[UNITED STATES] As a parent, one of the most important responsibilities I have is preparing my children for adulthood. While I’d love for them to listen to every piece of financial advice I offer, it’s usually met with an eye roll or a sigh. However, when it comes to taxes, I know these lessons will pay off—if they ever listen.
With tax season just around the corner, I often reflect on the four essential tax tips I give my children that I know will serve them well in their financial futures. While they might not see the immediate benefits now, these lessons will help them navigate the complexities of the tax system and save money in the long run. Here are the key tax tips I tell my children—when they’ll listen.
1. Start Contributing to Retirement Accounts Early
One of the most valuable lessons I give my children is the importance of saving for retirement early. I can't stress enough how vital it is to begin contributing to a 401(k) or an IRA as soon as possible. The earlier they start, the more they benefit from the power of compound interest.
As financial expert and advisor Lori T. Brown explains, “The earlier you start saving for retirement, the more money you’ll have when it’s time to retire—thanks to compound interest. Even small amounts contribute significantly over time.” The key is to start early, even if the amounts seem modest at first.
Retirement accounts like 401(k)s and IRAs allow young adults to save money in a tax-advantaged way. Contributions to a 401(k) are made pre-tax, which lowers your taxable income for the year. Similarly, contributions to a traditional IRA may be tax-deductible, reducing your overall taxable income.
Why This Matters:
Tax-Deferred Growth: By contributing to retirement accounts, my children can take advantage of tax-deferred growth, which allows investments to grow without being taxed until retirement.
Compound Interest: Even small contributions in their 20s can grow exponentially over time.
Long-Term Savings: Starting early ensures they won’t have to play catch-up in their 40s or 50s when retirement feels much closer.
Tip for Parents:
If your children are just starting out in their careers or are self-employed, encourage them to open a traditional IRA or a Roth IRA, depending on their income and tax situation. Many employers offer 401(k) matching programs, and it's essential they contribute enough to receive the full match.
2. Understand the Power of Tax Deductions and Credits
Another lesson that I frequently stress is the importance of understanding tax deductions and credits. For young adults, these can make a big difference in reducing the amount they owe in taxes.
David Blaylock, a certified financial planner, advises, “Young people often overlook deductions and credits, which is a missed opportunity to lower their tax liability.” Understanding which expenses are deductible (like student loan interest or educational expenses) and how credits work (like the Earned Income Tax Credit) can significantly reduce their tax burden.
Tax deductions reduce taxable income, meaning they lower the amount of income subject to tax. Common deductions for young adults include student loan interest, home office expenses, and certain work-related expenses. Tax credits, on the other hand, directly reduce the amount of tax owed. Examples include the American Opportunity Credit for education-related expenses and the Child Tax Credit for those with dependents.
For those entering the workforce or attending school, tax credits like the American Opportunity Tax Credit can help offset the cost of education. The Earned Income Tax Credit (EITC), designed to benefit low- to moderate-income earners, can also provide significant relief.
Why This Matters:
Deductions Lower Taxable Income: Reducing taxable income lowers the total tax owed.
Credits Reduce Tax Bills: Tax credits provide immediate relief, sometimes resulting in tax refunds.
Education Benefits: Tax credits related to education can help defray the cost of tuition and books.
Tip for Parents:
Encourage your children to review their finances carefully and consult a tax professional if needed. Many young people aren’t aware of the deductions available to them, and a good tax professional can help uncover opportunities to reduce their tax liability.
3. Be Careful with Freelance and Gig Work
As the gig economy expands, more young adults are turning to freelance or side hustles to earn extra money. Whether it’s driving for Uber, freelancing as a writer, or selling handmade products online, taxes on self-employed income are a crucial topic.
One critical piece of advice I give my children is to keep track of all earnings and expenses related to their freelance work. Freelancers are required to report all income, including any that doesn’t come with a 1099 form. In fact, the IRS expects gig workers to report all income from their side hustles, regardless of whether they receive official documentation.
“Many young freelancers and gig workers don’t realize they’re responsible for self-employment taxes, which include both Social Security and Medicare taxes,” says Tom O’Brien, a tax expert. “Self-employed individuals can face a combined tax rate of up to 15.3% on their earnings.”
Additionally, freelancers can deduct certain business expenses, such as office supplies, home office costs, and internet bills. Keeping detailed records of these expenses can significantly reduce their taxable income.
Why This Matters:
Self-Employment Taxes: Freelancers and gig workers are responsible for self-employment taxes, which can add up to 15.3% of their earnings.
Deductions for Business Expenses: Freelancers can deduct expenses like office equipment, software, and internet bills to lower their taxable income.
Quarterly Payments: Freelancers must make estimated quarterly tax payments, which many fail to do.
Tip for Parents:
Encourage your children to set aside a portion of each paycheck for taxes. Remind them to track all of their business-related expenses, and consider suggesting they consult a tax professional to ensure they are handling their self-employment taxes correctly.
4. File Taxes on Time (and Don’t Ignore the IRS)
One of the most important lessons I’ve tried to instill in my children is to always file their taxes on time. Even if they owe money, it’s better to file and set up a payment plan than to ignore their obligations.
Tax deadlines are non-negotiable. Failure to file on time can result in penalties and interest, which can quickly escalate and increase the amount owed. I’ve often reminded my children that even if they can’t pay their tax bill in full, they should still file their return on time to avoid late penalties.
“It’s crucial to file on time, even if you owe,” says Emily Hutton, a tax professional. “The IRS offers payment plans, but you must file your return to take advantage of these options. Plus, filing late adds penalties, and if you don’t pay, the IRS can garnish your wages.”
Filing early can also help speed up any potential refunds. The earlier they file, the sooner they can get their refund, which can be a nice financial boost. And with so many online tools available, it’s easier than ever for young adults to file their taxes accurately and on time.
Why This Matters:
Avoid Penalties: Filing late can lead to penalties and additional interest charges.
Faster Refunds: Filing early can speed up the receipt of tax refunds.
Compliance with the IRS: Filing and paying on time ensures you don’t face serious consequences from the IRS.
Tip for Parents:
Help your children stay on track by setting reminders for tax deadlines. If they are unsure about the filing process, encourage them to use IRS Free File or consider hiring a tax preparer to assist them.
Tax season can be overwhelming for young adults who are just starting to navigate the world of taxes. However, by following these four tax tips—starting to save early for retirement, understanding tax deductions and credits, managing freelance income, and filing taxes on time—they can reduce their tax liability and avoid unnecessary penalties.
If my children ever choose to listen to these lessons, I know they’ll have a much easier time managing their finances as they grow older. While taxes may seem complicated, these fundamental tips will give them the knowledge and confidence to tackle their financial future with ease.
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