If there’s one thing we all have in common, it’s that no one enjoys filing taxes. But, according to recent studies, millennials feel particularly anxious about the annual process.
A recent online study by NerdWallet and Harris Poll found that of more than 1,600 U.S. adults, 80% of taxpayers ages 18-34 who filed taxes last year and planned to file this year say they’re fearful about some aspect of preparing their taxes. That’s the highest of any age group. These fears include making a mistake (22%), not getting the biggest possible refund (17%) or paying too much in taxes (13%).
As Benjamin Franklin famously said, there are only two certainties in life: death and taxes. So, if you’re a millennial who is not exactly comfortable when it comes to filing your taxes (or you know one with this fear), here are a few tips to boost both knowledge and confidence when tax time rolls around.
1. Keep records of expenses, qualifying deductions and donations.
To stay organized and alleviate fears of overpayment come tax time, use an online financial account aggregator to classify and tag all your transactions throughout the course of the year as they’re incurred. This is particularly important if you’re an independent contractor or freelancer. Being able to search and filter for these items at year-end is an enormous time-saver.
It is also helpful to take pictures of any tax-related receipts and tag them immediately after scanning so that they’re searchable and filterable at year-end. Better yet, seek out a solution that can perform OCR on your receipts to add or suggest tags based on the vendor. If you’re unsure as to what receipts might be relevant to your taxes, the IRS has a handy overview of credits and deductions available to individual taxpayers.
Note that if you’re a wage earner (W-2) with a considerable income, don’t hold out for any tax benefits from job-related expenses. The IRS puts a patronizing floor on the deduction of unreimbursed employee business expenses: not only do you have to have enough in deductions to be itemizing in the first place, the IRS only allows taxpayers to deduct the portion of any expenses which exceed 2% of Adjusted Gross Income (AGI). For instance, if you make $100,000 annually, you can only deduct the portion of your expenses which exceed $2,000. It’s unlikely you’d accrue more than that, even with a home office.
When it comes to donating non-cash items to places like Goodwill or the Salvation Army, you’ll generally pull up, drop your stuff off, and immediately receive a half-filled out slip of some sort (if you’re lucky). But know that this is not going to be enough information for either you or your tax preparer come filing season. In almost all cases (with the exception of very large donations, like cars) these charitable organizations place the responsibility on you, the donor, to assess the value of each of the items you donate. It’s this value assessment that will serve as the basis of your tax deduction later. As a best practice, take a picture of everything you donate right before you donate it, then take a picture of whatever written slip or other documentation you receive once you drop-off your goods. Finally, tag both with meaningful information immediately, including your estimated valuation at the time.
2. Understand your withholding amount.
Don’t buy the hype: receiving a tax refund is not a good thing. Retailers don’t help with the wave of targeted advertising that comes every spring, inviting taxpayers to spend their refund one way or another. Unfortunately, too many millennials don’t have a true notion of just how much money is being withheld from each one of their paychecks, and therefore see tax refunds as a windfall, rather than the reality: a return of the money they overpaid needlessly, effectively floating the government an interest-free loan. Working with a tax professional, you can target a more specific withholding amount and/or estimated payment schedule, so you can see the benefits of larger paychecks year-round, instead. Self-employed individuals can also benefit through online bookkeeping and expense tracking, as they can more closely target (at a moment’s notice) appropriate estimated payments on a quarterly basis.
If you get married during the year, don’t forget to change your withholding at the beginning of the year. The IRS only cares about your marital status on the very last day of the year, which dictates your filing status for that entire tax year. The general rule is for the spouse earning the higher income to claim the maximum number of allowances (generally one for each spouse, and another for each dependent child) leaving the other spouse to claim zero allowances. Note that accountants can calculate far more precise recommendations in most cases. Many spouses enter into a marriage each claiming a single allowance with their respective employers and if they don’t change that, they end up under-withheld when it comes time to file—sometimes yielding a considerable balance due. Therefore, if you know you’re going to get married during the course of a given year (or more sadly, divorced), make sure to notify your payroll department with any withholding changes on January 1st.
3. Hire a tax professional.
With do-it-yourself tax preparations services abound, it might be tempting to file on your own. But, if you have a more complex financial situation (marriage, kids, self-employment, investments, etc.), it is by far and away worth it to hire a professional. For more information on why; check out It Doesn’t Take a Genius to Understand the Need for Tax Professionals.
And if you’re a tax professional looking for tips on working with millennials, keep an eye out for my next blog post on three ways you can better reach the millennial population.