7 Biggest Mistakes Gen Z Will Make on Taxes This Year, According to Experts
Written by
G. Brian Davis
Edited by
Amber Barkley
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The less money you lose to taxes, the faster you can build wealth. But tax planning is a game with its own complex rules and strategies — which is why you hear so many tales of billionaires paying lower effective tax rates than middle-class Americans.
If you want to win the game, you need to learn winning strategies. And most young adults barely know how to play the game at all.
Avoid these common tax mistakes Gen Z will make on taxes this year to put more money toward building wealth and less toward lining Uncle Sam’s pockets.
Failing To Take Available Tax Credits
Most young adults prepare their own tax returns, because they don’t feel they earn enough to justify hiring an accountant. But that means they often miss out on tax savings they qualify for — especially tax credits.
Logan Allec, CPA and owner of Choice Tax Relief, pointed out the most often overlooked: “Common tax credits that many Gen Zers qualify for include the Earned Income Tax Credit, the American Opportunity Tax Credit, the Lifetime Learning Credit and the Savers (Retirement Contributions) Credit.”
Double check whether you qualify for any of those, because the government might just owe you money rather than vice versa.
Falling To File Crypto Transactions
Like other assets, you don’t owe taxes on profits from cryptocurrency until you sell. So, if you didn’t sell any crypto assets last year, you don’t owe capital gains taxes on them.
Except you knew there was a “but” coming.
If you earned income in cryptocurrency, you owe taxes on it. If you mined coins or sold NFTs or staked ethereum to earn rewards, you owe taxes.
“Make sure that you report all of your capital transactions during the year, including those involving cryptocurrency,” said Allec. “If you don’t report your cryptocurrency sales and exchanges on your tax return, you could find yourself the recipient of an IRS CP2000 Notice in the mail: basically a ‘gotcha’ letter from the IRS to taxpayers who don’t report all their income.”
Failing To Report Side Gig Income
If you worked a side hustle and earned $600 or more, the payer should send you a 1099 form at the end of the year.
Even if you earned less than $600 from a given side gig, Uncle Sam still demands that you report it. Some self-employed workers opt not to, since there’s no paper trail without a 1099. But they do so at their own risk.
Unfortunately, self-employed workers owe both the employee and employer sides of Medicare and Social Security taxes. That comes to 15.3% total, double the 7.65% rate that W-2 employees pay.
Failing To Budget for Taxes on Side Hustle Income
Employers who pay you on a 1099 basis don’t typically withhold for the taxes you owe. They pay you everything up front, and it falls to you to budget and pay those taxes.
“Many young adults spend everything they earn from their side gigs, not realizing they’ll owe a hefty tax bill the following April,” said CFP Brian Seymour, founder of Prosperitage Wealth.
Actually, it’s worse than that. Self-employed workers owe estimated taxes each quarter, throughout the tax year. If you fall behind and only catch up when you file your tax return, the IRS can hit you with late fees and penalties.
Failing To Combine Self-Employed Deductions With the Standard Deduction
Self-employed workers can deduct some business-related expenses — while still taking the standard deduction for their personal expenses.
Melissa Murphy Pavone, founder of Mindful Financial Partners, explained, “Self-employed Americans should track all expenses related to their business or freelancing. That includes travel, a home office, meals, office supplies and more. These workers can deduct these from their business income directly, while still taking the standard deduction.”
Don’t go too far in the opposite direction, though — research which of your expenses qualify as deductions before you file.
Failing To Deduct Unreimbursed Medical Expenses
Medical expenses often add up enough for young adults to itemize their deductions.
“Many Gen Z workers have no idea that they can deduct unreimbursed medical expenses from their taxable income,” said Neal K. Shah, chairman of Counterforce Health. “As insurance denial rates soar, this issue is becoming more widespread. Yet most taxpayers don’t realize that those denied claims could be deducted on their taxes as out-of-pocket medical expenses — if their total medical expenses exceed 7.5% of their adjusted gross income.”
Failing To Take Advantage of Roth Accounts While Young
As a refresher, you can deduct from your taxable income the money you contribute to a traditional IRA, but you pay taxes on withdrawals in retirement. Roth IRA contributions work in reverse: You can’t write off the contributions now, but the money compounds tax-free, and you pay no taxes on withdrawals in retirement.
“Gen Zers are generally in their lowest earning years and should take advantage by making contributions into after-tax accounts like Roth 401(k) [plans] and Roth IRAs,” added Seymour. “The 10% and 12% tax brackets are historically low and likely the lowest that young adults will see in their lifetimes.
“By paying the taxes now, they remove the risk of a higher tax rate in the future and the inability to contribute to a Roth IRA if their income gets too high.”
Plus, as a young adult, your Roth account has decades to compound tax-free before you retire. Imagine you contributed $7,000 per year for the decade between ages 22 and 32, then never contributed another cent. If you averaged a 10% annual return and left the money to compound from age 32 to 62, you’d end with $2,283,419 in your Roth IRA — every dollar of which you can withdraw tax-free, and theoretically never pay taxes again.
Game: won.
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