According to recent studies, more than a third of all Americans are anxious about filing their taxes. This number is much higher, however, among young 20-something-year-olds who report severe anxiety regarding any correspondence with the IRS. Although it is understandable that many American’s hold some worry regarding their tax return accuracy, Heath N. Hendrickson, a CPA based in Caledonia, NY, hopes to reduce this anxiety by sharing his tax knowledge with young Americans. Today, CPA Heath N. Hendrickson of Caledonia, NY, will discuss the most common tax mistakes made by 20-something-year-olds and how to avoid these tax errors.
Overpaying Out-Of-State Taxes
At the beginning of a career, it is common for young adults to move once every few years. For this reason, one of the most common mistakes that young 20-something-year-olds make come tax season is overpaying their taxes for a state they previously worked in. When a person works in multiple states or moves from one state to another, your employer is required to withhold taxes and pay them to the state where you worked. However, each state has different tax withholding and reporting rules which can get tricky when a person has moved more than once in a year. When a person works out of state, they only have to pay taxes on the wages earned for the time period they were working in that state, which means individuals must calculate state wages earned in each state.
Penalties for Roth IRA Contributions
Recent surveys have found the majority of Roth IRA accounts are opened by recent college graduates. Once young twenty-something-year-olds receive their first full-time position, many will open a Roth IRA. However, Roth IRAs and Traditional IRA accounts can be quite complex, especially for young adults unfamiliar with IRA tax codes. Many young adults are unaware that income limitations contribute directly to a Roth IRA. An individual’s modified AGI limitation is $125,000, whereas it is $198,000 for married couples. If your AGI is above the threshold, you may be able to contribute a reduced amount, however, if individuals or couples violate this limit, there is a 10% penalty. This can be avoided if young taxpayers utilize the backdoor Roth IRA strategy, which consists of putting funds in a non-deductible Traditional IRA and converting it to a Roth IRA.
Paying Taxes on a 401(k) Rollover
As many young 20-something-year-olds change jobs every 2-3 years, many choose to move funds from their old 401(k) to their new employer’s 401(k) plan. Even if the funds are only going to be transferred from one pre-tax plan to another, there will be no tax associated with the transfer. However, if a person fails to report the 1099-R rollover on their tax return, or forgets to put the gross distribution on their tax return, they may receive a notice from the IRS. This can be easily avoided by consulting with a licensed CPA.