The path to financial independence is both exciting and daunting, and if you don’t know how to build a budget or manage your finances well, you may end up dealing with a vicious cycle of financial challenges that can be very difficult to handle.
Overconfident. Materialistic. Entitled. These labels are typically given to millennials. But when it comes to tax compliance and planning, millennials feel very anxious and stressed. A 2016 survey by NerdWallet shows more than 80% of 1,600 millennial taxpayers in the United States are very concerned about making tax filing mistakes, paying too much, or not getting enough refunds to get out of debt.
The truth is, millennials need all the help they can get to boost their financial literacy and get ahead on tax payments. They face unique challenges and life changes — from paying for higher education to getting a job, starting a new family, planning for retirement, and more — that can affect how they manage their taxes.
Whether you’re a millennial who is about to enter the workforce, owns a start-up, or juggles several jobs, the right kind of help goes a long way towards empowering you to navigate the world of taxation and master strategies that enable you to save money in the long run.
Here are some of the most common questions you may ponder when it comes to your taxes and the answers that can propel you to financial success.
1. How do I know if I need to file taxes?
There are a lot of factors that determine whether or not you are required to file an income tax return. These include your age, filing status, how much you’ve earned, and the source of your income.
If your gross income — salary from the employer, income from investments, money from freelance or side jobs, and all taxable income before deductions — exceeds a certain threshold, then you need to file federal tax returns.
The Internal Revenue Service (IRS) website has all the information you need to check if you owe federal taxes.
2. I am a freelancer. Do I still need to file for taxes?
Freelancing comes with a lot of freedom and benefits, but it also requires you to stay on top of your tax obligations. The IRS considers freelancers who earn $400 or more in a year to be self-employed. That means you have to file your taxes as a business owner, based on the standard tax brackets. And now that you’re independent, you’ll also have to deal with self-employment tax. This covers the Social Security and Medicare taxes that would have been automatically deducted from your paycheck as an ordinary employee.
If you are not sure yet about the amount you have to save, it’s best to set aside at least 25% to 30% of your paycheck for taxes.
3. Do I need to hire a tax professional?
An accountant or tax professional can lead you on the right track so you can file your taxes properly. Paying a tax professional may not be for everyone, but it’s always a smart idea to weigh your options. If it’s only a simple filing that covers an income statement, basic wage, and a few deductions, then you can opt to use online tax software to file your taxes.
It’s always best to leave it to the pros if you’re dealing with a complicated tax situation. Seek the assistance of an expert if you’re an investor, a business owner, a freelancer, or if you worked in multiple states, sold a property, or had any major change in your tax situation.
Tax pros will not only give you peace of mind in knowing that they can efficiently prepare and file your returns but can also help you create tax strategies, navigate possible deductions, and streamline your financial processes.
4. Do I still need to file taxes even if I live and work abroad?
Yes. The IRS requires U.S. citizens to file their income tax returns — no matter where they are in the world. Generally, American citizens and aliens residing abroad are given an automatic extension of two months to file their taxes and pay their dues. Make sure you know and understand the tax obligations and check whether you are subject to double taxation or eligible for various allowances and credits.
Let a tax specialist wade through all the specifics and help you file the returns, avoid any tax liabilities, and check whether you can get special tax credits and exclusions to reduce your U.S. expat taxes.
5. What happens if I can’t file and pay my taxes?
One of the biggest mistakes that any millennial or taxpayer can make is missing and neglecting the tax deadline. If you owe money and fail to file by the due date, you’ll have to deal with additional penalties and interest.
You may be charged with two types of late fees. The first one is a failure-to-file penalty, which is 5% of your unpaid taxes per month and can run up to a maximum of 25%. The second is a failure-to-pay penalty, which amounts to 0.5% of the unpaid taxes every month and maxes out at 25%.
6. What if I cannot afford the full outstanding tax bill?
It’s best to file your tax returns on time even if you can’t pay the entire bill so you can reduce the penalties you have to face. Don’t hesitate to reach out to the IRS if you have a tax bill but can’t pay up. You can either request an extension or apply for a payment plan.
The IRS can give you six more months to prepare and file your tax return, but keep in mind that the six-month extension is just for filing and not for paying. You still have to pay at least 90% of your total taxes due by the deadline so you won’t get hit with the failure-to-pay penalty. Contact the IRS as early as you can to avoid any conflict. If you miss the deadline but don’t owe taxes, you won’t be charged with any penalties but you will have to wait longer to receive your refund.
7. What is a tax audit?
Tax audits are carried out by the IRS to ensure that an individual or organization’s financial accounts — income and overall deductions — are all accurate and that they are complying with tax laws. The IRS may request you to submit your tax returns either by mail, at the local IRS office, or through an in-person interview at your home or office building. More often than not, the IRS sets its sights on taxpayers with glaring discrepancies in their returns. If you don’t report all of your income or the numbers don’t match the information that the IRS received, then you may be the subject of an audit. Other red flags include excessive deductions relative to the income, businesses with unusually large expenses or losses for several years in a row, and hundreds of thousands of dollars in charitable contributions that don’t match the income.
Be extra careful when filing your tax returns, report all your income accurately, and see to it that you don’t make any errors. Keep all records and documents of your expenses and deductions, so you can present your paper trail in case you do get audited by the IRS.
8. What's the difference between a deduction, an exemption, and a credit?
Tax deductions aim to reduce the amount of income that is subject to tax. These deductions cover specific expenses or investments such as tuition fees, transportation charges, medical expenses, donations made to charities, and investments under specific sections of the Income Tax Act.
There are particular sources of income, expenditure, and investments that are exempt from tax. These tax exemptions reduce the overall taxable income. Some examples of tax-exempt items include House Rent Allowance (HRA), Leave Travel Allowance (LTA), long-term capital gains on equity funds, and other items included in Section 10 of the Income Tax Act.
Tax credits, meanwhile, reduce the amount of actual tax owed. These are subtracted from your tax liability and do not affect your taxable income or tax bracket. Some of the most common types of tax credits are Child Tax Credit, Child and Dependent Care Credit, Adoption Credit, Lifetime Learning Credit, and Residential Energy Tax Credit. Tax credits may be refundable or non-refundable.
Plan Ahead for Tax Season
As a millennial, you should expect your taxes to be more complex than usual since you’re dealing with a host of financial responsibilities. Preparing as early as you can to file your taxes can save you a great deal of time and money. Start with a list of the tax forms and records that you should have and organize all your documents to make the filing process easier and faster. Invest in learning about tax breaks, penalties, and deductions or credits you’re eligible for so you can maximize your savings. And remember that even the smallest errors can be huge problems when it comes to your taxes, so it’s best to seek assistance from the experts.