for Your Home Matters to the IRS
A Roth IRA is an excellent account to save for your first home. You can use up to $10,000 to buy or build your first home without incurring an early withdrawal penalty as long funds in the account have not been held less than 5 years. Yes, the money in the Roth is pre-tax, but also any investment earnings you incurred you can avoid paying taxes on. Roth IRA typically yield higher interest rates than traditional savings accounts. In summary, can save at high rates of interest for your first home while avoiding some taxes and penalties.
Consider a Roth 401k
If your employer offers a traditional 401K and Roth 401k, you should consider saving in the Roth 401k because although the Roth does not grant a tax exemption while the traditional 401K does, young employees often end up in low tax brackets anyway. Also a Roth IRA does not tax withdrawals later on, which can be plus in terms of mitigating the threat of tax increases on the horizon due to bursting budget deficits and rampant government spending.
Save Your Receipts
Even if you don’t itemize your expenses you can deduct a wide range of items as long as you have your receipts to back up your claim. Teacher’s aides can deduct expenses that they purchased out of pocket and other people can claim a wide range of things from medical expenses to interest on student loans and even gas if you have moved more than 50 miles away from your current home.
Get a Health Tax Break
Some employers offer a health savings account (HSA). A salary deduction funds the account which means it is taken out pre-tax and then withdrawals made from this account can be used for paying for medical expenses. This can save you 20% to 35% on your medical expenses depending on your tax bracket because you used pre-tax money to pay.
Take Advantage of the Saver’s Credit
The Retirement Savings Contribution Credit will allow you to take a credit up to 50% of what you contribute to an IRA. This credit (unlike some other IRS provisions) actually encourages you to save for your retirement. Realize though that there are income limits on taking advantage of this credit which varies by your filing status. You must also be at least 18, not a full-time student, and someone else is not claiming you as a dependent. Check the IRS website for more details. This credit really helps young workers who early on in their careers have lower than average incomes.
Twenty-somethings should really be aware of all the ways they can save on the amount of taxes they pay. Keeping more of your income is one of the basic ways to head towards greater wealth.
*About the author: This guest post was provided by Ashley, who works for TaxDebtHelp.com, a site that provides help with IRS tax debt through its tax relief service offerings and self help articles for taxpayers facing major IRS tax problems