4 Tax Strategies Gen X Needs To Know
Written by
J. David Herman
Edited by
Gary Dudak
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Generation X, the demographic born between 1965 and 1980, may have the most to lose from poor tax planning and practices.
“The Gen Xers … they’re the most directly aligned to needing to understand the tax code,” said Mark Steber, chief tax information officer for Jackson Hewitt Tax Services. “They’re right in the middle of all of the tax benefits put there by our elected officials, for whatever reason.”
On balance, Gen Xers are wealthier than millennials (born between 1981 and 1996) and Gen Z (1997-2012). Gen X is more likely to own homes and often better positioned to grab “green” tax credits. They’re also more likely than baby boomers (1946-1964) to be supporting aging parents AND their own children. (Note that not everyone agrees on which years represent the cutoffs between generations, but the timeframes included here are widely accepted.)
All of that translates into a lot of potential credits, deductions and other maneuvers that, if overlooked, could mean a significant amount of money going to the Internal Revenue Service instead of your bank account. Here are four strategies for Gen X to think about this tax season.
Consider Itemizing If You Haven’t Been
Experts say too many Gen Xers settle for the same old standard deduction, when itemizing might lower their tax bill more.
“A lot of us get into a place where we do the same thing we did last year,” said Alison Flores, manager of H&R Block’s Tax Institute. “Maybe when they (members of Gen X) were younger, a standard deduction made more sense. As they uplevel their life, they need to consider whether a standard deduction is really the best option.”
A standard deduction reduces your tax bill by a set amount based on your filing status, inflation and other factors. Nearly 90% of us take this deduction, often because there’s a lot less to manage. Itemizing means keeping track of deductible expenses such as state and local taxes, vehicle license tabs, charitable donations and out-of-pocket medical costs, along with the related records.
“It’s easier to take the standard deduction,” Steber said. “Itemizing is hard.”
He added that Gen Xers (more likely to own homes) need to think hard about putting in the effort. Including items such as mortgage interest and points in your itemization may push you past the standard deduction amount.
Educate Yourself on ALL the Credits and Deductions Available
Steber refers to overlooking potential deductions and tax credits as an “ugly sister” of failing to itemize when it makes sense. Missed opportunities may be compounded for members of Generation X, who have so many available.
Deductions and credits popular with Gen X include the child tax credit, along with the child and dependent care tax credit.
“It’s really important for Gen X to look at these opportunities,” Flores said. “Is it possible that a parent qualifies as a dependent? Are you supporting an adult child living in your basement?”
Tax credits for retirement investments are also important to understand. Flores noted that many Gen Xers may be able to make catch-up contributions to tax-friendly retirement funds. Gex Xers and others with middle to lower incomes may be able to save $1,000-$2,000 with the retirement savings contribution credit.
Flores added that high-deductible health savings accounts (HSAs), where money can be kept tax-free if added through payroll deductions, are on the rise. HSAs have an advantage over flexible spending accounts in that HSA funds can roll over from year-to-year.
“It’s not ‘use it or lose it,'” Flores explained.
Take Advantage of Those Side Gigs When Filing
Steber said that while millennials may have the stronger reputation for side hustle work, Gen Xers are doing plenty of it themselves. On top of that, their side jobs are often more sophisticated than those of their younger counterparts.
“Gen Xers might have a full home office, or an employee,” Steber said “They’re not just rideshare driving.”
More sophisticated side jobs may mean more access to tax advantages, he added. Side hustle tax deductions may include expenses tied to your home office, tools, training costs and mileage.
Steber also noted that a trusted financial partner, be it a full-time tax pro or a more financially savvy friend you take out to lunch, can help you to make sure you’re taking advantage of all of these opportunities to lower your tax bill.
Know the Tax Benefits of Going Green
“Green” tax benefits include deductions for goods like solar energy systems and electric vehicles. Flores points to increases in “green” tax benefits with each passing year, as well as changes to allow taxpayers to claim some of these deductions every year, rather than just one time.
How does this apply to Generation X, specifically? Members of this age group are often better positioned financially to “go green.”
“They’re the ones who own the homes,” Steber said. “They’re the ones who are driving the electric cars.”
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