Millennials, who range in age from early 20s to mid-30s today, are in a life phase of ongoing change and evolution -- from students to graduates to independents to spouses. Navigating the in-betweens of these many major milestones is no cakewalk.
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In addition to the standard financial commitments that accompany such major milestones, millennials must remain mindful of how their ever-shifting circumstances influence their tax obligation. Here are five common tax mistakes made by millennials to watch out for.
1. Filing as a dependent when you're independent (and vice versa)
When it comes time to file your taxes, it's worth it to double-check with your parents before signing on the dotted line. If you still live at home or get any kind of financial assistance from your parents, be certain that you've elected the right filing status.
Parents can claim qualifying children under age 19 as dependents, or under age 24 if they are still students, according to the IRS. If your parents claim you as a dependent on their tax return, you cannot claim your personal exemption on your income tax return. Instead, check the box indicating that someone else can claim you as a dependent.
On the flip side, millennials might check this box and file as a dependent when they should instead file as independent, missing out on the opportunity to reduce their taxable income. The personal exemption amount changes every year, but for tax year 2015, the amount is $4,000. That $4,000 personal exemption might be just the ticket some millennials need to finally get ahead financially.
2. Skipping out on health insurance
People age 26 to 34 are the most uninsured of all age groups, with around 21% not having insurance, according to a recent Gallup-Healthways Well-Being Index survey. Under the new healthcare law, millennials who go without health insurance will have to pay a hefty penalty when they file their returns. Those who can afford health insurance but don't buy it must pay what's known as an individual shared responsibility payment, according to HealthCare.gov.
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In 2015, the penalty is the higher of:
- 2% of your household income.
- Maximum: The total yearly premium for the national average price of a bronze plan sold through the marketplace.
- $325 per adult.
- $162.50 per child under 18.
- Maximum: $975.
The only way around the non-coverage penalty is to qualify for an exemption by having a household income that's less than 8.05% of the lowest-cost bronze level marketplace plan. If find yourself stuck paying the non-coverage penalty, the IRS will hold back the amount of the fee from any future tax refunds. There are no liens, levies, or criminal penalties for failing to pay the fee.
3. Forgetting to deduct student loan interest
One of the ways the U.S. government supports higher education is by giving those with student loans a tax break based on how much interest they've paid over the course of the year. Unfortunately, millennials, the student loan poster children, might forget to claim this deduction.
You might be able to deduct student loan interest payments up to $2,500 on a qualified student loan, according to the IRS. Like most deductions and credits, there is an income limit to claim this deduction -- your modified adjusted gross income can't be over $80,000, or $160,000 if filing a joint return. Millennials should also know that they don't have to file an itemized return in order to qualify for this deduction.
4. Miscalculating deductions for the cost of relocating
For millennials who have moved for a job, the opportunity to deduct moving and relocating costs often comes as welcome news. That said, there are specific requirements that need to be met in order to claim this deduction.
"If you get a promotion or are relocated to a new office and move, that doesn't automatically qualify you to deduct moving expenses. There is a distance limit that must be met," said Eric Nisall, founder of AccountLancer.com,an accounting and bookkeeping firm for freelancers.
The IRS specifies that your new workplace must be at least 50 miles father from your old home than your old job location was from your old home. Additionally, there are other requirements, including a time test to prove that you are working full time after your move. These expenses must be claimed within one year of the date that you first reported to work at your new location.
5. Withholding too much for taxes
This last one is a mistake that many people, not just millennials, are guilty of making. Come tax time, we'd all rather get a refund than owe money to the IRS, but good financial practices suggest that we try to keep our refund amount as close to $0 as possible.
In 2015, the average tax refund was $3,218, according to the IRS. This means people are giving the government an interest-free loan, said personal finance expert Scott Alan Turner. "If millennials adjusted their W-4 withholding to where they got as close to zero on their refund as possible, they would take home an extra $252 per month to apply toward debts, savings, or investing," he added.
If you aren't sure how to set your W-4 withholdings, the IRS has a calculator to get you started.
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