Congratulations! You've got your first major job. Unfortunately, you've also got new tax obligations. Welcome to the workforce.
You probably want to deal with your taxes as quickly as possible. Most people do, regardless of their age. Unfortunately, if you breeze through tax forms, you might miss potential money-saving strategies like the ones below.
1. Review Withholding
Your W-4 form tells your employer how much of your salary you want to have withheld for taxes throughout the year. If you withhold too much money, you'll receive a refund when taxes are filed.
That sounds great – until you consider that you're asking the government to hold on to more of your money and give it back to you later. Why not withhold the correct amount and invest the money instead of letting the government earn interest on it?
The enactment of the Tax Cuts and Jobs Act (TCJA) is reason enough to review your withholding, but it's also wise to update it to accommodate major life changes throughout the year (marriage, birth of a child, raises, etc.) that change your tax filing status or income.
2. Consider Itemizing
The TCJA raised the standard deduction and makes it less likely that you'll itemize – but that doesn't mean that itemizing is the wrong choice for you. After looking over Schedule A, see if itemizing is worth the effort.
3. Look for Tax Credits
Tax credits are the most valuable breaks of all because they subtract directly from your tax bill. Younger families may benefit from the increased Child Tax Credit, while lower-income taxpayers may qualify for the Earned Income Tax Credit (EITC) or the Retirement Savings Credit.
4. Review Above-the-Line Deductions
Above-the-line deductions, or deductions that appear in lines 23-35 of Schedule 1 and are attached to your Form 1040, are valuable because they directly reduce your taxable income and you don't have to itemize to claim them. The TCJA eliminated some above-the-line deductions and modified others, but savings are still available on educator expenses, student loan interest, and other specific expenses.
5. Contribute to a 401(k)
If your employer offers a 401(k) program, take advantage of it to the extent possible. You'll defer taxes on that income while saving for your retirement and taking the greatest advantage of compounding over time. It's a win-win-win.
If your employer offers a matching 401(k) program, contribute at least up to your employer's matching limit. Otherwise, you are literally turning down free money.
6. Look into a Roth IRA
A Roth IRA is an alternative retirement program that is funded with post-tax dollars. Roth IRAs are useful retirement tools in that you can take the contributions out anytime without penalty. If you are likely to be in a higher tax bracket in the early years of retirement – a decent bet for anyone starting out on a first job – you can take the tax hit now with a Roth IRA and save money later.
7. Understand Self-Employment
Are you a proud new member of the gig economy? As an independent contractor, you have different tax deductions available to you (such as the ability to deduct the "employer's" portion of self-employment taxes) and different responsibilities (such as paying quarterly taxes). Make sure that you understand the unique tax issues associated with self-employment.
8. File on Time
You have until Wednesday, April 15, 2020, to file your tax forms for the 2019 tax year. Beat the deadline and avoid costly penalties.
9. Health Savings Accounts (HSA)
If your employer offers the option, consider contributing to an HSA. The funds grow tax-deferred and may be used tax-free for qualified medical expenses.
As unpleasant as it may be, take some time to review your taxes for potential savings. Every bit of savings counts, whether you save enough to buy a Lamborghini or a latte.
Failing to pay your taxes or a penalty you owe could negatively impact your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.