Millennials, who range in age from 25 to 40 in 2021, are in a life phase of ongoing change and evolution — from students to graduates to independents to spouses. Navigating the in-betweens of these many major milestones is no cakewalk.
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In addition to the standard financial commitments that accompany such major milestones, millennials must remain mindful of how their ever-shifting circumstances influence their tax obligation. That’s especially true for tax year 2020, when the coronavirus pandemic drove 2.7 million U.S. adults to move in with a parent or grandparent in March and April alone, according to a Zillow analysis of Census data.
Here are five common tax mistakes made by millennials to watch out for.
1. Filing as a Dependent When You’re Independent (and Vice Versa)
When it comes time to file your taxes, it’s worth it to double-check with your parents before signing on the dotted line. If you still live at home or get any kind of financial assistance from your parents, be certain that you’ve elected the right filing status.
Parents can claim qualifying children who were under age 19 on Dec. 31, 2020 as dependents, or under age 24 if they were full-time students who lived with their parents for more than half the year, and the parents provided more than half of their support.
In the event you incorrectly claim yourself as a dependent, your parents will miss out on any dependent tax credits or education deductions or credits they might legitimately qualify for. If, on the other hand, you incorrectly forgo claiming yourself as your own dependent, you’ll disqualify yourself from claiming deductions and credits you might be entitled to, and you might lose out on part of your standard deduction as well.
The standard deduction — that’s the amount by which you reduce your taxable income if you don’t itemize deductions — is $12,400 for tax year 2020. The maximum you can claim as a dependent is $1,100 or your earned income plus $350, up to a maximum of $12,400, whichever is larger.
If your parents claim you, you must check the box on your own tax return that indicates someone else has claimed you as a dependent. The box is located in the Standard Deduction section of Form 1040.
Most millennials worry that Social Security won’t be there for them when they retire, and 20% say that COVID-19 has reduced their confidence in their ability to retire comfortably, according to a study by the Transamerica Center for Retirement Studies. Yet, 38% aren’t yet saving for retirement. If you’re among that group, there’s no time like the present. Start now, and you might even qualify for a break on your 2020 taxes.
Two common types of retirement savings are individual retirement accounts and employer-sponsored 401(k) plans. Both reduce your taxable income.
You can contribute up to $6,000 per year to an IRA account, even if you participate in another retirement plan at work[x]. As long as your modified adjusted gross income is $65,000 or less ($104,000 or less if you’re married filing jointly), you can deduct your whole contribution, up to the $6,000 limit. The deduction phases out at $75,000 MAGI ($124,000 for married joint filers). You have until May 17 to make contributions that you can deduct on your 2020 tax return.
Please note that while the IRS has announced that the federal income tax deadline for individuals is May 17, 2021 for the 2020 tax year, state deadlines have not changed. So make sure to confirm your state’s due date before you file.
Contributions to a 401(k) work a little differently. They’re deferred from your paycheck before taxes are taken out, so you never see the money and you don’t have to claim the deduction. It’s too late for contributions to reduce your 2020 taxable income, but this is the perfect time to start contributing — or increase your contributions — for next year.
One of the ways the U.S. government supports higher education is by giving those with student loans a tax break based on how much interest they’ve paid over the course of the year. Unfortunately, millennials, the student loan poster children, might forget to claim this deduction.
You might be able to deduct student loan interest payments up to $2,500 on a qualified student loan, according to the IRS. Like most deductions and credits, there is an income limit to claim this deduction. It begins to phase out at $70,000 adjusted gross income for single filers ($140,000 for married couples filing jointly) and is eliminated entirely at $85,000 AGI ($170,000 for married joint filers).
It’s worth noting that you don’t have to file an itemized return in order to qualify for this deduction.
4. Miscalculating Deductions for the Cost of a Mandatory Military Relocation
Prior to 2018, taxpayers were allowed to deduct moving expenses for qualified relocations for their work. Although the relocation deduction was eliminated for most taxpayers, it’s still available to active-duty members of the military.
The deduction allows you to claim unreimbursed moving expenses you incurred due to a military order that resulted in a permanent change of station. The following relocations qualify for the deduction:
A move from one permanent post to another
A move from your last post to your home or a nearer location in the U.S.
Allowable expenses include reasonable costs of household and personal items, storage, lodging (but not meals) and other expenses directly related to your move.
The deduction is an adjustment to your income, so you don’t have to itemize deductions to claim it.
This last one is a mistake that many people, not just millennials, are guilty of making. Come tax time, we’d all rather get a refund than owe money to the IRS, but good financial practices suggest that we try to keep our refund amount as close to $0 as possible.
For tax year 2019, the average tax refund was $2,888, as reported by the IRS in July 2020. This means people are giving the government an interest-free loan, said Certified Financial Planner Scott Alan Turner. Millennials who adjust their W-4 withholding to where they get as close to zero on their refund as possible will take home extra cash they can apply towards debts, savings or investing, Turner added.
If you aren’t sure how to set your W-4 withholdings, the IRS has a calculator to get you started.
