Saving $100 on your taxes this year may not sound like much, but making smart tax moves over 40 to 60 years can easily add up to thousands of dollars in savings.
Not sure where to start? Here are several smart tax strategies experts recommend that can benefit you later on in life.
Fill Out Your W-4 Correctly and Check It Regularly
Did you recently get a new job? The W-4 form can be confusing — but it’s important you fill it out correctly if you want to avoid owing extra money come tax time.
“It might be beneficial to spend a few minutes with your tax preparer when completing it or making subsequent adjustments,” said Tammy Trenta, founder and CEO of Family Financial. “When filling out a W-4, Gen Zers should look to their most recently filed tax return for guidance and consider their current tax situation in case anything has changed.”
Changes that can impact your taxes include getting married, having children, going back to school, buying or selling a home, receiving an inheritance or opening a new investment account.
You should also check your tax status on your W-4 throughout the year to make sure it’s still accurate, said Mark Steber, chief tax information officer at Jackson Hewitt Tax Services. You can adjust the form as needed to get your desired outcome at tax time — whether you want a bigger refund or are looking to pay only what you owe.
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Invest In Multiple Retirement Accounts
Previous generations could rely — at least in part — on pension plans and Social Security. But Gen Zers may not have that same luxury. So it’s a good idea to invest in more than one retirement account, such as an employer-sponsored 401(k), a traditional IRA or a Roth IRA, said Steber.
And if you’re opening a retirement plan for the first time, you could be eligible for a Savers Tax Credit of up to $1,000 as a single filer, said Trenta. Keep in mind that eligibility and the amount you can claim depends on various factors set by the IRS.
So which accounts are right for you? If you’re in a lower tax bracket, consider investing in a Roth 401(k) or Roth IRA, said Jay Zigmont, CFP® and founder of Childfree Wealth. This lets you pay taxes now on the money you put toward retirement so that you can withdraw it tax-free later on.
And if you’re healthy, Zigmont recommends contributing to a health savings account (HSA). An HSA allows you to invest up to $3,850 as a single filer, which you may be able to put in the stock market depending on your plan.
“The bonus of an HSA is you get a tax break now, it grows tax-free, and as long as you use the money for medical expenses, it comes out tax-free,” Zigmont said.
Know What Deductions You Can Take
Steber recommends meeting with your tax preparer around July each year. This way, you can make any adjustments ahead of time and see what deductions you can take.
“For example, if you’re self-employed, there are many deductions that you’ll find yourself eligible for,” he said. “Not only will you be able to deduct business-related expenses, but you can also take a home office deduction.”
If you’re a student, benefits like the American Opportunity Tax Credit and Lifetime Learning Credit may apply. And those currently investing in cryptocurrency or stocks can deduct any losses on their tax return.
Take Advantage of Bear Markets
If you prefer to invest in stocks, Adam Nash — an adjunct personal finance lecturer at Stanford and CEO of Daffy.org — encourages young people to buy when the market is down.
“Investing is one of the only places where people buy when the price is high and sell when the price is low, which is the opposite of what you should do,” he said. “Young people should take advantage and buy low.”
But don’t become overly focused on timing the market. One of the smartest money moves young people can make is consistently spending less than they earn and putting extra cash toward long-term, tax-advantaged investments.
Keep Your Records Organized and Always E-File
Get into the habit now of keeping organized financial records, whether physically or digitally, said Steber. This can help you file an accurate tax return each year and keep you prepared in case of an audit.
“Additionally, always plan on e-filing your tax return instead of mailing a paper copy to the IRS,” he added. “This not only is safer but also ensures that your return is accepted and processed faster.”
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