Tax Planning for Millennials

September 15, 2017   |   Blog

a woman is holding a piece of paper and pointing at it in a conference room

Millennials are quickly taking over the workforce. It’s easy to adopt a do-it-yourself attitude however in many cases consulting a CPA for tax strategies can be extremely beneficial to eliminate the chance of a missed opportunity.

Finance a first-time home purchase
Finding the money for a down payment on a home can be daunting and it can seem tempting to seek alternative source, like tapping into a 401(k) from an old employer. An early distribution form a retirement plan can result in a 10% early-withdrawal penalty, but there’s a smarter approach that avoids penalties. By rolling that old 401(k) into an IRA you can take distributions for a first time home purchase (up to $10,000) and are not subject to the early-withdrawal penalty. However, it is important to be aware that those funds distributed will be included in income and subject to tax if they were contributed pretax.

Consider claiming educational expenses as a business deduction
Employees or those who are self-employed are able to claim educational expenses as an itemized business tax deduction. Employees may take a miscellaneous itemized deduction subject to 2%-of-adjusted-gross-income limitation as a work-related educational expense. The self-employed may deduct educational expenses as ordinary and necessary business expenses from gross self-employment income. The expenses MUST be for education that maintains or improved skills required in one’s trade or business. The maximum lifetime learning credit is $2,000 per year based on qualifying expenses of $10,000 for the year, with zero carryover. However, as a business or itemized deduction can take into consideration higher expense totals.

Take advantage of a cafeteria plan
Internal Revenue Code Sec. 125 allows employees to receive some of their compensation pretax for qualified expenses. CPAs might advice their millennial clients of the potential to avoid paying income tax and Federal Insurance Contributions Act tax (7.65%) on contributions to these plans. Cafeteria plans often include flexible spending arrangements for health care or dependent care expenses and qualified fringe benefits. These could save hundreds of dollars a year in taxes.

Manage student loans for optimal use of above-the-line deduction for interest paid
The general rule of thumb is to pay down student loans as early as possible because they cannot be discharged in bankruptcy and generally charge higher interest rates than safe investments. Although an adjustment to adjusted gross income (AGI) is available for student loan interest paid, it’s worth reinforcing that this deduction is limited to $2,500 and phases out at AGIs of $65,000 to $80,000. Student loan consolidation can reduce monthly payments as well as the total amount paid over the life of the loan. It’s important to take an inventory of all loans and consolidate only those current loans that are unqualified, so as not to lose credit for qualifying payments already made to date.

Addressing investment concerns
Young taxpayers may desire to invest, but find it difficult to pull together all the necessary funds. Converting a 401(k) to a Roth IRA is extremely beneficial. Investing is more tax-efficient within a tax-advantaged retirement accounts, such as a Roth IRA. This way when the funds are distributed in retirement they are not taxed.

Help sole proprietors understand their tax obligation
We see a lot of millennials that are creating craftsman-like businesses. It is extremely important to be aware of the importance of properly documenting ordinary and necessary business expenses. Time should be spent discussing listed property (furniture, equipment, and other property that might be fully deductible in the year of acquisition) as well as maintaining logs for business vehicle mileage and a detailed log of meals and entertainment.