What Tax Topics Do Millennials Care About?

What Tax Topics Do Millennials Care About?
From left to right: Bret Kaye, a certified financial planner at AEPG Wealth Strategies, Diane Pineda, senior accountant at KRS CPAs, and Lance Aligo, CPA, senior accountant at KRS CPAs

On July 25, 2017, senior accountants Lance Aligo and Diane Pineda participated in an NJBIA panel presentation focusing on personal finances for young professionals. The first few years following college can be very challenging and it’s important for YPs to understand the tax implications of life changes.This panel covered topics such as marriage, job changes, first time home buyers, and starting a family.

One tax topic discussed was the difference between filing a “married filing joint,” “married filing separate” and “single” tax return.

Whether a couple is married on January 1 or December 31, they are considered to be married for the full year for income taxes and are required to file a “married” tax return.

An audience member posed the question,

When is it beneficial for a couple to file a married filing joint tax return compared to married filing separate?

Here’s what the panelists noted:

  • When married filing joint, the couple will complete one shared tax return and take full responsibility for the income and tax that is owed.
  • When married filing separate, the couple will each report their own income and be responsible for their own tax liability.
  • Filing separate can limit or disqualify tax credits and deductions. Each couple is unique and depending on their situation, both ways should be considered.
  • It is important to keep in mind that married filing separate is not the same as filing as a single person. Most of the time, a couple will pay less tax when filing a married filing joint return.
  • A married couple filing separate will lose the following credits and deductions (geared towards the young professional):
    • Traditional IRA deductions
    • Child and dependent care tax credit
    • College tuition expense deduction
    • American opportunity credit and lifetime learning credit
    • Student loan interest deduction
    • Earned income credit
  • If married filing separate, both taxpayers must claim either the standard deduction or itemized deduction. If one spouse is itemizing, the other must too.

Situations where married filing separate may benefit the taxpayer:

  • When filing separately, you will be responsible for the accuracy and completeness of only your return and have no responsibility for your spouses.
  • It’s possible that your overall tax bill could be lower as a couple when filing separate due to one spouse having significantly high itemized deductions. Specifically, itemized deductions limited by your adjusted gross income.
    • Medical expenses, unreimbursed employee business expenses, investment expenses, fees for tax preparation, charitable contributions.
  • Since adjusted gross income is lower on married filling separate returns, the limited itemized deductions listed above may be higher if you file separately reducing a couple’s overall tax liability.

If a couple is married, it is important to consider each unique situation and then determine which method, joint or separate, provides you with the lowest tax liability.

Standard vs. itemized tax deductions

Another topic discussed was standard vs. itemized deductions. The standard deduction for 2017 for a single individual is $6,350 and for a married couple $12,700 ($6,350 for married filing separately).

Itemized deductions are a group of eligible expenses that an individual can claim on their federal income tax return that potentially reduce their taxable income.  These deductions are reported on Schedule A of Form 1040.  A taxpayer may claim itemized deductions and receive a benefit from them when their total itemized deductions are larger than the IRS standard deduction.

What are some of the itemized deductions and how can they be tracked?

First-time homeowners should be aware that they are paying real estate taxes which are tax deductible as an itemized deduction. If the homeowner is paying a mortgage, the interest portion of the payment is tax deductible as an itemized deduction.

These deductions are tracked by the bank where you have your loan.  At the end of the year you will receive a Form 1098 which reflects the mortgage interest that was paid for the year.  Typically, Form 1098 will also reflect the amount of real estate taxes that were paid for the year.  If it does not, you should refer to quarterly or semi-annual tax statements from your town.

Taxes paid to any state jurisdiction are tax deductible. If you are working as a W-2 employee, state taxes are being withheld from your paycheck.  These taxes will be reported to you on your Form W-2 reflecting what taxes were withheld and what can be deducted as an itemized deduction.  If you are self-employed and pay quarterly estimates, a great way to track your payments is to keep copies of the checks you write as well as proof from your bank statements.

Charitable contributions are also itemized deductions. Cash and non-cash items qualify for this deduction as long as they are donated to a recognized charitable organization.  The organization that you donated to will provide you with a receipt of what was received and the value of the gift.  If donating a non-cash item valued more than $5,000, a special appraisal needs to be completed and in writing to submit to the IRS with your Form 1040.

Other itemized deductions that are common to the young professional include medical expenses, unreimbursed employee expenses, job search costs, union dues, investment expenses, continuing education, and tax preparation fees. To claim these deductions, the taxpayer should retain receipts for any expense incurred.

We’ve got your back

As a young professional myself, I understand the challenges we face. If you have any questions relating to tax topics relevant to YPs, contact me at [email protected] or 201-655-7411.