As a young adult, you may be just starting out in the workforce and learning the ins and outs of taxes for the first time. Preparing for taxes can seem daunting, but it doesn’t have to be. With a little bit of planning and knowledge, you can make sure you’re taking advantage of all the tax benefits available to you, minimize your tax bill and maximize your tax returns.
Gather Necessary Documents
The first step in preparing for taxes is to gather all of the necessary documents, including your W-2 form from your employer, any 1099 forms for any freelance or independent contractor work you did, and any other income-related documents. You’ll also need any information on deductions or credits you’re eligible for, such as charitable donations, mortgage interest, or student loan interest paid.
Maximize Deductions and Credits
Next, take a look at your tax bracket and determine which deductions and credits will have the biggest impact on your tax returns. For example, if you’re in a lower tax bracket, taking the standard deduction may be more beneficial than itemizing deductions. However, if you’re in a higher tax bracket and have a lot of deductions, such as state and local taxes, it may make sense to itemize. It’s always best to consult a tax professional or use a tax calculator to determine the best approach for your individual situation.
One of the most beneficial tax breaks for young adults is the American Opportunity Tax Credit (AOTC). The AOTC is a credit of up to $2,500 per eligible student for the first four years of higher education. To be eligible for the credit, you must be paying for tuition, fees, and other expenses for yourself, your spouse, or a dependent.
Another tax break to look out for is the Saver’s Credit. This credit is worth up to $1,000 for individuals and $2,000 for married couples filing jointly. It’s designed to help low- and moderate-income individuals save for retirement. If you contribute to a 401(k) or another retirement account, you may be eligible for this credit.
If you’re self-employed, don’t forget to take advantage of the self-employment tax deduction. This deduction allows you to deduct half of the self-employment tax you paid during the year. This can provide significant tax savings and maximize your tax returns for those with a high amount of self-employment income.
Finally, it’s important to plan ahead and save for taxes throughout the year. Set aside a portion of each paycheck or gig payment for taxes so you’re not caught off guard come tax time. You can also make estimated tax payments throughout the year to avoid underpayment penalties and maximize your tax returns.
Preparing for taxes may seem daunting, but it doesn’t have to be. By gathering all necessary documents, maximizing deductions and credits, and planning ahead, you can ensure you’re paying the least amount of taxes possible and get the most out of your tax returns. Remember to consult with a professional if you have any doubts or difficulties with your tax returns.