Tax Memo For Millennials

In the fairly recent past, each January Americans would begin to gather documents and paperwork in preparation for tax filing.  Blank tax forms were stacked in neat piles at the post office, and taxpayers were tasked with selecting all the correct forms for their situation. There was much angst as pencils were sharpened and resharpened, numbers were crunched and recrunched, and tears were shed.  At some point prior to midnight on April 15, paperwork was signed, neatly folded and stuffed into envelopes, then snail-mailed off to the IRS and state tax offices.  If a refund was expected, it was long forgotten and a nice surprise when that paper check showed up in the mailbox three months later.

Millennials, please read that again!

While the current system is much more streamlined and less painful, one of the downfalls is that many millennials simply don’t understand the tax system. They log on to TurboTax, import some documents, then push a button and wait a couple weeks for money to show up in their bank account.  There is never that ‘aha!’ moment when they figure out how it all works.

So, here are a few tax tidbits for millennials.

1. You may not get a refund of all the tax withheld from your pay. If everyone did, what would be the point of the process? As your income increases, so does your tax liability.  When you are just starting out, you pay little to no tax.  At some point that will switch to paying some tax, and then to paying a lot of tax!    Prepare for it, and do some tax planning to minimize the tax bite.

2. A “tax return” is the paperwork you file with the IRS or your state to report your income and deductions for the year. A “tax refund” is money received back from the IRS or state due to an overpayment of tax (theoretically). ‘Return’ and ‘refund’ are not interchangeable.

3. Your tax return is based on your specific situation, and it cannot be compared to the return of your friend or sister or cousin or neighbor….no two situations are the same. You may not be eligible for the same credits or deductions or dependency exemptions as those around you. As similar as your situations may seem on the surface, don’t assume the IRS treatment is the same.  Your refund, processing time, or paperwork may be vastly different.

4. Slow down!!! Employers, financial institutions, colleges, and other reporting agencies have until January 31 to get your documents in the mail to you (some have a later deadline). Each year millions of taxpayers must file amended returns because they submit their original return before receiving all documents.

Often those amendments come at a price – some of the refund that was already received and spent must be paid back.  It’s ugly.  Don’t push that ‘submit’ button until you’ve carefully reviewed everything to ensure that it is correct and complete.  Your electronic signature is attesting to the fact that your return is accurate.  Don’t sign if you don’t know that.

5. The IRS takes deadlines seriously, and so should you.

The federal tax filing deadline is April 15, unless extended due to weekends and/or holidays as is the case this year.  Your 2016 tax filing is due by midnight April 18.  If you owe the IRS, any tax owed is due by midnight April 18.  If you are having trouble getting your paperwork together, you can apply for an automatic extension of the filing deadline which will give you until October 15 to file the necessary paperwork. However, even with an extension, all tax owed is due by the April deadline.  Estimate the amount due and submit a payment prior to midnight April 18 to avoid interest and penalties.

6. If you are owed a refund, you can file late. Late filing penalties are calculated based on the amount of tax owed……and you can’t calculate a penalty based on $0 owed. As a matter of fact, if you are due a refund and file late, the IRS will pay you interest on your refund.  However, if you are owed a refund and do not file within three years of the due date, you’re out of luck.  After that date, the IRS gets to keep your money.

7. Identity theft is a thing now. Electronic filing makes it much simpler for the thieves, as well as for the taxpayer. With just a few crucial pieces of data, a thief can file a fraudulent tax return in and make off with thousands of dollars in your name.  Then, when you e-file your return, the IRS bounces it right back to you with a notice saying, “Sorry, someone has already filed a return in your name/SSN.”  It may take months to clear things up with the IRS and receive your refund.

Protect your personal information.  Always use a secure connection for anything tax-related.  Don’t respond to e-mail, phone calls, or text messages asking you to verify your tax information or login information.  The IRS will not contact you via those methods.  If they need verification, they will send it via snail mail.

8. Always, always keep a copy of your tax return! Correction….. keep duplicate copies.  Digital copies of the tax returns are okay, as long as they can be printed.  In the event of an audit, the IRS will want a paper copy.  While most millennials are very opposed to anything paper, this is one document that you really need to print and store in a secure place.  In the event you need a copy and don’t have one, the IRS will send you a copy……for a fee of $50.

While a numbered list of eight items isn’t a replacement for the education manual tax preparation can provide, it’s a good start.  Use the current technological advances to your advantage – google, research, and learn before you file. Knowledge is power, and in this case it can put more money in your pocket!