FREE BEER!!!! [Quarter Life Crisis Guest Post]

28 Feb

By John W. Haag, Sr., CPA/ABV, CVA, CFF
Principal, Yeo & Yeo CPAs

I learned many years ago that if an article has the word “tax” in the title, it will not be read. Please excuse my desperate attempt to draw more attention to this blog — did it work?

If I asked you for $100, what would you say? You would probably want to know why. You would want to know what I am going to use it for, will you get it back, how did I determine $100 was the amount I needed, and do I really need $100 or would a smaller amount do. Yet every day that you earn money, you give a little of it away in taxes. The truth is, most people do not ask what it is being used for, how it is calculated, or how much they will get back.

As a CPA, I meet with young professionals all the time who are starting their careers and going through transitions (jobs, moving, buying houses, getting married, starting families). A common comment that I hear is, “I have never paid much attention to taxes, but figured it was about time to start having a professional prepare them.” And do not feel bad, I still hear a few “Actually, my mom still does my taxes for me.” If that is you, then I have prepared a list of some of the most important things that young professionals should know about taxes.Keep in mind that each individual’s tax situation is different and that many of the items discussed below have income limitations, referred to as phaseouts. In other words, once your income reaches a certain level, some of these credits and deductions go away.

Getting Smart
Chances are you may still be paying some higher education expenses. If that is the case, two federal tax credits may help lessen your tax bill: the Hope Scholarship Credit (American Opportunity Tax Credit) and the Lifetime Learning Credit.
The Hope Scholarship Credit is worth a maximum of $2,500 for 2013. The credit is available for the first four years of undergraduate education and can be used to cover the cost of course materials. In addition, 40% of the credit is refundable, which could enable lower-income taxpayers to get money back from the IRS. The Lifetime Learning Credit, which applies to undergraduate study, as well as graduate and professional education pursuits, could be worth up to $2,000.There is also an above-the-line deduction for tuition and fees if you are not eligible for any of the credits, which can reduce the amount of your taxable income by up to $4,000.
Up to $2,500 of interest paid on student loans may be deducted. Since this is an “above-the-line” deduction, even non-itemizing taxpayers benefit. The loans may be used for qualified higher education expenses, such as tuition, fees, room and board, and books.
Question: $1,000 deduction vs. $1,000 credit…which is better? A deduction decreases your taxable income. So if your tax rate is 15%, a $1,000 deduction would be worth $150 in your pocket. A credit decreases your actual tax “dollar for dollar.” So a $1,000 credit is worth $1,000 in your pocket. Credits win!

Moving On Up
Prior to owning a home, most young professionals take advantage of the standard deduction and do not itemize deductions. Signing for that mortgage changes this, as you may now be able to deduct property taxes, mortgage interest, points, and in some cases private mortgage insurance. This often allows young professionals the opportunity to begin itemizing deductions. In other words, they can now deduct charitable contributions (cash and non-cash), license plate fees, state income taxes, charitable mileage, etc. In today’s world, many young professionals find themselves moving to find work. Moving expenses related to work, subject to a distance and time test, can be deducted on your tax return, provided that they are not reimbursed or paid for by your employer.


Tying the Knot
Once the champagne is gone and you return from the Bahamas with your golden tans, tax time rolls around and you realize that doing your taxes is a bit different. You are no longer a single tax filer, but rather qualify to file married filing jointly. Income and deductions from both you and your spouse are combined on one tax return. I am often asked, “Can we still file separately?” The answer is yes; however, in the majority of circumstances, this will result in you both collectively owing more tax. A common issue is that in the year of marriage, one spouse has been earning a W-2 wage and having an appropriate amount of taxes withheld, whereas the other spouse has been earning a W-2 wage but claiming a large number of exemptions and has very little withholding. The first spouse thinks that he or she will get a large refund, and the other is used to paying in all the time. And therein lies your first argument. To avoid this, it is a good idea to have a discussion with a CPA together, prior to marriage, to get your financial house in good order and make sure everyone is on the same page.

tax deduction

Populating the Earth
Although deducting baby formula and diapers are out of the question, there are some tax benefits for your little one. The child tax credit is available for parents with children under the age of 17, and is equal to $1,000 per child, subject to a phaseout once income gets too high. In addition, you will be able to claim a dependent exemption of $3,900 on your federal return and $3,950 on your state return. Assuming a 20% effective tax rate and 4.25% state tax rate, little Bobby or Suzie could be worth almost $1,950 a year in tax savings. That should cover a month’s supply of diapers, right?
If your company offers a Flexible Spending Account (FSA), do not pass up the opportunity to take advantage. Use this to cover co-pays, prescription drugs, or even those well baby checkups. You can elect to contribute up to $2,500 a year to an FSA, which saves not only federal and state income taxes, but also social security and Medicare taxes. A young professional could easily save $700 or more by participating.


Retirement Planning
Deductions and tax credits are a great thing; however, you do not want to forget about deferrals. This is where you defer taxes on your income, which is primarily done through investing in qualified retirement plans. Retirement vehicles such as 401(k)s and Traditional IRAs defer taxes and allow your money to be invested and grow, with taxes not being due until you actually use the money in retirement. Young professionals these days need to adopt a retirement saving strategy early in their careers and stick with it. Many times I see young professionals drawing from their retirement accounts — and paying penalties and taxes — to fund living expenses. This should absolutely be a last resort. Get in the habit of contributing to a retirement plan and let it grow. As your income increases, so too should your contributions. For example, if you get a 3% raise, increase your retirement contributions by 1%. The days of relying on pensions and social security have passed; young professionals must develop their own retirement savings plans.

Where to Now? My Thoughts
Although this blog is about taxes, I would like to expand it to include all aspects of a young professional’s personal and financial life. Young professionals are faced with a lot of changes when they enter the “real world.” They should not hesitateto seek advice from other young professionals early on in their careers. Develop relationships with an attorney, a mortgage lender, an insurance agent, a financial advisor, a CPA, a real estate agent, a primary care physician, an auto salesperson, etc. By utilizing a young professional for these types of services, you can develop a long-term relationship and grow together as they are learning their craft too. The most successful relationships that I see in my line of work are those that began many years ago and developed over time. Begin developing your professional relationships today. And regarding the Free Beer, if you ever want to talk taxes, let me know and I will buy you a beer.

Haag, JohnJohn W. Haag, Sr., CPA/ABV, CVA, CFF, is a Principal in charge of the Management Advisory Services group of the Midland office of Yeo & Yeo CPAs and Business Consultants. He is a co-leader of the firm’s Valuation & Litigation Support team. John has specialization in business valuations, litigation support, business plans and start-ups, troubled debt restructuring, mergers and acquisitions, and management studies. He is a Certified Valuation Analyst and holds the designation of Certified in Financial Forensics from the American Institute of Certified Public Accountants.

Contact John via e-mail at or call 800.701.3574.


2 Responses to “FREE BEER!!!! [Quarter Life Crisis Guest Post]”

  1. Jessica L. Robinson March 3, 2014 at 1:26 pm #

    haha! you really did trick me into getting started reading the article. And I’m glad it worked. Very informative.


  1. Taxes…I Never Know What I am Doing | Midland Young Professionals - March 4, 2014

    […] at Yeo & Yeo CPA’s & Business Consultants, was a guest blogger for us and he wrote a very useful, informative and entertaining post with some tax tips for young professionals. If this past year you bought a house, got married, had […]

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