Tax Planning for Millennials

By Barral, David M. | Journal of Accountancy, September 2017 | Go to article overview

Tax Planning for Millennials


Barral, David M., Journal of Accountancy


Millennials need help with tax compliance and planning. Many are sole proprietors who could benefit from tax planning while starting a business, often in the "gig" economy. Many others are entering the corporate work force, and understanding their taxes is a huge consideration for them as well.

However, many Millennials don't go to CPAs for tax compliance or advice because they have a do-it-yourself attitude or because the idea of paying a CPA to prepare their taxes can be intimidating for them. Some tax practitioners might not even specifically target this demographic, assuming it's just not worthwhile. But they may be missing an opportunity to present such a taxpayer with tax-saving strategies and perhaps thereby gain a loyal client.

Below is a checklist of tax planning and other financial concepts, goals, and strategies to discuss with Millennial clients.

Finance a first-time home purchase

Finding the money for a down payment on a home can be daunting, and some would-be buyers might seek alternative sources, such as tapping into their 401(k) account from an old employer. An early distribution from a retirement plan can result in a 10% early-withdrawal penalty, but there is a smarter approach that avoids this penalty if these funds must be accessed. A retirement plan from an old employer generally can be rolled over to an IRA, from which distributions for a first-time home purchase (up to $10,000) are not subject to the early-withdrawal penalty (Sees. 72(t)(2)(F) and 72(t)(8)). However, the funds distributed will be included in income and subject to income tax if they were contributed pretax.

Consider claiming educational expenses as a business deduction where eligible

Most taxpayers have heard of tax credits for educational expenses. However, many are unaware that, if they are employees, they may instead be able to claim the expenses as an itemized deduction or, if self-employed, as a business expense, either of which may yield a greater tax benefit in some situations. Employees may take a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income (AGI) limitation as a work-related educational expense. The self-employed may deduct educational expenses as ordinary and necessary business expenses from gross self-employment income. The expenses must be for education that maintains or improves skills required in one's trade or business or meets the express requirements of an employer (Regs. Sec. 1.162-5(a)).The education cannot qualify the taxpayer for a new trade or business, such as law school for a person in a profession other than law (see Regs. Sec. 1.162-5(b)(3)(ii), Example (1)).

This can benefit a taxpayer going back to school for an MBA or other advanced degree, which is typically expensive, sometimes topping $60,000 per year. The maximum lifetime learning credit is $2,000 per tax year, based on qualifying expenses of $10,000 for the year, with no carryover. However, a business or itemized deduction can take into consideration higher expense totals.

Take advantage of cafeteria plans at work

Sec. 125 allows employees to receive some of their compensation pretax for qualified expenses. CPAs might advise their younger clients of the potential to avoid paying income tax and Federal Insurance Contributions Act tax (7.65%) on contributions to these plans. Cafeteria plans often include flexible spending arrangements for health care or dependent care expenses and qualified fringe benefits, such as passes for mass transit. These two alone could save hundreds of dollars a year in taxes.

Manage student loans for optimal use of the above-the-line deduction for interest paid

The general rule of thumb is to pay down student loans as early as possible because they cannot be discharged in bankruptcy and generally charge higher interest rates than a safe investment can earn. …

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