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Tax Advice for Millennials

Kimberly Palmer

Filing taxes isn't easy for anybody, but it can especially be daunting for millennials, who have less practice with the annual tradition, often undergo life transitions that impact their filing status and are frequently eligible for many of the constantly-changing array of tax deductions and credits. U.S. News sought out a handful of top experts to help 20-somethings navigate the process and leave as much money in their bank accounts as possible. Here are a dozen of their suggestions.

1. Coordinate your filing plans with your parents.

If your parents plan to claim you as a dependent, then that affects your own filing status, so you'll want to be sure to coordinate plans with them, especially if you're still living with them or otherwise getting support from them, says Mark Luscombe, principal analyst for the tax and accounting firm at CCH, which is part of Wolters Kluwer. The Internal Revenue Service specifies that parents can claim qualifying children who are under age 19 or under age 24 and still a full-time student. The child can qualify as a dependent if they are earning below a certain amount a year; for 2013, it was under $3,900. "If you're living at home because you have no job, then yes, you probably qualify, but if you have a job, then you probably have to file on your own," Luscombe explains.

[Read: 11 Ways to Save on Your Taxes This Year .]

2. Take relevant education credits.

Student loan interest is eligible for a deduction up to $2,500, says tax expert and U.S. News contributor Barbara Weltman. She adds that you don't have to itemize your deductions in order to take it, but there are income limits. Other education-related credits include the American Opportunity Tax Credit, which offers a tax credit up to $2,500 for the first four years of college (there are also income limits on eligibility). The Lifetime Learning Credit, which covers courses for academic credit or career development, offers up to $2,000 could also apply, she says.

3. File electronically.

Weltman urges millennials to file taxes electronically, as 90 percent of taxpayers do, which saves time and can also reduce errors. She adds that the Free File program from the IRS and tax software industry gives those earning below $58,000 access to free tax software.

4. If you moved for a job, you might be able to deduct the costs.

Weltman points out that you need to have moved a certain distance, but if you qualify, then you can write off moving expenses, which includes the cost of moving household goods as well as driving from one location to the other. You don't need to itemize to take this deduction, she says, but you have to work in the new location full time for at least 39 weeks. This deduction applies to new college graduates, too, Weltman says.

5. If you bought a home, deduct your mortgage interest.

For millennials who are already homeowners, mortgage interest is often eligible to be a tax deduction, but you'll have to itemize your deductions to claim it, Luscombe says. You can also check IRS.gov to see if other home-related expenses are eligible for credits, like energy-efficiency improvements.

[Read: Why You Should Embrace Your Tax Refund .]

6. If you have children, then an array of deductions and credits might apply.

Parents can qualify for a dependent care credit if both spouses are working and they pay for child care; a child tax credit of $1,000 per child is also available, but phases out for higher incomes, says Luscombe. Parents can also take advantage of tax-advantaged college savings accounts for their children, such as 529 or Coverdell accounts.

7. Remember to update your name if you change it.

Luscombe notes that newlyweds who change their name often forget to inform the Social Security office, which can cause problems with a tax return that appears to list an incorrect name. "That could be a reason for a return to get kicked back to you," Luscombe notes.

8. Accurately estimate your withholding.

While there's nothing wrong with getting a big tax refund when you file your taxes, and in fact, it could be a useful way to budget, Luscombe notes that it's also the equivalent of giving the government a free loan throughout the year. To make your withdrawal amount more accurate, Luscombe recommends updating your W-4 form to reduce your withholding.

9. See if the earned income tax credit applies to you.

If you earn less than $51,567 a year, then you might be eligible for the earned income tax credit, which can be worth as much as $6,044 if you have three or more dependents, says Karl Frank, author of "Go Tax Free." Many people miss out on this benefit because they don't know about it or don't realize they qualify, he says.

[See: Avoid These 10 Common Tax Mistakes .]

10. Don't mess up.

According to Kathy Collins, chief marketing officer of H&R Block, half the taxpayers who complete their tax forms on their own end up making mistakes. "Taxes are very complex. People think, 'I can just [file them] online, my situation isn't that complicated,'" but that is not the case, she says, partly because the tax code constantly changes. Common mistakes include missed deductions and credits that end up costing taxpayers money.

11. Max out your tax-advantaged retirement accounts.

"It's never too early to begin saving for retirement, whether you're 21 or a thirty-something," says Steven Brett, president of the advisory firm Marcum Financial Services. Anyone with access to a 401(k) account through their employer can start there, especially if their employer offers matching benefits. Those in the beginning of their careers who are not in a high tax bracket might want to consider a Roth 401(k) if it's available, because it allows you to pay taxes today instead of later, when you might face a higher tax rate. Those without access to those employer-sponsored accounts can consider an individual retirement account or Roth IRA, Brett adds.

If the goal is to accumulate $1 million by a retirement age of 65, with an assumption of a 6 percent return on investments, then a millennial starting at age 20 will have to save $361 per month to reach that amount. If that same person waits until age 30 to start saving, she'll have to save almost $700 per month, and waiting until age 40 would require saving $1,436 per month, Brett calculates.

12. Don't forget about the taxes you'll pay later.

Anyone saving for retirement today should consider what their true purchasing power will be after paying any necessary taxes, Brett says. If most of your retirement savings are in a 401(k), for example, you shouldn't forget that you'll have to pay taxes on those withdrawals. "You might not have 100 percent of that dollar working for you, whereas with a Roth 401(k), it grows tax-deferred and then you take it out tax-free," Brett says. And in some cases, such as with an early withdrawal, you might even need to pay taxes on a Roth account.

Investing in your taxpaying prowess now will pay off for many years to come, and might even help you pay less to the government this year.

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