Let’s face it, taxes aren’t exactly the most exciting topic. But for millennials, navigating our complex and somewhat archaic tax code can feel even more overwhelming, especially since this generation is facing certain financial challenges.

From gig economy jobs to side hustles, student loan debt, and the desire to save for big goals like homeownership, you’ve got a lot on your plate financially. That’s why smart tax planning is crucial for maximizing your money. 

With the right strategies, you can keep more of your hard-earned cash and make progress towards your goals faster. This insightful financial guide for younger consumers covers key tips to help you get ahead of the game and tools to tackle tax season confidently.

Demystifying Your Bracket

First things first, understanding your tax bracket is essential, as it determines the percentage of your income that gets taxed. The more you make, the higher the tax bracket you fall into.

Are you an employee with taxes withheld from your paycheck via W2? Do you have income from self-employment, investments, or other sources that need to be reported? Knowing the types of income you receive and your corresponding tax obligations is vital to ensuring you aren’t overpaying.

Savvy & Sustainable Retirement Planning

Getting more deductions might not be as beneficial as contributing more to a retirement account if you’re nearing the edge of a higher bracket. Committing more of your funds to a tax-advantaged option like a 401K or an IRA can help you save money in the long run.

These allow you to contribute pre-tax dollars, reducing your taxable income today. The magic happens down the road when you withdraw the money in retirement. Depending on the account type, those withdrawals may be taxed quite favorably.

For example, if you contribute $6,000 to a traditional IRA, you can deduct that amount from your taxable income. If you’re in the 22% tax bracket, that’s a tax savings of $1,320 for the year. Millennials have the advantage of a long investment time horizon, so these accounts offer appealing tax-deferred growth potential as well.

A Roth IRA can also be a powerful tool for millennial investors looking to build a sturdy nest egg. While contributions to this type of IRA are made with your after-tax dollars, qualified withdrawals once you hit retirement age are tax-free.

Emphasize Well-Being

You may also want to consider setting up (or utilizing your employer’s) health savings accounts for you and your family members. 

If you don’t have employer-sponsored healthcare, you can enroll in a High Deductible Health Plan (HDHP), used in conjunction with an HSA, that provides both insurance coverage and a tax-advantaged way to help save for future medical expenses.

Some medical expenses are tax deductible, but only if you itemize instead of taking the standard deduction. Determining which path is best for you depends on many different factors, but an experienced financial advisor can help you run the numbers. 

The Side Hustle Shuffle

The gig economy is booming, and millennials are at the forefront. If you’re a freelancer, rideshare driver, or solopreneur, remember that all of that income is taxable.

One of the downsides of being your own boss is the additional burden of the 15.3% self-employment tax, which covers your contributions to Medicare and Social Security. You also need to submit estimated tax payments four times a year — and missing them can result in hefty penalties.

There are many valuable self-employment tax deductions for freelancers, contractors, and other self-employed people. Some of the most common include:

  • Mileage and depreciation of your vehicle
  • Qualifying work-related education expenses such as tuition, books, and lab fees
  • Home office support costs and supplies
  • Non-employer-sponsored health insurance premiums
  • Half of your self-employment tax (yes, really)
  • Cell phone and internet
  • Business travel and meals
  • Startup costs and advertising

Read the Receipts

Getting and staying organized is integral to ensuring your finances are in the best possible shape, especially if you have multiple streams of income or you’re laser-focused on a lofty goal like buying a historic home or becoming a globe-trotting digital nomad

Thanks to modern technology, there’s an array of personal finance software and apps available to help you build a budget, keep track of your savings trajectory, and manage your assets. 

Using cloud storage, scanning receipts, and leveraging expense-tracking apps can help keep your records digitally organized year-round. That way, you won’t be scrambling to manually enter data or find missing info when it’s time to file taxes.

Understanding Your Unique Situation

The US tax code is quite complex, with new rules and changes emerging each year. Working with an expert financial planner who understands the sometimes difficult situations millennials face ensures you’re optimizing your efforts and not overpaying or risking penalties.

Professional assistance has many benefits for millennials with their eyes on the prize. Financial advice isn’t just for the rich — smart tax planning is one of the pillars of building wealth over time. 

Hang on to more of your hard-earned money, and gain confidence and peace of mind by creating a strategy for success with me today!