Tax Breaks for the 20-Somethings

For today’s young adults, paying more in taxes can have a devastating effect on their already struggling lifestyle.  Thus, taking advantage of every available tax break is vitally important to starting an independent financial life.  Fortunately, the IRS offers deductions, credits and other tax breaks that have a particular appeal for those in their 20s.  Below are some of the most popular:

1. Educational Tax Breaks. Since many individuals in their 20s have not finished their education, education-related tax breaks can be valuable.  The American Opportunity Credit pays 100 percent of the first $2,000 and 25 percent of the next $2,000 in expenses for the first four years of college.  Also, the Lifetime Learning Credit will pay you up to 20 percent of eligible expenses of up to $10,000.
2. Deduct Student Loan Interest. If student loans qualify, you can deduct up to $2,500 in interest on your loans against your taxable income.  Furthermore, you can claim this benefit even if you do not itemize other deductions.
3. Open a Roth IRA. Oftentimes, early in your career you are in the lowest tax bracket, and opening a Roth IRA is a great way to save for retirement.  With a Roth, you will not get an up-front tax deduction on your contribution, but you also will not have to pay taxes when you withdraw money from your Roth in retirement. 
4. Get the Retirement Savings Contributions Credit. Another reason to contribute to a Roth is that if you qualify, you can get the Retirement Savings Contribution Credit (Saver’s Credit).  This matches up to 50 percent of your retirement contribution in the form of a tax cut and is designed to offer an incentive to low-income taxpayers to start saving for retirement.  
5. Earned Income Tax Credit. The Earned Income Tax Credit has become available to people without children and singles making up to $14,590 and joint filers with incomes up to $20,020 can get the credit.  One benefit of the EITC is that it is refundable, meaning you can collect it even if you otherwise do not have tax liability.

See Dan Caplinger, The 5 Best Tax Breaks for 20-Somethings, Daily Finance, Nov. 1, 2014.