December is a busy month, and taxes -- understandably -- are not top of mind for most people. But in order to score the largest possible tax refund come April, tax moves must be made before the clock strikes midnight on Jan. 1.
The average federal tax bill was nearly $9,000 in 2014, with over $1.3 trillion paid across almost 148 million tax returns. Everyone loves a tax refund, and 80 percent of Americans received one, but some taxpayers left money on the table. According to the IRS, about 3 percent of tax returns had mistakes that resulted in a smaller tax refund than was possible.
Inaccuracies are one thing, but proactive tax planning in December can bulk up a tax refund. If you’re a cash-strapped millennial, you’re more likely to experience certain tax-altering life events and earn self-employment income. So, reducing your tax bill is key. The best part is, it isn’t as difficult -- or boring -- as you might think.
Between holiday parties and travel plans this month, schedule some time to reflect on 2015. If you fit into one or more of the following categories, you can save big bucks by taking advantage of the corresponding end-of-year tax strategies.
“The freelance economy seems to be where a lot of millennials end up, and they do have more complex tax situations,” says Jody Padar, author of “The Radical CPA” and CEO of New Vision CPA Group in Mount Prospect, Illinois.
Business owners and freelancers can take advantage of holiday sales to purchase computers or other expensive office equipment, which are deductible for tax purposes. Even a new car could count as a business expense for Uber or Lyft drivers. “A lot of them are very surprised that you can actually write off a certain amount of your car, up to $25,000 for any SUV or vehicle under 6,000 pounds,” says Lisa Greene-Lewis, a certified public account and TurboTax tax expert.
Padar recommends that you get organized before the end of the year by uploading receipts to an app like Hubdoc, which turns financial documents into digital files that are easy to store. She also says it’s smart to open a separate account for business deposits and expenses. “Keep business expenses separate from personal expenses because the biggest audit flag is going to be when you’re stuff is all commingled,” Padar says.
Newlyweds need to be aware of the change to their filing status for tax purposes, advises Greene-Lewis, as well as any deductions from the wedding itself. “If you were married in a historic monument, you can actually deduct what you paid for your venue,” she says. Donating a wedding gown can be a deduction as well, which may be worth doing before the end of the year.
A multitude of tax credits and deductions are available to new parents, but sending the IRS a birth announcement won’t cut it. “Make sure that you have a Social Security number for your baby. You need that to get all the valuable credits and deductions like the child tax credit, the earned income tax credit, the child and dependent care credit and also the exemption,” says Greene-Lewis.
Many 20-somethings have crashed on a friend’s couch, or opened their own home to a friend in need. It turns out that kindness can be lucrative when tax time rolls around, as long as the friend stays the entire year and earns less than $4,000. “A lot of people don’t realize that if you’ve been taking care of a friend and they don't have very much income, you can actually claim them on your taxes,” says Greene-Lewis.
Making a cash donation to charity may not be in the budget this year, but volunteering for an organization can still add up. Food items and decorations purchased for events are deductible, as are donations of clothing or household items. Driving to an event is deductible as well, at a rate of 14 cents a mile.
The Free Spirits
More millennials are working remotely, which is great from a lifestyle perspective, but potentially problematic from a tax perspective. “Multistate returns are a common problem that people don’t realize that they get into," says Padar. "They might move and live in three states over one year and not realize that if they earned income in those states, they have to file in each of those states.”
Padar says it helps to find an accountant sooner rather than later. “There are lots of firms that work virtually who have the skill set to do multistate returns,” she says. “Find an accountant who is tech savvy, versus an accountant who physically wants to meet with you.”
Current students can save a lot on taxes, even if they aren’t on campus full time. “If they’re planning on going to school in the first quarter of next year, then they could pay their tuition early and reap the benefit of the deduction. Even if it’s only one class, they could get up to a $2,000 credit,” says Greene-Lewis.
Making an extra student loan payment in December could be a wise move, since borrowers can deduct the interest they pay on a loan in their own name. Individuals who earn under $80,000 can write off up to $2,500 in interest each year.
Of course, the easiest way to save on taxes is to funnel more money into a tax-advantaged retirement account. December is often a time of pay raises and bonus payments, which makes it a great time to increase contributions to a 401(k) or an individual retirement account. For certain taxpayers, the savings can go beyond the deduction.
“There is a credit that a lot of people don’t know about called the saver’s credit," says Greene-Lewis. "Not only do you get the deduction for contributing to your retirement, but you also get an additional credit of up to $1,000 if you’re single and $2,000 if you’re married. Maybe 1 out of 4 people actually take it.”
With the average cost of a vacation hovering around $1,100, making a retirement contribution before the end of the year could mean the difference between splurging on a trip in 2016, or not.