Author: Tyler Benson, Masters of Accounting UNC Kenan-Flagler Business School
It’s officially spring and that means it’s almost Tax Day. Filing can feel daunting; especially for anyone who is only recently filing their own taxes, but there is nothing to fear.
The single best tip I can offer is to give yourself time to file. Don’t wait until the night before taxes are due. A couple hours over the weekend will leave you squared away, hopefully with a nice return headed your way.
For almost all young professionals, I recommend filing with a simple, free service like TurboTax. The IRS also offers free software with no charge to file if you earn less than $64,000 per year. Odds are that your tax situation is not complex enough to warrant paying anybody to do your taxes or to help with tax planning strategies. This isn’t the case for somebody who is married, has kids, has a mortgage, is saving for their kids’ college tuition, makes a number of charitable contributions each year, and so on. If that describes where you’re at, you should consider hiring a tax professional unless you’re a CPA yourself.
When using any filing software, consider every kind of deduction that it prompts you to review, but at this stage in life most people will just take the standard tax deduction of $6,300. It would be very rare that you would have itemized deductions that exceed this amount, but that is why a filing software is so valuable. It will do the math and check for you then compare it to the standard deduction and provide you with the best option.
Tax season is a great time for a general financial checkup. I always encourage young professionals to max your 401K or 403b contributions. If your employer offers any matching incentive, it is a free raise to your salary. Plus, these contributions go into your 401k pre-tax, meaning that your total taxable income will be lower - yay!
If you don’t have a 401k option or you are rolling in cash and have more money to save, it’s time to consider IRAs. Most young professionals under 30 choose to invest in a Roth IRA, which uses non-tax deductible dollars. You pay taxes now, but don’t pay any when you remove the money later. The logic being you are probably now in a lower tax bracket than you will be when you retire. There are exceptions, like if you are a high-income earner now or are married to one. The max yearly contribution to an IRA is $5,500. Saving a little now and letting compound interest do its magic is a much better strategy than trying to save a lot later in your career.
So this tax season, take a deep breath and don’t panic. There are so many good tools to help you file that you are never in it alone. And once you’ve taken care of that task, make sure to keep an eye on the future with your retirement savings plan.