5 Ways 2023 Tax Changes Affect Gen Z and Millennials
As millennials and Gen Zers prepare to file taxes this year, they may wonder if there are any changes they need to be aware of during the filing process. The IRS has announced a few tax return changes, such as new 2023 tax brackets, which have the potential to increase or reduce tax refunds.
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The best practice for millennials and Gen Zers is to be prepared before they file. The following tax changes need to be top of mind for millennials and Gen Zers.
Increase in Standard Deduction Amounts
In October 2022, the IRS announced there would be tax inflation adjustments made for the 2023 tax year. This includes an increase in standard deduction amounts for 2022 returns.
Lisa Wood, CPA and director of tax at Buckingham Advisors, breaks down the increase per filing status below.
- Single filers: $12,950
- Head of household filers: $19,400
- Married filing jointly filers: $25,900
Wood also said the majority of filers, including millennials and Gen Zers, will take the standard deduction rather than itemizing deductions.
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Retirement Changes Per SECURE 2.0
On Dec. 29, 2022, President Joe Biden signed SECURE 2.0 into law. This legislature means significant changes are in effect for retirement savings plans. While many of these changes are designed to benefit employers and employees, Lee Reams Sr., co-founder of TaxBuzz, said there are retirement-related tax changes millennials and Gen Zers should be mindful of.
One provision from SECURE 2.0 concerns any money millennials or Gen Zers may have in a 529 college savings account. Reams said those who still have money in a 529 plan can roll over up to $35,000 over the course of their lifetime from any 529 accounts in their name into their Roth IRA.
Increase in Retirement Contributions
In 2023, the IRS said total contributions to traditional IRAs and Roth IRAs increased to $6,500 respectively for those under age 50. Previously, total contribution limits were $6,000 per year for these accounts. Similarly, increases have been announced for 401(k) plans. In 2023, individuals may be able to contribute up to $22,500 to their 401(k), a significant bump from $20,500 as the 2022 contribution limit.
Millennials and Gen Zers need to be mindful of the additional increases to contribution limits as it impacts their retirement planning. Wood recommends, at a minimum, contributing what is necessary to receive an employer match if your employer offers a retirement plan and matching contribution. Both generations are also recommended to increase retirement contribution amounts (if not already maxed out) once they receive raises or bonuses.
Wood also recommends taking advantage of all pretax benefits that may be offered through your employer. “This is especially important as the income tax return advantages for these expenses decrease,” Wood said.
Tax Credit for New Electric Vehicles
This may be applicable to millennials and Gen Zers for anyone in either generation who bought a new electric vehicle (EV) in 2022. The IRS said they may be eligible for a clean vehicle tax credit. This credit is for up to $7,500 and is nonrefundable.
To find out who qualifies or if your vehicle qualifies for this credit, you may check in with the IRS or use Wood’s recommendation to confirm with the VIN at the U.S. Department of Energy’s website.
Lower Tax Liability
Millennials and Gen Zers who file their taxes this year may note that their liability for the 2023 tax year is less than it was in 2022. If your tax bill goes down, Colleen Carcone, director, wealth planning strategies at TIAA, said this is because 2023 inflation-adjusted tax figures have increased. This makes more income taxable at lower rates and gives taxpayers the chance to adjust their withholding.
Similar to Wood’s recommendation of maxing out retirement fund contributions and taking advantage of employer-provided contribution matches, Carcone also recommends increasing your savings instead of spending higher take-home pay.
In addition to filing taxes, millennials and Gen Zers may be well-advised to meet with a financial advisor this year. “Your financial advisor can help you to identify how much you need to save to meet your financial goals and will help you to create a plan to achieve those objectives,” Carcone said.
Don’t Delay Filing Your Taxes
There are even more aspects of filing taxes that millennials and Gen Zers may have questions about, such as what to do if they purchased cryptocurrency or how to navigate side hustle tax forms. Those unsure about filing on their own are advised to work alongside a tax filing professional. An accountant or CPA can answer questions and ensure you don’t miss out on any valuable tax credits.
While this year’s tax filing deadline is April 18, 2023, Wood recommends filing well before the deadline. There are extension forms available to those who need them, but it’s important to remember any tax liability is also due with this extension.
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