Smart Tax Strategies for Younger Workers

Still new to the ways of the IRS? Here are a few smart tips to help you get through tax day as painlessly as possible

by Marc Hogan

Taxes are a headache by almost anyone's estimation. Despite occasional talk about simplifying the code, Americans' yearly encounter with the Internal Revenue Service probably won't get less complicated any time soon. For example, President Bush included a proposal in his State of the Union address Jan. 23 that would change the tax treatment of health-insurance benefits (see BusinessWeek.com, 1/24/07, "Salesman in Chief").

Heady stuff when you're setting up your own financial house. Every year, a new batch of young workers dives into this tangled maze of credits and deductions without the benefit of experience. According to IRS demographic data, nearly a quarter of all individual income tax returns processed in 2004 were filed by taxpayers under 30. Many members of this age group face their own unique tax situations, whether it's not having a mortgage to pay or not receiving benefits at work (see BusinessWeek.com, 2/16/06, "Life Without a 401(k)").

Unfortunately, even the enthusiasm of youth probably won't keep taxes from being a chore. To make that job easier, this week's Five for the Money shares five basic tax tips for young professionals still getting the hang of dealing with the taxman.

1. Get It Together.

First, make sure your financial house is in order. The longer it takes you to gather up your various tax-related documents, the more it will cost to prepare your return, whether in time or money. "There's one major rule when preparing to file your taxes," explains John Deyeso, principal of New York financial planning firm Financial Filosophy. "Be organized and detailed."

What papers do taxpayers need? The list starts with the W-2 or 1099 form from your employer, or at a minimum your individual pay stubs. Homeowners will require 1098 forms from their mortgage lenders. Also locate any mutual fund 1099 forms or bank-dividend statements. Student-loan payments and receipts for continuing education, charitable donations, or moving expenses may come in handy as well (more on those later).

2. Decide Your Plan of Action.

Novice taxpayers face the question of whether they should do their taxes themselves or seek professional help. Even some financial pros say many young professionals should start out doing their taxes themselves using popular tax software like Intuit's (INTU) TurboTax or H&R Block's (HRB) TaxCut. "There's no better education than seeing where the numbers end up on the return," says Sammy Grant, president of SG Financial Advisors in Sandy Springs, Ga. "It's fine to hire a professional one day, but I recommend trying it on your own first."

On the other hand, professional tax advisers can help young workers get their tax lives on the right track at an early age, other experts say. "Correctly addressing tax implications early in one's career can also help establish habits that reinforce a savings ethic over a working lifetime for retirement needs," says Barbara Steinmetz, founder of Steinmetz Financial Planning in Burlingame, Calif.

Taxpayers who settle on a plan early will likely find themselves in better shape on Apr. 16, this year's tax deadline in most states. "Don't wait until the last moment," says Donald Duncan, principal of D3 Financial Counselors, based in Downers Grove, Ill. Duncan likes TurboTax, but young workers should ultimately pick whichever option makes the most sense for their particular circumstances.