A tax return is a form you file on a yearly basis that outlines your income, expenses and investments. The purpose is to prove you’ve met your legal tax obligations. The IRS processes over 100 million tax returns every year.
While most people file tax returns, their age and stage in life will dictate the way they file them.
Here are six ways tax returns differ between millennials and boomers.
In most cases, millennials have simple tax situations.
“Millennials usually have a full-time job and receive a W2 form from their employer,” said Logan Allec, CPA and owner of Money Done Right. “They’re more likely to use a tax software like TurboTax or H&R Block to file their tax returns.”
Baby boomers tend to have more complex tax returns. Some boomers may own a large business, have a higher income or qualify for more deductions. Most will hire a CPA or tax professional to handle their returns.
A deduction lowers a person’s taxable income and helps them save money on taxes. Since most baby boomers own homes, they can deduct mortgage interest from their taxes.
“Baby boomers often have deductible medical expenses. They are also more likely to purchase things like solar panels and electric vehicles, which they can deduct as well,” said Allec.
The standard deduction reduces taxable income by a fixed amount while itemized deductions are made up of eligible expenses. With itemized deductions, you can claim whichever permitted deduction cuts your tax bill the most.
In 2020, the standard deduction is $12,400 for single taxpayers, $24,800 for those who are married filing jointly, and $18,650 for heads of households. “Since many millennials aren’t eligible for mortgage or medical bill deductions, they often take the standard deduction,” said Allec.
Read more about the different tax filing statuses.
Social Security can make tax returns confusing for baby boomers, who are either in or close to retirement age.
“If they have a moderate or high income, they may have to pay federal taxes on some of their benefits. There are also thirteen states that impose a state income tax on Social Security,” said Peter Greco, CPA at CSI Group.
Some baby boomers may not be aware of Social Security tax implications and are surprised when they later find they owe taxes on their benefits.
Millennials have decades to go before reaching retirement age, but they can reduce their tax burden by planning ahead.
“Millennials often save for retirement with accounts such as 401(k)s, Roth IRAs, and SEP IRAs. By putting money into these accounts, they can reduce their tax liability and lower their tax bill,” said Greco.
Baby boomers who are nearing retirement can also take advantage of this tax saving strategy.
While both baby boomers and millennials may have children, millennials are typically the ones who are eligible for the Child Tax Credit. The Child Tax Credit gives taxpayers discounts of up to $2,000 per child.
“The Child Tax Credit has increased significantly from what it was in the past and is now available to more taxpayers,” says Greco.
Taxpayers who are married filing jointly and have a gross taxable income of $400,000 or less as well as singles with an income of $200,000 or less can claim this credit on their return.
Check out our complete guide to filing your taxes.
Image: Alfred Gescheidt
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