If you're young and single, there may seem to be limited ways to legitimately and effectively reduce your taxes. But there are still some tricks you can have up your sleeve if you know where to look. Here's a handy guide to 5 tax-lowering choices for any young earner.
Get Health Care Tax Breaks. Young people tend not to think about their health care costs as much as older workers, but it can benefit you to do so now. If you have an employer health care plan, make sure that the premiums are paid before taxes are calculated (pre-tax contributions) to reduce your taxable income. Ask if your employer offers a Flexible Spending Health account (a so-called "Cafeteria Plan") that you can contribute to for tax savings. If you have a High Deductible Health Plan, consider opening a tax-free Health Savings Account at your local bank or through your employer. A single taxpayer can contribute up to $2,600 tax-free in 2015.
Choose Between Roth and Traditional. When choosing a retirement savings plan – whether its through your employer or via your own Individual Retirement Account (IRA) – you may have the choice between a traditional plan or a Roth plan. Basically, Roth 401(k) plans and Roth IRA contributions are made with money that you have already been taxed on, while traditional contributions are made before taxes are calculated. This means that you either pay the taxes on the money up front (Roth accounts) or when you withdraw it in retirement. If your tax rate is low (or zero), it may save you a lot of money to pay the taxes now and have tax-free money when you retire.
Don't Carry 401(k) Loans. Borrowing from your 401(k) can be a costly mistake in terms of lost earning potential, but it can be a deadly mistake for your finances if you can't pay it back. If you leave a job (voluntarily or not) before you've repaid the loan, the loan will become taxable income to you – possibly skyrocketing your tax bill. Instead, open a Roth IRA account if you may need to use it as an emergency fund in the future.
Try for Education Assistance. Be sure to use all your available education credits – including the Lifetime Learning Credit that can be used for an unlimited number of years. In addition, ask your employer about offering tuition assistance or reimbursement. Employers can generally reimburse you for a significant portion of your tuition, books, or related educational expenses without having to include it in your taxable income.
Use Capital Gains Rates. If your company includes stocks as part of your benefits package, consider making an "83(b) election" that allows you to pay taxes on the stocks' values today rather than in the future. Why? Because if the stocks rise in value, you will only have to pay taxes on the appreciation using lower capital gains rates. Similarly, if you have taxable investment accounts, avoid selling stocks that have been held for less than a year – allowing you to declare this income as long-term gains that are taxed at a lower rate.
If you're unsure how any of these items will affect your tax bill or how to successfully use them to reduce it, it may be beneficial to work with a qualified accountant or tax preparer, like one from The Callen Accounting Group, PLLC. But, whether you do it on your own or with professional assistance, the boost to your finances can be an investment that pays you back for a lifetime.