5 Tax Mistakes Gen Xers Are Most Likely To Make — And How To Avoid Them
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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For many Gen Xers, the late 40s and 50s are a time of higher salaries, higher investment growth and progress on long-term goals.
But relying on old tax strategies or making assumptions about retirement contributions can put Gen Xers in a tough tax position.
Experts explained the most common tax mistakes Gen Xers make and how to avoid them.
1. Letting Peak Earning Years Outpace Your Tax Strategy
As incomes rise, so does tax complexity, and many Gen Xers run straight into phaseouts and income limits, according to Cristina Wiebelt-Smith, a CPA and retirement planner with Gertesma Wealth Advisors. They may no longer qualify for certain deductions or credits they thought they’d be able to rely on, such as education tax credits, just as college bills start to peak.
She added that higher income can also reduce the tax advantages of some retirement accounts, such as traditional IRAs, or income may be too high to contribute directly to a Roth IRA. The result can be frustration and missed planning opportunities.
Jeffrey Hensel, a broker associate at North Coast Financial, also sees Gen Xers retain the same filing habits they had 10 years ago even though they’ve moved into a much higher bracket.
Instead, revisit your tax plan after raises, bonuses or investment gains. A higher bracket often requires proactive planning, not just higher withholding.
2. Underestimating the Alternative Minimum Tax and Lost Deductions
Higher income can also activate tax rules that didn’t previously apply, such as the alternative minimum tax, Hensel explained.
“This system is available to ensure high earners pay a base level; however, it often comes as a surprise to families who believe they have plenty of write-offs,” he said.
He described peak earning years as “a double-edged sword when it comes to tax returns,” saying that growing wealth can bring “much more scrutiny from the government.”
Hensel recommended you have a CPA run projections before year-end.
3. Getting Withholding Wrong in a Dual-Income Household
Many Gen X households have two earners, bonuses or job changes and outdated withholding settings yet often under-withhold “because the payroll withholding system assumes a single-income household and that’s no longer the norm,” Wiebelt-Smith explained.
Withholding is like cruise control, she said — it works fine until the road changes. To avoid it, run a mid-year withholding check, especially after raises or job changes. Adjust Form W-4 proactively rather than waiting for an April surprise.
4. Ignoring Tax Diversification Before Retirement
A major mistake that Gen Xers often make too late is concentrating all retirement savings in one retirement bucket.
“This isn’t about stock diversification; it’s about tax diversification or asset location,” Wiebelt-Smith said.
If all your retirement money is in a 401(k) or traditional IRA, every dollar you withdraw during retirement is fully taxable. Having three buckets — taxable assets, tax-deferred assets, and tax-free assets — gives you flexibility to manage your taxes year by year instead of being locked into taxable withdrawals.
5. Overlooking ‘Sandwich Generation’ Tax Breaks
Many Gen Xers are financially supporting both children and aging parents. Hensel noted that Gen Xers may be able to claim a parent as a dependent if you support them more than half of the time. “Based on my years in the field, this one adjustment can reduce your taxable income by a lot of money,” he said.
Review whether you qualify to claim a dependent parent or other overlooked credits.
6. Failing To Plan For Side Gig and Freelance Taxes
Gen Xers who have added consulting, freelance or side hustle income on top of W-2 earnings and who don’t pay quarterly estimated taxes may have overlooked the extra tax layer, Wiebelt-Smith warned.
To avoid this problem, set aside 25% to 30% of side income in a separate account and schedule quarterly estimated payments.
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