Gen Z Has a Major Tax Problem

A recent survey has sought to find out how well Americans understand taxes, and the results show a worrying lack of understanding from younger generations.

The poll, conducted by Talker Research, asked 4,000 U.S. adults who planned to file their taxes this year to match several financial terms with the correct definitions. Terminology used in the survey included "filing status," "standard deduction" and "earned income tax credit (EITC)."

EITC is a tax break that helps workers and families with low to moderate income reduce the taxes they owe, and it can help increase the refund they receive. When asked if they were familiar with the term, 49 percent of Americans said they knew of it.

Age appeared to be an important factor: 28 percent of Generation Z—people born between 1997 and 2012—was familiar with the term, compared to 59 percent of Gen X, those born between 1965 and 1980.

The survey, which was carried out between November 14 and November 22, also found that less than half of Americans could successfully match EITC with its definition, with 47 percent getting it right.

When respondents were categorized by age, the results showed that 56 percent of baby boomers—people born between 1946 and 1964—correctly defined EITC, followed by 51 percent of Gen X.

Younger generations had a much lower understanding of taxes, as 43 percent of millennials—people born between 1981 and 1996—and 37 percent of Gen Z could correctly explain EITC.

Women also showed a slightly better understanding of how taxes work—with 48 percent able to correctly define EITC, compared to 46 percent of men.

Among the other terms, 51 percent of all respondents managed to correctly define standard deduction as the flat amount the IRS allows a person to reduce their taxes by, and 61 percent correctly identified filing status.

Are These Results Surprising?

When it came to younger generations, financial expert and tax agent Karla Dennis wasn't surprised by their overall lack of understanding. She told Newsweek that "the tax system is confusing" and personal finance isn't always taught in schools, which leaves young people vastly unprepared.

Dennis, the founder of Karla Dennis and Associates, also suggested that practice made perfect, which was why older generations had a better understanding. Not to mention, EITC can be confusing at the best of times, as it has "very specific rules" about who it applies to, according to Dennis.

"Older generations, like baby boomers, have had more time to deal with taxes over the years, when tax preparation wasn't as automated as it is today, thus they've had to learn by doing. Gen Z is just starting out new to the workforce," Dennis said.

She continued: "Many people don't even know EITC exists because it's not something that's explained well or talked about often. Even the name can sound intimidating if you're not used to tax terms."

Misunderstanding EITC isn't the only error people make. For example, Dennis also believed there was confusion over how retirement savings could affect taxes, and people frequently mixed up tax deductions with tax credits.

Dennis encouraged people to seek help from a professional or use tax software to simplify the process and save themselves from problems in the future.

"There are quite a few misunderstandings with taxes, but it's easy to get information about it these days," she said.

Dennis added: "I think everyone should be required to get some tax education. Schools and community groups should teach basic money skills, including how taxes work, and there's always YouTube, which has a ton of videos on this."

This random double-opt-in survey was conducted by the market research company Talker Research, whose team members are members of the Market Research Society (MRS) and the European Society for Opinion and Marketing Research (ESOMAR).