3 Tax Moves Gen X Should Make Before Their Peak Earning Years End
For many Gen Xers, the next few years could be some of their most lucrative, and thus most important, from a tax-planning perspective. That’s because your marginal rate (the tax rate applied to your next dollar of income) generally rises as your income moves into higher tax brackets. So when you’re earning the most, certain tax moves become especially valuable.
“The frame I would give Gen X is this: Peak earnings years are the years your marginal rate is highest,” Anthony Guerriero, certified public accountant (CPA) and managing partner at Manhattan Miami Real Estate, told MoneyLion. “That single fact should decide almost everything else.”
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With that in mind, here are three tax moves worth considering by Gen Xers before those peak earning years are behind them.
1. Maximize Valuable Deductions Now
If you’re going to take a deduction, Guerriero says your highest-earning years may be the time to do it.
“A deduction is worth the most now,” he said. “It will never be worth more than it is at your top rate, so this is when you take the deferral rather than saving it for later.”
2. Consider Roth Conversions Later
While a deduction may be worth the most at the moment, Guerriero admonished that “a Roth conversion is worth the least now. Converting at your highest rate is paying the most tax you will ever pay on that money. The window people miss is the gap between the last big paycheck and the start of required distributions, when income drops and the same conversion gets cheap. That gap is a planning opportunity and it is short.”
“So the honest answer to ‘What should I do now?’ is often defer now and convert later,” he added, “and the mistake is doing both in the same decade.”
3. Legally Establish Your Domicile
Moving to a lower-tax state can be an appealing strategy as a Gen Xer makes more money and builds toward retirement by spending that income on a new house for their golden years. That said, buying a new home doesn’t automatically change where you’re considered a resident for tax purposes. “People believe buying in Florida makes them a Florida taxpayer. It does not,” Guerriero warned as an example.
“Domicile” can involve factors including where you actually live, your days in a state and your broader personal ties. For someone leaving a high-tax state, Guerriero recommends establishing that record before making the move.
“I have watched people move the house and leave the domicile behind, and the assessment arrives years later,” he said.
If you're serious about a tax-driven relocation, the paperwork and lifestyle changes should happen before the move becomes an audit question.
The Bottom Line
For Gen Xers approaching the end of their peak earning years, there’s no need to look for a magic loophole; instead, consider focusing more upon getting your timing right.
“The money is made in the year you plan, not the year you file,” Guerriero concluded. “By April, the options are mostly gone.”
That may be the most important tax move of all: Start planning before the tax return is sitting in front of you, and while your earnings are still at their peak.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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