Tax Deductions for Young Adults — Plus Tax Credits & More!
June 21, 2017 : Jim Buttonow - The Tax Institute
Millennials, like any other generation of taxpayer, can deduct many expenses on their taxes. This applies if the nature of the expense and their circumstances qualify. Here are some common tax deductions for young adults:
- Moving expenses – if not reimbursed by an employer
- Part of a self-employed taxpayer’s self-employment tax
- Self-employed retirement plan contributions
- Student loan interest
- Tuition and fees (if not claiming an education credit)
- Mortgage interest for homeowners
- Real estate tax
- Tax on vehicles, motorcycles, and boats
- State and local income taxes (or sales taxes, at the taxpayer’s option)
- Unreimbursed employee expenses
- Charitable contributions
- Expenses for an office in the home
Tax Credits for Young Adults
Remember: not all tax benefits qualify as deductions. There are several tax credits millennials could qualify for. Here are some common ones:
- The Child Tax Credit (worth up to $1,000 per child)
- The American Opportunity and Lifetime Learning Credits are available to millennials for education expenses
- Child and Dependent Care Credit
- The Earned Income Credit is available for lower-income taxpayers – even millennials. If eligible, the credit increases as additional children claimed (up to three)
What Can’t You Deduct?
Tax deductions for young adults are plentiful — but you can’t deduct everything. Generally, personal expenses are not tax deductible. The reason is simple – because the Internal Revenue Code says so:
“Except as otherwise expressly provided in this chapter (the code), no deduction shall be allowed for personal, living, or family expenses.”
The gateway to deducting an expense is the “except as otherwise” clause. If a deduction is identified in the tax code, it is available to the taxpayer if they meet all qualifications. So clothing, groceries, home furnishings, personal grooming, health club or gym memberships, concert or sporting event tickets, commuting costs, fines, and penalties are not deductible.
However, some expenses can be deductible depending on the circumstance. This is not always clear-cut. This is where an experienced tax professional or good understanding of tax law can help a taxpayer. Here are some examples:
- Cell phone deductions: Nearly all millennials own cell phones. But is a cell phone a non-deductible personal expense, or is it deductible if used for work or in a business? One of the most accurate responses to tax questions is, “it depends’ on the facts and circumstances”. Self-employed taxpayers who use their phones exclusively for business can deduct the phone. Employees who use a personal cell phone for their jobs can deduct the job-related portion if their employer rejects their claim for reimbursement. However, as an employee and not a business owner, that unreimbursed expense, along with all miscellaneous itemized deductions, can be deducted only to the extent the total exceeds 2% of the taxpayer’s adjusted gross income.
- Start-up costs: Millennials small business owners can deduct up to $5,000 in expenses.
- Continuing education or professional expenses: The cost of continuing professional education if not reimbursed by their employer can be deducted. However, certain expenses such as the cost of admission to an industry (CPA exam or review course, bar examination fees) are not deductible.
- Side-job expenses: In our high tech society, opportunities to earn “side gig” income are boundless. Consultants, contract drivers, etc. may earn extra income – but that usually means increasing one’s tax bill. Any expense that is ordinary and necessary to conduct that business may be deducted, so such taxpayers are wise to keep an accounting of all expenses incurred to support that income.
- Paying medical expenses for an aging parent: As millennial’s parents age, they could end up caring for them, and even paying for some of their unreimbursed medical expenses. In fact, a millennial may qualify for the same deductions or credits if incurred for a parent as would be for a child, if that parent can be considered a dependent (and a parent need not live with the taxpayer to still be considered the taxpayer’s dependent). Thus, a millennial who may not have reached the 10% of AGI threshold with his or her own family’s medical expenses may be able to reach that level of deduction if a parent can be claimed as a dependent.
- Clothing deductions: Clothing may be deductible if required as a condition of employment and not adaptable for general usage as ordinary clothing, like uniforms.
Pay Attention to Details
Do your due diligence to see if you satisfy the requirements to claim a tax deduction or credit. Every tax benefit – whether an adjustment to gross income, an itemized deduction, or a credit – has its own set of requirements, which often are very complex.
For more information on tax deductions for young adults and to get educated on taxes, visit the H&R Block Dollars & Sense website. This initiative helps educate teens and young adults about the world of personal finance.