Tax planning for Millennials

By David M. Barral, CPA/PFS

Tax planning for Millennials
Image by A-DIGIT/iStock

Millennials need help with tax compliance and planning. Many are sole proprietors who could benefit from tax planning while starting a business, often in the "gig" economy. Many others are entering the corporate work force, and understanding their taxes is a huge consideration for them as well.

However, many Millennials don't go to CPAs for tax compliance or advice because they have a do-it-yourself attitude or because the idea of paying a CPA to prepare their taxes can be intimidating for them. Some tax practitioners might not even specifically target this demographic, assuming it's just not worthwhile. But they may be missing an opportunity to present such a taxpayer with tax-saving strategies and perhaps thereby gain a loyal client.

Below is a checklist of tax planning and other financial concepts, goals, and strategies to discuss with Millennial clients.

Finance a first-time home purchase

Finding the money for a down payment on a home can be daunting, and some would-be buyers might seek alternative sources, such as tapping into their 401(k) account from an old employer. An early distribution from a retirement plan can result in a 10% early-withdrawal penalty, but there is a smarter approach that avoids this penalty if these funds must be accessed. A retirement plan from an old employer generally can be rolled over to an IRA, from which distributions for a first-time home purchase (up to $10,000) are not subject to the early- withdrawal penalty (Secs. 72(t)(2)(F) and 72(t)(8)). However, the funds distributed will be included in income and subject to income tax if they were contributed pretax.

Consider claiming educational expenses as a business deduction where eligible

Most taxpayers have heard of tax credits for educational expenses. However, many are unaware that, if they are employees, they may instead be able to claim the expenses as an itemized deduction or, if self-employed, as a business expense, either of which may yield a greater tax benefit in some situations. Employees may take a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income (AGI) limitation as a work-related educational expense. The self-employed may deduct educational expenses as ordinary and necessary business expenses from gross self-employment income. The expenses must be for education that maintains or improves skills required in one's trade or business or meets the express requirements of an employer (Regs. Sec. 1.162-5(a)). The education cannot qualify the taxpayer for a new trade or business, such as law school for a person in a profession other than law (see Regs. Sec. 1.162-5(b)(3)(ii), Example (1)).

This can benefit a taxpayer going back to school for an MBA or other advanced degree, which is typically expensive, sometimes topping $60,000 per year. The maximum lifetime learning credit is $2,000 per tax year, based on qualifying expenses of $10,000 for the year, with no carryover. However, a business or itemized deduction can take into consideration higher expense totals.

Take advantage of cafeteria plans at work

Sec. 125 allows employees to receive some of their compensation pretax for qualified expenses. CPAs might advise their younger clients of the potential to avoid paying income tax and Federal Insurance Contributions Act tax (7.65%) on contributions to these plans. Cafeteria plans often include flexible spending arrangements for health care or dependent care expenses and qualified fringe benefits, such as passes for mass transit. These two alone could save hundreds of dollars a year in taxes.

Manage student loans for optimal use of the above-the-line deduction for interest paid

The general rule of thumb is to pay down student loans as early as possible because they cannot be discharged in bankruptcy and generally charge higher interest rates than a safe investment can earn. Although an adjustment to AGI is available for student loan interest paid, it's worth reinforcing to these graduates that this deduction is limited to $2,500 and phases out at AGIs of $65,000 to $80,000 ($130,000 to $160,000 for taxpayers who are married filing jointly).

A student loan consolidation can reduce monthly payments as well as the total amount paid over the life of the loan for a debtor eligible for loan balance forgiveness under a career-based program such as Public Service Loan Forgiveness (PSLF). The balance is generally forgiven once 120 qualifying monthly payments have been made under a qualifying repayment plan while working for a qualifying employer. Only loans received under the William D. Ford Federal Direct Loan Program qualify for the PSLF program. Loans with other federal student loan programs (e.g., Perkins Loans or Federal Family Education Loans) can qualify once they are consolidated into a Direct Consolidation Loan. It's important to take an inventory of all loans and consolidate only those current loans that are unqualified, so as not to lose credit for qualifying PSLF payments already made to date.

Address Millennials' investing concerns

Young taxpayers may desire to invest but find it difficult to pull together the necessary funds. Some taxpayers will decide to draw the money from a 401(k) plan from an old employer, viewing it as a piggy bank. As mentioned above, such former employer plan balances are best transferred or rolled over to an IRA, and then there's no need to pull the money out of the old account to invest. Or clients may opt to convert those balances to a Roth account (see "When Clients Should Open or Convert to a Roth IRA," July 2016). In either case, investing is more tax-efficient within the tax-advantaged retirement account. Also, while CPAs shouldn't give specific investment advice unless they are qualified to do so, they should discuss risk and the benefits of diversification.

Help sole proprietors understand their tax obligations

Young taxpayers often seek ways to make money on the side to make ends meet. A common misunderstanding concerns self-employment taxes. CPAs should advise their clients in the gig economy of this consideration, as well as any state and local tax concerns. These clients also need to be made aware of the importance of properly documenting ordinary and necessary business expenses. Time should be spent discussing listed property as well as contemporaneous logs for business vehicle mileage and meals and entertainment.


Tax compliance can be cheap—often free, in the do-it-yourself ethic common among Millennials—but many times, it takes a professional to assist taxpayers in minimizing their tax bills. Tax planning arises out of a conversation that begins with the simple question, "What are your concerns?" Thus, the CPA must be cognizant of how the concerns of younger taxpayers differ from those of their older clients.

David M. Barral ( is a tax and accounting manager at MBAF CPAs LLC in New York City and an adjunct professor at Wagner College in Staten Island, N.Y.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at or 919-402-4434.

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