When you’re young, taxes can be scary. They don’t have to be. Here’s why.
When you’re young taxes can be scary. However, at some point you’ll have to get over those fears and start taking the necessary steps to get a handle of your tax health. Recently, I had the opportunity to have a conversation with Gene Austin, a Tax Advisor and Financial Services Professional at Austin Financial Strategies (www.financiallyfitt.net). Gene shared with me 7 tips that young professionals can use to help them keep their taxes on track. Check out his tips/suggestions below. I found them very useful and informative and hope you will too!
1. Be an Owner.
Owning a business or real estate has its perks as the IRS tax code provides many deductions for self-employed individuals and homeowners that can reduce your tax burden which are not available to renters and W-2 employees. In addition, the IRS also offers several retirement plans only available to business owners that may provide significant tax advantages.
Rana’s bottom line: Being an owner can help reduce your tax burden, so put that on your list of to-dos when making a financial roadmap
2. Be Proactive.
Taxes are complicated and the best way to be prepared is to make sure you make tax preparation a priority. Retain the services of a tax professional that’s open year round and try to do it now, long before the holidays and year end. If you wait until after you receive your W-2 next year it will be too late to take advantage of tax planning strategies that your tax advisor may have suggested.
Rana’s bottom line: No one will do this for you, but you. Remember, no matter what you do, you’ll need to file taxes each year. Don’t procrastinate.
3. Have a System.
Use a scanner, spreadsheet or find an app that will help you scan your expense records and store them digitally so you can always know where to find them. This will save stress at tax time and make the process smoother. Retain your returns and supporting documents for at least 3 years – preferably in the cloud where they won’t get misplaced or destroyed.
Rana’s bottom line: You need to be keeping track of what you are spending and all the items related to filing your tax paperwork. Don’t be that person who is scrambling to find your documents come tax time.
4. Don’t do it yourself.
The time you spend trying to save a few dollars may cost you more in the long run. Enlist the help of a professional who can carefully walk you through preparation and filing. Even if use a tax preparation program you can make a mistake or overlook a critical deduction. Plus, your time is valuable. To get an idea just how valuable your time is, if you’re a salaried employee, take your paycheck and divide it by the number of hours worked.
Rana’s bottom line: If you don’t know how to do taxes, why waste time trying to do them yourself? See this as an “investment” in your financial future.
5. Leave your retirement funds alone.
Never withdraw money from a company retirement plan when changing jobs or if you’re in a temporary financial pinch. Distinguish needs from wants and find the money someplace else. In addition to depleting your retirement nest egg, you could wind up paying as much as half of your account value in income taxes
and penalties if you take an early distribution.
Rana’s bottom line: Your retirement money is there to help you when you’ll need it. When you withdraw early, you actually incur tax penalties which will take away from how much you actually get! (Didn’t know that one, huh?)
6. Continuing education is key.
If you want to go back to school and get a post-graduate degree, there may be tax-based benefits to doing so. There are a various tax deductions and credits for pursuit of an MBA or education expenses associated with maintaining or improving skills used in your current job or self-employed business. Plus you’ll make yourself more marketable and boost your earnings as well!
Rana’s bottom line: When you’re planning to make continuing education a possibility in your near future, check to see how that will figure into your year-end taxes and long-term financial viability.
7. Make sure you have health insurance.
You WILL be penalized for not having health insurance. The IRS is going to impose a penalty for not being having health coverage of 1% of your adjusted gross income (AGI) when you do your 2014 tax return next year, and its going up to 2% in the following year, with rises scheduled to continue thereafter. In addition to not having hundreds of dollars taken from your 2014 refund you’ll also protect yourself from the risk of being hit with a huge hospital bill if you have a medical emergency.
Rana’s bottom line: If your job doesn’t have health insurance or if you are a freelancer, don’t skip out on trying to get it. It may be worth the investment to buy your own until you are covered by your place of employment.
Do you have any other tax tips for young professionals? If so, please share your tips in the COMMENTS section below!
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