*Updated for 2016
Your twenties and thirties are an exciting time.
Your career is taking shape, you may be purchasing a home. You may even be starting a side business or starting to invest.
As you start to make more money, you may discover you’re also paying more taxes.
It’s important to plan ahead, so you get all the tax breaks to which you are entitled.
These tax issues, from automobile expenses to zero tax refund, may affect you as a working millennial:
You drive your car almost every day. Some of those miles are probably deductible.
You can take the standard mileage deduction in most cases when you use your car for business (as a self-employed person or as an employee), when you drive to the doctor, during a deductible move, or when you’re volunteering for a charitable organization.
For mileage as an employee or for medical purposes, your total expenses in each category must exceed a threshold before you get a deduction.
The standard deduction for use of a car in 2016 is 54 cents per mile for business miles, 19 cents per mile for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.
Be sure to keep written records with date, distance driven and purpose.
Now that you’re making money, you may find people wanting to borrow from you.
If you can’t get them to repay, you had an actual debt, and if you made efforts to collect, you may be able to deduct the bad debt as a short-term capital loss.
Capital gains and losses
Plan your capital gains and losses – before you sell.
Capital assets are most assets you own that are not for business. Your car, boat, and investments are all capital assets.
If you’re selling any capital asset at a gain, pay attention to the minimum holding period for a long-term capital gain if possible.
If you sell an asset one year or less after you purchase it, you have a short-term gain.
Hang on until “more than” one year; for example, one year and one day, and it’s a long-term gain.
The tax savings can be very significant.
Every child you claim as a dependent reduces your 2016 taxable income by $4,050. You’ll get that full-year exemption, even if your child is born on New Year’s Eve.
Don’t forget to claim qualifying foster children, a child who lives with you but is away at school, and in some cases a child you support who lives with the child’s other parent.
You may also be able to take a dependency exemption for your parents who you support, or for nonrelatives who live with you, if they meet the IRS requirements.
Effective and marginal tax rates
As your income increases, it’s important to know the difference between effective and marginal tax rates so you can plan effectively.
Your effective tax rate is the percentage of your total taxable income that you pay in income taxes.
Your marginal tax rate is the rate you pay on the next dollar you earn. Your marginal rate is usually more helpful in tax planning.
For example, if your marginal rate is 25 percent, you know that if you earn another $100, you must pay $25 of it in income taxes.
Don’t forget Social Security and Medicare taxes, as well as state taxes.
Use this calculator to determine your tax rate.
Employer-sponsored retirement plans
If your employer has a retirement plan, be sure to sign up for it as soon as you qualify.
The minimum you should contribute to the plan is the amount your employer will match.
Home office deduction, reinvented
The home office deduction has always been a little touchy.
Sure, it’s a great deduction for people who work at home, but it’s also a hassle to calculate and some people say it can be a red flag for audits.
Meet the new, improved home office deduction.
If you qualify, you deduct $5 per square foot for up to 300 square feet, for a maximum simplified home office deduction of $1,500.
You may be able to deduct insurance premiums you pay for yourself and your family.
If you’re self-employed, you can deduct 100% of self-employed health insurance premiums and dental insurance premiums, even if you don’t itemize deductions.
You can also deduct long-term care insurance premiums, up to a limit.
Your deduction is also limited by your net self-employment income after retirement contributions and the deduction for self-employment tax.
Looking for a new job can be expensive, especially if you pay agency fees or you travel to interview for a job.
If your total miscellaneous itemized deductions, including job-hunting expenses, exceed 2% of your adjusted gross income, you may be able to take a deduction for qualified expenses.
Mortgage interest deduction
The deduction for home mortgage interest is a powerful incentive to buy a home.
You can deduct interest on up to $1,000,000 total acquisition debt on your main and secondary home.
Your “secondary home” can be a cabin on the lake, or a motor home, as long as it has eating, toilet, and sleeping facilities.
You can also deduct interest on a home equity loan, but be careful. You can only deduct interest on $100,000 of home equity debt.
Most people know that the sale of a residence is not usually a taxable event.
Make sure you play by the rules if you’re selling a house that has gone up in value, however, or you could owe a big tax bill.
You and your spouse generally need to live in the house and own it for two out of the last five years to claim the $250,000 exemption ($500,000 if married filing jointly).
As with most tax issues, there are exceptions for special circumstances.
Whether you make some freelance income on the side, or you’ve left the corporate world completely and are running your own show, you may be self-employed in the eyes of the IRS.
You’ll pay self-employment tax, at 15.3 percent of your net income, on your income tax return.
The good news is that you should also be able to take other business deductions, such as computer expenses, home office expenses, vehicle expenses and travel, and so on.
Zero tax refund
We all love a good refund, but there’s only one thing better – being able to keep and use your own cash in the first place.
With good tax planning, and the help of TaxAct, you can have just the right amount of tax withheld and make the best estimate for your quarterly tax payments, if necessary.
That way, you have neither a big tax bill nor a windfall when you file your tax return.
It’s your money. The closer your refund is to zero, the better you did at keeping your money in your wallet all year. Tweet this