A little cash goes a long way––especially for millennials––so why not make sure you take advantage of the best tax credits (dollar for dollar tax reductions) and deductions (reductions of taxable income) the IRS has to offer? These five tax breaks could help increase your refund or reduce the amount of tax you owe.
1. Earned Income Credit
The Earned Income Credit (EIC) is designed for low-income earners who are at least 25 years old and cannot be claimed as a dependent of another. The EIC is perfect for millennials who have earned income that does not exceed the IRS threshold for the given tax year.
The best part? The EIC is a refundable credit, which means that if the EIC is greater than the tax due, you will be refunded the difference. For example, if your total tax is $1,000 and your EIC is $1,500, you will receive a $500 refund that you could use to treat yourself to that watch or outfit you had your eye on, or even to save for retirement…
2. Retirement Savings Contribution Credit (Saver’s Credit)
It’s never too early to save for retirement, and it’s a no-brainer if you qualify for the Saver’s Credit. To be eligible, your adjusted gross income (AGI) must be lower than the IRS limits for that tax year. The credit is equal to 50%, 20%, or 10% of your contribution, depending on your AGI.
The Saver’s Credit is a nonrefundable credit, which means it can only reduce your tax to $0 (even if the credit exceeds the total tax). The good news is, the credit is in addition to the tax deduction you are entitled to for the amount of your contribution, provided that the contribution was not made with after-tax dollars (e.g., Roth IRA).
3. Student Loan Interest Deduction
The student loan interest deduction is probably the only positive thing to come out of that massive pile of debt you were left with after graduation…aside from your education, of course. If you do not have any student loan debt, congratulations! I’m envious of you. If you do have student loan debt, take solace in the fact that you can deduct the interest paid on your student loans during the year (principal payments are not deductible, sadly).
As long as you don’t make over a specified amount (set annually by the IRS) and you can’t be claimed as a dependent of another, you are entitled to the deduction, which is limited to $2,000 per year.
4. Tuition Credits
There are two credits offered to taxpayers with tuition costs: the American opportunity tax credit (AOTC) and the lifetime learning credit.
AOTC – The AOTC can only be claimed for your first four years of college. You must be enrolled at least half-time and have a modified adjusted gross income (MAGI) that is under the IRS limit for the year. The AOTC is a partially refundable credit worth up to $4,000 per student, with 40% of the credit being refundable (up to $1,000).
Lifetime Learning Credit – The lifetime learning credit has no limit on the number of years you can claim the credit. You can’t be a dependent of another and your MAGI must not exceed the IRS limit for the year. The lifetime learning credit is a nonrefundable credit worth up to $2,000 per return.
The AOTC and lifetime learning credit are mutually exclusive, therefore only one may be claimed in a given tax year.
5. Moving Expenses
Moving to a new location for work? Moving expenses such as transportation, storage, travel, lodging, etc. may be deductible if you meet the following requirements:
- Move related to the start of work – your move must closely relate to the start of work in both time (within a year of starting your job) and place (distance between new home to new job must not be more than distance between old home and new job).
- Distance test – your new job must be at least 50 miles farther from your old home than your old job was from your old home. If you are moving for your first job, your new job must be at least 50 miles away from your old home.
- Time test – as an employee, you must work full-time for at least 39 weeks in the first 12 months at your new job. If you’re self-employed, the requirement is the same, but you also must work a total of at least 78 weeks in the first 24 months.
The eligible expenses serve as an adjustment to income, therefore lowering your taxable income.
Be Organized and Maintain Good Records!
Keep these credits and deductions in mind as you prepare for the current tax season. Create a separate folder for all your tax-related documents and statements. Spend a couple hours each month reviewing your finances and tax situation. This will ensure that all records are organized and in one spot come tax time, allowing the focus to be directed to maximizing your refund or minimizing your tax due.
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Nick Aiola is a CPA and the owner of Aiola CPA, PLLC. Nick and his team provide the highest quality of tax and advisory services to real estate investors and individuals and business owners in the real estate industry.
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