Tax planning for young adults

Karin Price Mueller/The Star-Ledger  writes: Q. My daughter just started a new job earning about $60,000 a year. What would be a good way to plan for taxes? She is 24 and lives at home with no deductions. — Proud Parent

A. Seems like the voice of experience is seeping through your question, and that’s great for your daughter.

"As many of us vaguely remember, it was a shock when we first started making serious money and realized what a big chunk of those earnings is either taken or must be set aside for taxes," said Clare Wherley, a certified financial planner and certified public accountant with Lassus Wherley in New Providence.

Before we get to your daughter specifically, Wherley said, the most important point to keep in mind about taxes these days is that the rules change. She said historically, there have been major changes to the federal tax code every 30 or so years. The last major overhaul was in 1986, so Wherley said she expects there will probably be big changes in the next few years.

"Therefore, because taxes are an important part of life, the most important step in planning is to take the time and make the effort to really understand the provisions of the tax code," she said. "Probably the best way to do that is to take a basic tax course or spend some time with someone who does have a good understanding."

Wherley said when an individual has a good basic understanding of the tax code, they realize that Congress utilizes the tax code to manipulate the behavior of the American public. For example, she said, in the 1970s when we had the first oil and gas crisis, Congress passed a law to allow credits for energy savings.

"Credits for installing insulation, replacing windows, or taking other such measures were a huge factor in encouraging Americans to reduce fuel consumption," she said. "We’ve seen similar credits made available in the last few years, but on a much smaller scale."

Another example is tax-deferred savings in IRAs. She said Congress wants the American people to save more for their own retirement.

Wherley said the smartest planning move your daughter can make to reduce her income taxes now is to contribute to a retirement plan such as a 401(k).

Michael Steiner, a certified financial planner and certified public accountant with RegentAtlantic Capital in Morristown agrees.

"Your daughter can achieve both the savings and tax reduction objectives in one shot," he said. "Additionally, if the employer has a plan and also offers a match, then she will have hit the trifecta of savings, reduced taxes and company contributions to the plan."

For 2013, individual can contribute up to $17,500 to their 401(k) plans, Steiner said. Any amounts deferred into a retirement plan also reduce the wage income that is subject to taxes. Employer matching contributions are also exempt from taxes, he said.