April 15 is months away, but there are ways you can prepare ahead of time to avoid the stress — and maybe even get your taxes out of the way early.
One of the most first things to figure out is your adjusted gross income — that’s how much of your earnings the IRS can tax. Once you’ve got that figured out, you can deduct (subtract) a standard deduction, or itemized deductions, whichever is greater. Deductions reduce the amount of taxes you have to pay, and give you a better shot at a nice tax return.
Standard vs. Itemized
The standard deduction is a set amount of money you can deduct from your AGI, and for 2013 it’s $6,100 for individuals. So if you earned $50,000, you would only be responsible for taxes on $43,900, which bumps you into a lower tax bracket.
Itemized deductions, on the other hand, have to be listed out (itemized) individually. There are several different kinds of itemized deductions young investors could be eligible for, especially if you’ve had a lot of work- or education-related expenses like travel or student loans.
Sure, figuring out whether your itemized deductions are greater than the standard deduction takes some doing, but think of it this way — if you don’t do it, no one else is going to, and it’s your money on the line!
5 Tax Deductions You Might Not Know About
I’ll go through each type of itemized deduction one by one, and give an example so you can see what would go into deciding whether to go with the itemized or standard deduction for a typical year (barring any unusual medical expenses or other disasters that could be deductible).
Medical and dental expenses: If you had hefty medical expenses that weren’t covered by insurance in 2013, you can write off 10%. For young people, though, expenses like that are atypical.
Uninsured casualty or theft losses: In a normal year, one would hope this wouldn’t happen, but if you had losses of over $100 that make up more than 10% of your adjusted gross income, you can deduct it.
Interest or taxes: Not all states have income and property taxes, but if they do, you can deduct it from your federal taxes. Interest paid on student loans, a mortgage payment or margin you used to buy stocks also counts. For example, say you have $5000 of state income tax withheld from your wages. Then you got a new car, and since you live in a state with auto taxes, you had to pay a tax of $500. That’s $5500 you can deduct.
Charitable contributions: If you donate to a 501(c) 3 organization, you can deduct it from your federal taxes. Where it gets complicated is if you receive a gift in exchange for your donation — you can only deduct the amount beyond the value of the gift. Also, valuing clothes donated to Goodwill or Salvation Army can be tricky, so you’ll need to get a receipt at the time you donate.
For example, if you give $5 a week in your church’s collections basket, that’s $260 annually in charitable contributions. And say your alma mater keeps calling you and asking for money for a new gym, so you make an additional charitable contribution of $100. Carrying over the tax example, that comes to $5860 in deductions. Still not over the standard deduction rate, but there’s one more category of deductions.
Miscellaneous: This category runs the gamut from unreimbursed employee business expenses (like travel, licenses and subscriptions to professional periodicals) to tax preparation fees. Consult the 1040 instructions for an explanation of what counts. Your miscellaneous deductions need to be 2% or more of your income before you can deduct them.
Here’s an example. Say you just graduated college, and you scored a job as a nurse earning $50,000 in adjusted gross income for 2013. However, to get this job, you needed to drive 500 miles to several interviews. The standard IRS rate for business-related use of your car is 56.5 cents per mile, so that’s $283 (rounded up). You also spent $150 to get professional resumes printed, paid $250 for a nursing license in your state, and subscribed to some professional periodicals for $200. You also had to pay someone to prepare your taxes last year for $200. With the total coming to $1083, only $83 can be deducted from taxes.
Add that to the $5860 from the other two categories, and it comes to $5943—still not over the standard deduction of $6,100. So in this case, you would have a lower tax liability with the standard deduction, not the itemized deduction.
As you can see, it takes a lot of extra spending throughout the year to qualify for a significant itemized deduction. The story is different, of course, if you made a major purchase like a house in the past year, since that generally gets you a generous state and interest tax deduction.
If that example made your head spin, then you could save yourself some stress by having someone prepare your taxes for you. But for some, figuring all this stuff out is like solving a puzzle. If that’s you, you might actually enjoy the challenge of doing it yourself.
Carla Lake is an assistant managing editor at InvestorPlace Media. She is not a CPA or tax preparer, so if you have questions about your taxes, consult a professional.