5 Common Tax Mistakes That Could Cost Gen Z Money
A recent survey by GOBankingRates found that the top tax day concern among taxpayers aged 18-24 was making a mistake (27%). It’s no wonder, considering that Gen Z is fairly inexperienced with the world of taxes and finances in general. Plus, making mistakes on your tax return could not only mean missing out on certain write-offs, but potentially, facing penalties.
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Read on to learn which common mistakes to avoid when filing taxes this year.
Not Knowing Whether You’re a Dependent
When you’re younger and living at home or otherwise financially dependent on your parents, they likely claim you as a dependent. But once you start supporting yourself, you are no longer considered a dependent.
It’s important to know which situation applies to you and note it on your return, according to Kari Brummond, an accountant with TaxCure.com. “However, accidentally ticking this box if your parents no longer claim you as a dependent can cost you money,” she said. That’s because as a dependent, you’re unable to claim certain tax benefits.
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Not Paying Taxes on Unemployment
According to a GOBankingRates survey from December 2022, 12% of Americans were experiencing unemployment and hunting for a new job. However, unemployment disproportionately affected younger workers, with 15% of the respondents in this category members of Gen Z.
Those that claimed unemployment benefits need to pay taxes on the income if they didn’t opt to have taxes withheld from payments. “While there was an exclusion for some unemployment during the financial and COVID-19 crisis, unemployment is normally considered taxable income on a federal tax return,” said Eric Bronnenkant, head of tax at digital investment advisor Betterment. He explained that a 1099-G tax form should be issued by the state government paying the benefits, but it’s not always mailed to the taxpayer. “If a taxpayer does receive unemployment income, they should seek out their 1099-G tax form on their state’s website and report on their tax return,” he said.
Failing To Write-Off Business Expenses
About 43% of Gen Z professionals did freelance work in 2022. “One of the biggest mistakes that younger taxpayers might make when filing is not claiming all of their eligible deductions against their freelance or side hustle income,” said Logan Allec, a CPA and owner of tax relief company Choice Tax Relief.
He explained that this income is viewed as self-employment income, and it’s taxed at a higher rate than most other forms of income, such as W-2 wages. “This is because self-employment income is subject to not only one’s regular income tax rates, but also the 15.3% self-employment tax,” Allec explained.
However, many younger taxpayers may not be familiar with what tax deductions they qualify for or how to maximize them to offset these taxes. “To learn more about maximizing deductions against their freelance or other self-employment income, members of Gen Z should consider reading IRS Publication 535 or consulting with a tax professional,” Allec said.
Underreporting Income
On the other hand, it’s also important to report all income, including money earned from side jobs — even if it’s a fairly small amount. “The IRS states that all income is taxable unless there is a specific exclusion (i.e., gifts from parents),” Bronnenkant said.
He added that underreporting income can lead to significant interest and penalties in addition to the tax owed. So be sure to report all income, even if you didn’t receive a 1099 for it.
Ignoring Messages From the IRS
Getting a letter from the IRS might ring alarm bells in your mind, but Bronnenkant said it’s important to review these communications and respond in a timely manner, if required to do so. “Ignoring the notice may result in the IRS assessing interest and penalties, which could have potentially been avoided with a timely response,” he explained. Even if you owe money, it is better to be communicating with the IRS and trying to resolve the issue. “Inaction usually results in the worst possible outcome,” Bronnenkant concluded.
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