Here's What Every Twentysomething Needs To Know About Taxes (2024)

I know — taxes can get scary, and some people address that fear by hiring a tax preparer every year to do their worrying for them. Thing is, if your income is from a regular job that takes taxes out of your paycheck and your employer gives you a W-2 form, you'll be fine doing your own taxes with the help of a computer program or online service.

If you have many sources of income, multiple investments, or do freelance work that requires to you to make payments every quarter, then you should consider a tax preparer. But if you just work a normal job, you'll be totally fine doing it on your own.

It's worth mentioning how the top two tax programs (TurboTax and TaxACT) break down before you decide to spend your money on them:

TurboTax has four editions to choose from. In all versions, filing federal taxes is free, while filing state taxes is about $20. If you're filing more than a simple W-2 form, you may need to pay for an upgrade to a more complex version, but the program will ask you questions to help to determine that, so don't worry if you're not sure which one you need.

TaxACT has three editions to choose from, and all versions can file federal taxes for free. With the Deluxe and Ultimate editions, state tax filing is included, and is $14.99 in the Free version. TaxACT doesn't have as many features as TurboTax, but it is significantly cheaper.

Before you start work on your taxes, call your parents and ask if they're claiming you as a dependent. In most cases, a parent will claim you as a dependent to reduce their taxable income by about $4,000, which could get them a bigger return. Unfortunately, there's a downside: Your parents claiming you as a dependent will disqualify you from some deductions, and maybe a bigger refund for yourself.

In order for your parents to claim you as a dependent, you have to be under 24 and their financial support has to count as at least 50% of your income. The full list of requirements can be found here, and it's very much worth going through with your parents to see if your situation qualifies.

Through our twenties, we realize one universal truth: College isn't cheap. If you're in an undergrad program or even deep into your graduate program, there are two tax credits you can take advantage of that may save you quite a bit of money.

American Opportunity Credit (undergrad students): This tax credit can cover up to $2,500 of undergraduate costs, and covers things like tuition, enrollment fees, books, and course materials. Parents can also claim this for dependent children who are students, and the student has to be taking classes at least half-time working toward a bachelor's or associate's degree.

Lifetime Learning Credit (undergrad students carrying limited course loads, graduate students): This tax credit can cover up to $2,000 of undergraduate and graduate school costs, and covers tuition, enrollment fees, and books you purchase from the school. It can also be used for courses taken to improve job skills.

You cannot claim both of these credits at once, although both are a great way to ease school costs. Both credits can be claimed while using most tax filing programs.

If you made less than $10,150 in the past year, you are not required to file a federal tax return. But even if you don't have to, you probably should still file for a few reasons. For one, working any typical job during the year means you likely signed a W-2, which means that taxes were taken out of your paycheck, and that means you are still eligible for a refund. There are also credits like the Earned Income Tax Credit or the Additional Child Tax Credit which can give you more money back if you qualify.

Even your return is not a million dollars, it might be a hundred or two, and that's still money to go toward the car or TV you've been wanting.

This year, the U.S. government will offer you a standard deduction of $6,200, which means that amount is automatically subtracted from what you owe. If that subtracted amount is greater than the amount you owe, that's when you start getting money back through a tax refund. In most cases, taking this standard deduction and adding some other info should get you a pretty good return.

But if you've spent a lot this year for school or work, then you may want to think about filing itemized deductions, which allows you to subtract the cost of what you bought from what you owe. By doing this, you are giving up the standard deduction of $6,200, but this allows you to subtract things like medical expenses, the value of stolen items, large charitable donations, and more.

In most circ*mstances, the standard deduction for a twentysomething will get you more money (and take less work) than trying to do an itemize deduction with everything you bought. In the end, you should choose the one that gets you more money back.

Services like H&R Block and TurboTax offer an extra 5% to 10% on gift cards to places like Amazon or Starbucks if you put some of your return toward them.

But think about it: This is your tax return, and maybe even the biggest amount of money you'll see in one check all year. I know getting free iced white chocolate mochas for the next year seems tempting, but you'll be better off in the long run putting that money toward something that matters, like a car or retirement.

The worst thing that can happen when it comes to your taxes is if the IRS triggers an audit, which allows them to ask you questions about your expenses and potentially take away from a bigger return. The chances of this happening to you however are very, very slim, as the IRS only audited less than 1% of all tax returns last year.

Most of those audited are people making over $1,000,000 or those who greatly lie about their expenses, so if you're working a job or going to school as a twentysomething, you'll be fine. Keep your receipts close, be realistic when entering your expenses, and you'll more than likely to get a good amount of money back.