Only 1 in 5 millennials realize how getting married, having a baby or buying a house impacts their taxes.
Life happens — and it affects your tax refund.
Yet more than one in five millennials (22%) doesn’t realize that getting married, having a baby and buying or selling a home can have a major impact on what you owe or how much money you get back, according to a new H&R Block survey, even though almost three in four (72%) lived through at least one of these experiences in the past year.
Turns out, there’s a lot that millennials (born between 1981 and 2006, according to the Pew Research Center) don’t know about filing their tax returns — like when they’re due. The tax prep service quizzed young adults to choose between three dates for when 2017’s tax returns need to be filed — and 66% didn’t realize that Tax Day falls on April 17 this year. And even though seven in 10 are “worried” they’ll file incorrectly, and 82% find the whole process “somewhat complicated,” most millennials (61%) still file their taxes on their own.
“For many, the tax refund is the single largest financial transaction you will have all year. Not only do you not want to leave any of your money on the table, but some people also worry about facing an audit,” Meg Sutton, a director with H&R Block, told Moneyish.
You got married or divorced. The good news is, filing jointly can often yield lower tax rates plus high deductions and exemptions. But newlyweds can also be hit by the “marriage penalty,” where filing a joint return causes a couple to have a higher tax liability than if they had filed as single individuals. This is more common in couples with very high and very low incomes, or middle-income couples where one person makes a lot more than the other.
If you were divorced or legally separated by Dec. 31 last year, you can file as single, which could either cost you that marriage bonus or free you from the marriage penalty. If not, you still need to file a joint return this year. Remember to report alimony payments; the person paying can claim those as an above-the-line tax deduction, while the recipient must claim them as taxable income. But because of changes in the Tax Cuts and Jobs Act, alimony will not be deductible by the payer or taxable to the recipient for divorces finalized after 2018. Review your W-4 forms filed with your employers to make sure that the right amount is being withheld if you tied or untied the knot.
You changed jobs or had more than one job. H&R Block found that the most common “life events” for millennials are changing jobs (35%) and working more than one job (24%). “People who work two jobs often don’t have enough tax withheld from their part-time earnings. So they might wind up owing a large sum of money at tax time,” warned Sutton. “To avoid this, you might need to increase the amount of money withheld either from your main paycheck or from your second job — or both.” To change your withholding, ask your employer for a new W-4 form, or download and print one at www.irs.gov/formspubs. Bring the completed form to your workplace to update your withholdings.
“Joining the sharing or gig economy can have one of the biggest impacts on your taxes,” added Sutton. “There are so many changes that come with starting a business or becoming self-employed. You’re going to get different information-reporting documents. You’ll file a different form with your tax return. You’ll pay estimated quarterly taxes instead of having tax withheld from a paycheck. You’ll have more generous rules for deducting expenses. You can also get tax benefits to help pay for health insurance.”
You had a baby. Once you have a child, you may qualify for a child tax credit of $1,000 in 2017 and $2,000 in 2018, Sutton said. And you can receive a child care credit for your kids’ expenses, or pay these expenses using pre-tax dollars in a dependent care flexible spending account. It’s also easier for parents to qualify for the earned income tax credit (EITC) because the income limitation more than doubles once you have a baby. “This credit can be worth more than $6,000, but eligibility can vary year to year because it is tied to income, filing status and the size of your family, so it’s important to check in every year so you don’t miss out,” she said.
You bought or sold a home. “Owning a home is often the key that unlocks itemization because homeowners may deduct typically larger expenses like mortgage interest and real estate taxes,” said Sutton. “Taxpayers only benefit from itemizing if their itemized deductions are bigger than the standard deduction, which will almost double in 2018.” And under the new tax code, while other common itemized deductions will be capped at $10,000 starting in tax year 2018, mortgage interest will be fully deductible for qualifying mortgages. And if you’re selling your home, up to $250,000 of your profit is tax-free if you’re single (up to $500,000 if you’re married and filing jointly) and you’ll have to pay taxes on top of that if you owned and lived in the home for at least two years.
You are in school or went back to school. “Depending on the kind of academic program, what year you’re in, income and other factors, you may qualify for several different tax benefits,” said Sutton. “One of the most advantageous college tax benefits is the American opportunity (tax) credit, which maxes out at $2,500. It is limited to students in their first four years of undergraduate studies. The lifetime learning credit is worth up to $2,000 and is more widely available to graduate students or people taking courses to improve their job skills.” And once students or graduates begin repaying their loans, they can even start deducting the interest they pay by up to $2,500, she added — so that decreases your taxable income, and therefore what taxes you owe.
© 2018 Dow Jones & Company, Inc. All Rights Reserved