Taxes for Millennials: 5 Deductions You Probably Didn’t Know Existed
Millennials are balancing a lot these days. They’re working hard while simultaneously caring for their kids and elderly parents alike — not to mention managing the household finances. No wonder many millennials could use a break. And they might just find it in some unexpected places, like tax deductions and credits.
While they’re busy holding the world on their shoulders, many millennials have missed key tax deductions and credits that could reduce their overall tax burden and help them save money in the long run. Fortunately, MoneyLion is here to help. We took a look at some of the tax deductions and credits busy millennials might not even know exist.
1. Student Loan Interest Deduction
For more than a few millennials, student loan interest is a scourge that keeps them financially overwhelmed. There may be some relief during tax time: They can deduct up to $2,500 — or the actual amount of interest paid, whichever is less — on qualified student loans.
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Writing for Kiplinger, Katelyn Washington describes this unexpected and incredibly helpful deduction.
“The interest paid can be on any qualified student loan that you took out for yourself, a spouse or someone who was dependent at the time you took out the loan,” she wrote. “And the best part is you can take the student loan interest deduction even if you don’t itemize deductions when you file.”
If you qualify for this deduction, it could be a real help. Keep in mind that income limits apply, and the deduction phases out at higher modified adjusted gross income levels.
2. Retirement Savings Contributions Credit
Millennials have gone from the generation being lambasted for their love of lattes and indie-pop music to fretting over their retirement accounts. While you wonder what happened in the decades since your last Death Cab for Cutie concert, you can also take advantage of the Retirement Savings Contributions Credit, commonly referred to as the Saver’s Credit.
Washington explains it succinctly: “Contributions to traditional IRAs and 401(k)s aren’t taxed, but some people who contribute to these (and select other) retirement accounts qualify for even bigger tax breaks,” she wrote. “Better known as the Saver’s Credit, the retirement savings contributions credit allows eligible filers to claim a tax credit worth up to $1,000 ($2,000 if married filing jointly).”
The size of the credit depends on a few factors, including your contribution amount, filing status and adjusted gross income. Unlike a deduction, this credit directly reduces the amount of tax you owe — dollar for dollar — which can make it especially valuable for savers who are eligible.
3. Energy-Efficient Home Improvements
Known as a progressive generation with a big heart, it’s not surprising that millennials would undertake home improvement projects to make their homes more energy-efficient. What is surprising? That more millennials don’t know about the tax credits available for projects like insulated windows, new doors or even a new roof.
According to H&R Block, you should investigate — on your own or with your tax preparer — credits including the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit.
4. Home Office Deduction
As millennials support their own kids and aging parents, they’ve become no strangers to side hustles or working from home full time. But if they’re strangers to the home office deduction they can claim, they need to get acquainted — and fast.
The home office deduction is for self-employed people who use part of their home exclusively and regularly for business — meaning a dedicated space used only for your trade or business. (Employees who work remotely generally do not qualify.) FileLater breaks down how the IRS lets you calculate this deduction.
There are two methods:
Simplified method: Deduct $5 per square foot of your home used for business, up to a maximum of 300 square feet, resulting in a maximum deduction of $1,500.
Regular method: Calculate actual expenses, such as mortgage interest, utilities and repairs, prorated based on the percentage of your home devoted to business use.
The site also offered a clear example for the simplified method: If you use a 200-square-foot room exclusively for your business, you could claim a deduction of $1,000 (200 square feet x $5). Not too shabby.
5. Homeowner Deductions
As more millennials achieve the major milestone of buying their first home, they’ll also benefit from a number of deductions and credits aimed at making homeownership more affordable.
Mark Steber, chief tax officer at Jackson Hewitt, lists a few of these credits and deductions:
Home mortgage interest deduction: This deduction lets you subtract the interest you pay on your mortgage loans from your taxable income.
Property tax deduction: This one is pretty self-explanatory, since you can deduct property taxes from your taxable income. However, the deduction for state and local taxes — including property taxes — is capped at $10,000 per return.
Home equity loan interest deduction: Through this deduction, you can deduct the interest you paid on qualifying home equity loans or lines of credit from your taxable income — but only if the funds were used to buy, build or substantially improve the home securing the loan.
By keeping thorough records and working with your tax preparer, your home sweet home can become a tax haven — well, kind of.
The Bottom Line
Keeping track of all the tax credits and deductions available to you is a major enterprise for anyone — especially busy millennials. But these deductions and credits touch on almost every area of your regular life, from paying student loans to setting up your house, and they can make tax time a little less cumbersome — and potentially less expensive.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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