How Gen Z files taxes

Gen Z adults representing new generation of taxpayers with modern work, lifestyle, and income habits

What Tax Professionals Need to Know About Gen Z’s Earning, Learning, and Filing Habits

By NATP Staff

In this article, we continue exploring tax issues faced by the Johnson family. The focus is on Generation Z, who, in 2025, range in age from 13 to 28. In the Johnson family, Gen Z includes Ty, a 19-year-old full-time college sophomore, and his sister Ellie, a 16-year-old high school junior who just got her driver’s license and started her first part-time job.

Generation Z—also known as Gen Zers or Zoomers—generally includes those born between 1997 and 2012. This generation is known for being tech-savvy, diverse, and socially conscious. They value authenticity, inclusivity, and mental health awareness. Financially cautious yet entrepreneurial, Gen Zers are adaptable and highly individualistic while maintaining a strong interest in community and social causes.

Working with Gen Z Clients

Tax professionals serving Gen Z should understand their unique characteristics and evolving needs. Because Gen Z is highly comfortable with technology, it’s important to meet them where they are—online. This includes embracing digital tools and platforms such as:

·      Secure online portals

·      Document-sharing apps

·      Social media messaging

·      Video calls and real-time communication tools

These tools align with Gen Z’s preference for interactive, fast, and digital-first communication.

Life Stages and Tax Issues

Generation Z spans a wide range of life stages.

Younger Gen Zers are middle and high school students taking their first jobs.

Older Gen Zers are college students balancing education with employment.

Young adults are launching their careers and beginning to manage finances independently.

As Gen Z begins earning income and managing money, some of the key tax issues they face include:

Completing accurate Form W-4 withholding certificates

Claiming education credits (e.g., American Opportunity Credit, Lifetime Learning Credit)

Navigating student loan interest and repayment issues

For college students, tax practitioners may need to work collaboratively with their parent(s) or legal guardians when addressing certain tax matters. One important area is the withholding certificate, especially relevant for those entering the workforce directly after high school.

Additionally, many in this generation are exploring side hustles and freelance work—topics we’ll cover in more depth when we discuss Millennials in the June CPE session.

Why Your Online Presence Matters

We’ll conclude this article with a high-level discussion of your online presence as a tax professional. Gen Z is a digitally native generation, and their decisions are heavily influenced by online research and first impressions.

A strategic digital marketing approach should include:

·      Engaging content that speaks to their concerns

·      Interactive communication through digital channels

·      A clear, trustworthy professional image online

Importantly, tax professionals must comply with Circular 230, which governs practice before the IRS. We’ll address the advertising and solicitation rules under §10.30 of Circular 230 at the end of the article.

Furnishing a Withholding Certificate

Anyone entering the workforce—whether part-time or full-time—must complete Form W-4, Employee’s Withholding Certificate (formerly the Employee’s Withholding Allowance Certificate). This form introduces young earners to the concept of federal income tax withholding and its impact on take-home pay.

Filling out Form W-4 incorrectly can result in:

·      Overpayment of taxes, leading to large refunds

·      Underpayment, which may cause an unexpected tax bill

As tax professionals, we can guide not only Gen Z clients but all clients through the W-4 process. This includes:

·      Reviewing their income, deductions, and tax situation

·      Advising on appropriate adjustments

·      Assisting with accurately completing the form

Form W-4

Note: Beginning with the 2020 tax year, Form W-4 was substantially revised. Instead of using withholding allowances, an employee checks a filing status box on the Form W-4. This generally results in the employee having the basic standard deduction for that anticipated filing status on their income tax return considered when determining the amount of tax withheld from their pay if the employee only completes Step 1 (including checking the box for a particular filing status) and Step 5 (signing under penalties of perjury).

The IRS urges employees to use its online tax withholding estimator (see https://www.irs.gov/individuals/tax-withholding-estimator) as a tool to determine if any additional withholding should be deducted. The online tax withholding estimator is only as accurate as the information entered. When using, the IRS recommends that taxpayers have their most recent pay stubs (and the spouse’s if married), information for other sources of income, and their most recent income tax return. The estimator works for most taxpayers; however, the instructions in IRS Publication 505, Tax Withholding and Estimated Tax, provide additional assistance for those with complex tax situations.

The revised Form W-4 must be used by all new employees who are first paid after 2019 and any other employee who wants to adjust their withholding.

When to Furnish

Form W-4 and its contents are governed by Reg. §31.3402(f)(5)-1. When a new employee starts a new job, they should give their signed Form W-4 to their employer on or before the date employment begins [§3402(f)(2); Reg. §31.3402(f)(2)-1(a)].

If a new employee does not provide a Form W-4 to their employer, they are treated as a single filer with no other adjustments. This means that the employer will determine the employee’s withholding using a single filer’s standard deduction based on guidance provided by the forms, instructions, publications, and other IRS guidance [Reg. §31.3402(f)(2)-1(a)(4)].

The filing status of the employee affects the withholding rate. Tax is withheld at different rates for single (S) filers and married persons filing jointly (MFJ). Under no circumstances may the withholding allowance the employee claims exceed the amount the employee is entitled to, as determined by their reasonable expectations and the guidance provided in IRS forms, instructions, publications, and related materials [Reg. §31.3402(f)(2)-1(a)(2)].

Claiming Exempt from Withholding

An individual may claim an exemption from withholding in the current calendar year if they (1) had no federal income tax liability in the preceding calendar year, and (2) expect to have no federal income tax liability in the current calendar year [§3402(n)].

The employee claims this exemption from wage withholding by writing “Exempt” on Form W-4 in the space below Step 4(c). In some instances, wages are subject to withholding regardless of whether a certificate of exemption has been furnished to the employer (i.e., wages subject to the mandatory flat-rate withholding). See Reg. §31.3402(n)-1(b) for additional information on mandatory flat-rate withholding.

If an individual claims an exemption from withholding, the exemption expires on Feb. 15 of the following year. To continue to be exempt from withholding in that following year, the individual must file a new Form W-4 by Feb. 15. If a new Form W-4 is not given to the employer, the employer must withhold tax as if the employee had checked the box “Single or Married Filing Separately” in Step 1(c) and made no entries in Step 2, 3, or 4 of Form W-4. For a discussion on these steps, see the section “How to Complete” later in the article.

Example: Taxpayer Exempt from Withholding

An unmarried individual, Susan, filed her income tax return for 2024 on April 10, 2025. Susan’s adjusted gross income (AGI) was $5,000 and she had no income tax liability. She had $180 of income tax withheld during 2024. Susan estimates having approximately the same amount of AGI for 2025 and no income tax liability.

On April 25, 2025, Susan starts a new job. She gives her employer a Form W-4 certifying that she had no income tax liability for 2024 and estimates she will have no income tax liability for 2025. Susan’s employer should not deduct and withhold on wage payments made to her on or after April 25, 2025.

Suppose Susan does not give a new Form W-4 to her employer for 2026, certifying that she anticipates having no federal income tax liability for the current year (2026) and that she had no federal income tax liability for the preceding tax year (2025). In that case, her employer must deduct and withhold wages upon payment made after Feb. 15, 2026 [Reg. §31.3402(n)-1(e)(1), Ex. 1].

Example: Taxpayer Not Exempt from Withholding

Assume the same fact pattern as the example above, except that for 2024, Susan has taxable income of $8,000, income tax liability of $1,630, and income tax withheld of $1,700. Even though Susan received a $70 refund due to income tax withholding of $1,700, she cannot state on her Form W-4 for 2025 that she incurred no liability for tax for 2024. Despite anticipating no income tax liability for 2025, Susan is still subject to withholding as she had an income tax liability in 2024 [Reg. §31.3402(n)-1(e)(3), Ex. 3].

A student is not automatically exempt from withholding but may qualify for an exemption if they work only part-time or during the summer.

Example: Student Exempt from Withholding

A high school student, Ellie, expects to earn $2,500 from her summer job as a lifeguard. She does not expect to have any other income, and her parents can claim her as a dependent. She can claim an exemption from withholding for tax year 2025.

Scenario Change

Would Ellie be able to claim an exemption from withholding for the tax year 2025 if she had $2,500 in earned income for 2024 and had $375 in federal income tax withheld from her pay, and the entire $375 was refunded when she filed her 2024 tax return? Yes, she could claim an exemption from withholding for 2025 as she had no 2024 tax liability and expects to have no liability for 2025.

A person who can be claimed as a dependent on another person’s tax return, regardless of whether they are claimed as a dependent, cannot claim exemption from withholding if, for 2025, that person’s income (wages and unearned income) will exceed $1,350 and they have over $450 of unearned income (i.e., interest or dividends). This includes students who save some of their wages [Ann. 87-69, 1987-33 IRB 34].

In some cases, if a person cannot be claimed as a dependent, they can be exempt from withholding if their 2025 total income is less than $15,000. For additional information, see Figure 1-A, Exemption from Withholding on Form W-4, in IRS Publication 505 (2024), Tax Withholding and Estimated Tax.

Note: At the time of this writing, the 2025 version of the publication was not available.

Example: Student Not Exempt from Withholding

Ellie expects to earn $2,500 from her summer job as a lifeguard. She has a savings account and hopes to have $475 of interest income in 2025. She cannot claim an exemption from withholding for 2025 because her total income exceeds $1,350 and includes more than $450 in unearned income. She cannot claim an exemption from withholding for 2025 because her total income exceeds $1,350 and includes more than $450 in unearned income. She cannot claim an exemption from withholding despite having a total income of less than $15,000 because she can be claimed as a dependent.

Change in Status: When a New Form W-4 Is Required

Before December 1 of each year, employers should ask employees to provide a new Form W-4 for the upcoming calendar year if their personal or financial situation has changed since submitting the previous one [Reg. §31.3402(f)(2)-1(f)(1)].

Examples of Common Changes That May Affect Withholding

Lifestyle Changes:

·      Marriage or divorce

·      Birth or adoption of a child

·      Purchase of a new home

·      Retirement

·      Filing for Chapter 11 bankruptcy

Wage Income Changes:

·      Employee or spouse stops or starts working

·      Starting or stopping a second job

Changes in Taxable Income Not Subject to Withholding:

·      Interest income

·      Dividends or capital gains

·      Self-employment income

·      IRA distributions

·      Certain Roth IRA distributions

Changes in Adjustments to Income:

·      IRA deduction

·      Student loan interest deduction

·      Alimony expense

Changes in Itemized Deductions or Tax Credits:

·      Medical expenses

·      Taxes or interest expense

·      Gifts to charity

·      Dependent care expense

·      Education credit

·      Child tax credit or credit for other dependents

·      Earned income credit

Timing Requirements for Submitting a New Form W-4

A “change of status” occurs when an employee’s marital status, income, deductions, or expected credits change. Under the rules:

If the change reduces withholding allowances (i.e., increases tax owed), a new Form W-4 must be submitted within 10 days.

If the change increases allowances (i.e., lowers withholding), the employee may submit a new Form W-4 [§3402(f)(2); Reg. §31.3402(f)(2)-1(b)-(c)].

Note: If a taxpayer gets married and wants the lower withholding rate for married taxpayers, they must submit a new Form W-4 showing their changed filing status.

Situations Where a New Form W-4 May Not Be Immediately Required

According to [Reg. §31.3402(f)(2)-1(b)(3)], a new Form W-4 is not required within 10 days if sufficient tax will still be withheld after the status change. This includes:

Changes in marital or filing status

Loss of eligibility for the child tax credit (CTC)

Expecting fewer qualifying children than claimed previously

Anticipating a decrease of more than $500 in credits

No longer expecting to claim exemption from withholding

Reminder: Employees may still update their withholding at any time for any reason (e.g., spouse stops working, new child, estimated changes in income or deductions).

If a client has had too little tax withheld, they may avoid a penalty by increasing their withholding for the rest of the year. The IRS treats the added withholding as if it had occurred evenly throughout the year.

Employees Who Should Review Their Withholding

Encourage a withholding check for employees who:

·      Are in two-income households

·      Work multiple jobs

·      Work part-year

·      Itemized deductions in the prior year

·      Have children who file their own returns

·      Have high income or complex returns

·      Received a large refund or tax bill last year

·      Received unemployment at any point during the year

Employer Obligations and Employee Penalties

Employers cannot force employees to submit a new Form W-4.

However, if the employee must increase withholding and fails to provide a new form within 10 days, they may face a $500 penalty [Reg. §31.6682-1; Reg. §3402(f)(2)(B)].

Example: Required New Form W-4

Emily filed a Form W-4 with “Married Filing Jointly” status. In 2025, she got divorced.

Emily must submit a new Form W-4 within 10 days of the divorce [Notice 2018-92, Sec. 4, 2018-51 IRB 1038].

Practitioner Pointer

Generally, a new Form W-4 is required within 10 days if the filing status changes from:

MFJ or QSS ➝ to Head of Household (HOH), MFS, or Single

HOH ➝ to MFS or Single

Exception: If the current withholding still covers the anticipated tax liability, a new form is not required immediately. However, the employee must submit a new Form W-4 for the next calendar year by the later of:

Dec. 1 of the current year, or

10 days after the status change [Reg. §31.3402(l)-1(c)(2)]

Using the Correct Form Year

When an employee gives their employer a new Form W-4:

It must be the correct revision year for the calendar year it’s being submitted in.

A future-year form can be submitted in advance for the next year’s withholding.

Example: Prior-Year Form Not Valid

Isaac submits a 2024 Form W-4 during calendar year 2025.

That form has no legal effect. The employer must ignore it and continue using the most recent valid form, if any.

If none exists, the employee is treated as having no valid Form W-4 and withholding defaults to Single or MFS with no adjustments [Reg. §31.3402(f)(5)-1(a)(4)(i), Ex. 1].

Note: Employers should notify the employee if their Form W-4 is invalid. If a valid one isn’t resubmitted, default withholding applies.

Example: Future-Year Form Valid

Isabel gives her employer a 2025 Form W-4 during calendar year 2024, to take effect the following year.

The 2025 form is valid, and the employer must implement it in 2025 according to [Reg. §31.3402(f)(5)-1(a)(4)(ii), Ex. 2].

When Effective

A Form W-4 provided to the employer by a new employee generally takes effect as of the beginning of the first payroll period ending on or after the date on which the form is provided to the employer [§3402(f)(3)(A); Reg. §31.3402(f)(3)-1(a)]. It remains in effect until another withholding certificate is provided [§3402(f)(4)].

A new (revised) Form W-4 provided to the employer by an existing employee that has a withholding certificate in effect must be put into effect no later than the start of the first payroll period ending on or after the 30th day from the date the employer received the revised Form W-4. The employer can put the revised Form W-4 in effect earlier, beginning with any wage payment on or after the date the withholding certificate was given [Reg. §31.3402(f)(3)-1(b)]. The employer must honor the request unless there are situations where the Form W-4 is invalid or lock-in letters apply.

Note: The IRS uses information on Form W-2, Wage and Tax Statement, to identify employees with withholding compliance problems. In some cases, the IRS may issue a notice to an employer (lock-in letter) stating the maximum amount of credits or deductions allowed and the filing status for any wages paid after the date stated in the lock-in letter. The lock-in letter will also be sent to the employee. This usually will apply when the employee overstated their withholding or can’t claim a complete exemption from withholding. After the lock-in letter takes effect, the employer must withhold tax based on the withholding rate for the marital status and maximum withholding specified in the letter.

How to Complete Form W-4

The Form W-4 is divided into five steps and is completed as follows:

Step 1 – Personal Information

Description:

Enter employee’s personal information:

Name

Address

Social Security number

Filing status

Note:

A married employee can check the single box for higher withholding. This may be easier—but less accurate—for those who do not want to spend the time gathering additional information. They could also consider checking the box in Step 2(c) and completing Steps 3 and 4, if applicable.

Purpose:

Informs the employer what to withhold based on filing status and standard deduction if no other steps are completed.

Note: Step 1 and Step 5 must be completed.

Step 2 – Multiple Jobs or Spouse Works

Description:

Adjust withholding for income from additional jobs or a working spouse if filing MFJ.

Use one of three options.

Purpose:

Allows for an increase in withholding due to income from other jobs, which generally will increase tax liability.

Note:

If the employee does not want the employer to know they have another job, they could skip this step and enter an amount on Line 4(c).

Step 2(a) – IRS Estimator

Description:

Use the IRS Tax Withholding Estimator.

Purpose:

Allows for precise withholding adjustments based on an IRS tool.

Step 2(b) – Multiple Jobs Worksheet

Description:

Use the Multiple Jobs Worksheet in the Instructions for Form W-4.

Enter the extra withholding in Step 4(c) for only one of the jobs.

Purpose:

Allows for a manual method for calculating additional withholding.

Step 2(c) – Check the Box

Description:

If there are only two jobs total, check this box for both jobs.

The employer will determine the withholding.

Purpose:

Simplifies adjustments by relying on the employer to determine.

This option is generally less accurate, as more tax than necessary may be withheld.

Additional Info:

For a sense of what the employer will withhold, see the “Form W-4, Step 2, Checkbox Withholding” column in the percentage method or wage bracket method tables in Publication 15-T (2025), Federal Income Tax Withholding Methods.

Step 3 – Claim Dependent and Other Credits

Description:

If total income is less than $200,000 ($400,000 MFJ), enter how many children and dependents there are and multiply by the credit amount.

This is not required; if dependents are not claimed, even if the employee has them, more federal taxes will be taken out of the paycheck.

In multiple job households, withholding will be most accurate if this adjustment is claimed on the Form W-4 for the highest-paying job.

Purpose:

Reduces taxable income and adjusts withholding based on anticipated tax credits.

Step 4 – Other Adjustments (Optional)

Description:

Increase/decrease in withholding based on the annual amount of other income or deductions reported on the income tax return.

In multiple job households, adjustments in Step 4(a) and 4(b) will be most accurate if made only on the Form W-4 for the highest-paying job.

Purpose:

Fine-tunes withholding to be based on personal circumstances.

Step 4(a) – Other Income (Not from Jobs)

Description:

Enter annual estimated non-job income not subject to withholding, including:

·      Interest

·      Dividends

·      Retirement

·      Self-employment

Purpose:

Increases annual wages by factoring in additional income not subject to withholding.

Step 4(b) – Deductions

Description:

Amount from Line 5, Deductions Worksheet, in the Instructions for Form W-4.

Used if the employee expects to claim deductions other than the standard deduction.

Purpose:

Reduces annual wages by accounting for additional deductions.

Step 4(c) – Extra Withholding

Description:

Enter any additional federal tax to be withheld from the employee’s pay each pay period.

Include amounts from Line 4, Multiple Jobs Worksheet, in the Instructions.

Purpose:

Covers additional anticipated tax liability.

Could be utilized by employees who are self-employed on the side.

Step 5 – Sign Here

Description:

All employees must complete and sign this section.

Purpose:

Finalizes and authorizes the withholding instructions.

Example:

Jennifer is a divorced taxpayer with two children who can claim them as dependents. Ty is a 19-year-old college student, and Ellie is a 16-year-old high school student (she is 16 on Dec. 31, 2025). In addition to her full-time job as a teacher, Jennifer has a part-time job as a server. She qualifies to file as HOH.

Jennifer expects her taxable wages to be $75,000 from her teaching job and $7,000 from her server job. She does not want to use the tax withholding estimator or the multiple job worksheet in the Form W-4 instructions, so she checks the box in Step 2(c) on both Form W-4s (withholding will be calculated using higher rates).

To increase her withholding accuracy, she also completes Steps 3 and 4 on her teaching job (higher wage job) Form W-4. She enters $2,500 in Step 3 ($2,000 for Ellie and $500 for Ty) to account for the dependent and other credits. She could leave Step 3 blank if she wanted to, even though she has dependents to claim.

Jennifer also expects to have $600 in taxable interest, so she enters $600 in Step 4(a). She does not have any other items to take into account as adjustments; however, she is always nervous about correctly estimating her income from her serving job. So, to be safe, she enters $10 in Step 4(c) as an additional amount to be withheld from each paycheck.

To check the accuracy of what Jennifer has done, the practitioner could assist Jennifer by using Publication 15-T (2025) to manually compute what the employers will withhold. The practitioner could also use Jennifer’s paystub to calculate if withholdings equal tax liability projections and have her adjust accordingly.

Note: Employees who gave their employers a Form W-4 any year before 2020 are not required to submit a new form just because of the redesign. IRS Pub. 15-T contains withholding tables that permit employers to figure out withholding based on a Form W-4 from 2019 or earlier, as well as from 2020 or later (redesigned form).

Gen Z student studying at home, potentially eligible for education tax credits like AOTC or LLC

Education Credits

Many Gen Zers view a college education as important and attend a four-year college after high school. Due to the high cost of higher education, many in this generation are also looking at other options, such as community colleges, online courses, and certifications, rather than committing to traditional four-year colleges. Individuals are allowed an income tax credit—also referred to as the higher education credit or education credit—equal to the sum of the American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) for higher education expenses at accredited post-secondary educational institutions paid for themselves, their spouse, and their dependents [§25A].

The amount of the education credit is the sum of the AOTC and LLC [§25A(a)].

Up to $2,500 per eligible student attending an eligible institution can be taken for the AOTC.

Up to $2,000 per return for qualified tuition and related (QT&R) expenses paid to eligible institutions can be taken for the LLC.

These credits are claimed on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). The form must be attached to the taxpayer’s timely filed return (including extensions), original return (including late-filed), or an amended return filed before the statute of limitations for claiming a credit or refund for the tax year [IRS Notice 99-32].

No credit will be allowed unless the taxpayer includes the name and taxpayer identification number (TIN) of the eligible student on the tax return for the year in which the credit is claimed.

The education credits are generally nonrefundable, except that part of the AOTC is refundable. Individuals are not allowed to carry forward any unused education credit. Both the AOTC and the LLC are phased out for higher-income taxpayers. The taxpayer can only claim one of the credits in a tax year for the same student [§25A(c)(2)(A)]. However, a taxpayer can claim the same credit (or a different one) for other students in a tax year.

Below is your comparative chart between the AOTC and LLC:

 

Comparison of the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC)

Item	AOTC	LLC
Maximum credit	·Up to $2,500 per eligible student· The calculation is as follows:   – 100% of the first $2,000 paid   – 25% of the next $2,000 paid	·Up to $2,000 per return· The calculation is as follows:    – $10,000, or actual expense (whichever is smaller), multiplied by 20%
Carryforward	· No carryforward of unused credit	—
Enrollment	·Student must be enrolled at least half-time for at least one academic period beginning during the year or the first three months of the following calendar year	·Available for one or more courses during any academic period beginning in the tax year or in the first three months of the following year. Available if the student is attending on a less-than-half-time basis
Claiming	·Claimed in the year the expenses are paid, if the education begins during that year or the first three months of the next year [§25A(g)(4); Reg. §1.25A-5(e)(1) and (2)]	Same
Degree requirement	·Student must be pursuing an undergraduate degree or other recognized education credential	·Student does not need to be pursuing a degree or other recognized credential
Eligible institutions and types of courses	·All accredited public, nonprofit, and proprietary post-secondary institutions, as well as many vocational schools, are eligible to participate in the Department of Education’s student aid program · Must offer credit toward a bachelor’s, associates, or other recognized post-secondary credential	·Same as AOTC, but also includes courses to acquire or improve job or career skills · Courses do not have to be part of a degree program
Availability	·The taxpayer, the taxpayer’s spouse, or a person whom the taxpayer claims as a dependent	Same
Phase-out based on MAGI	·Phased out ratably with MAGI beginning at:    – $80,000 ($160,000 for MFJ) · Fully phased out at:    – $90,000 ($180,000 for MFJ) · These amounts are not adjusted for inflation	Same
MFS filing status	· Not allowed [§25A(g)(6)]	Same
Qualified educational expenses	·Includes qualified tuition and related expenses (QT&R), including books, supplies, and equipment needed for a course of study (whether or not purchased from the institution)  ·Does not include room and board, medical expenses (e.g., health fees), transportation, or other personal/living expenses [Reg. §1.25A-2(d)(3)]  · Must reduce expenses by tax-free educational assistance (e.g., scholarships, Pell grants, employer-provided assistance, veterans’ benefits)	·Usually only includes tuition · Charges for books and student activity fees are only eligible if required to be paid as a condition of enrollment or attendance [Reg. §1.25A-2(d)(2)]
Refundability	·Up to 40% may be refundable (unless claimed by a child with unearned income subject to the kiddie tax) [§25A(i)]	·Nonrefundable credit
Years available	·Available only until the student’s first four years of post-secondary education are completed (generally freshman through senior years)	·Available to students for an unlimited number of years · Applies to all years of post-secondary education and for courses to acquire or improve job skills
Felony drug conviction	·Student must not have a felony drug conviction	·No restriction
Adjustments	·Qualified expenses must be out-of-pocket [§25A(g)(2)] · Must adjust for scholarships and certain other payments	Same

Example: Proper Year for Claiming

In December 2024, Jennifer, a calendar year taxpayer, pays $1,000 in qualified tuition and related expenses for her dependent child, Ty, to attend classes during the 2025 spring semester. The spring semester begins in January 2025, and Ty will start the second semester of his sophomore year. Jennifer may claim an education tax credit only in 2024 for payments made in 2024 for the 2025 spring semester. She can use the payment paid in 2024 on her 2024 tax return because the education begins during the first three months of the following year.

If she had paid the expenses in January 2025, she would claim the credit in 2025.

As we see, Jennifer can claim an AOTC credit in 2024 or 2025, depending on when she pays the expenses. If she maximized the AOTC in 2024 by paying $4,000 or more in qualified expenses for the first semester, she should consider delaying the payment until January 2025. If she did not maximize their 2024 AOTC credit, she should consider making the payment in 2024. Also, the college may require that the tuition for 2025 be paid in December 2024, and she may not have a choice. Something else to consider is if the student paid for their education with a loan from financial aid, they typically cannot choose when tuition is paid, as generally tuition is paid with the loan when classes start.

Note: The credit will be available in the payment year if the education starts or continues within that year or the first three months of the following year.

Who Claims

As the above chart indicates, a taxpayer can claim the appropriate credit for the qualified education expenses required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse, or a person whom the taxpayer claims as a dependent.

Dependency is an important element. The taxpayer claiming the student as a dependent is entitled to the education credits, regardless of who pays the tuition. If the student is a dependent, any qualified education expenses paid by the student are treated as paid by the taxpayer of whom the student is a dependent.

In cases where a parent or other taxpayer can claim the student as a dependent but does not, only the student may claim the education credits [Reg. §1.25A-1(f)(1)]. Suppose a third party, such as a grandparent or other relative, pays qualified education expenses on behalf of the student. In that case, the expenses are treated as paid by the student unless the third party can claim the student as a dependent [Reg. §1.125A-5(b)(1)].

Note: In situations where the parent’s income is too high and they cannot claim the education credits, they may want to consider not claiming a student as a dependent to allow the student to take the credit, assuming the student has sufficient income to take the credit.

Example: Who Claims – Custodial Parent

In 2025, Jennifer pays $1,000 of eligible QT&R expenses for her dependent, Ty, to attend college. Jennifer claims Ty as a dependent on her 2025 federal income tax return. Assuming all the other requirements are met, Jennifer is allowed an education credit on her return. Ty is not allowed an education credit on his return.

What would the result be if Ty paid $200 of eligible QT&R expenses and Jennifer paid $800 of eligible QT&R expenses?

The result would be the same. Jennifer would be considered to have paid $1,000 in expenses, including the $200 paid by Ty, to calculate the credit to which she is entitled.

Example: Who Claims – Divorce

Under a court-approved divorce decree, Jennifer’s ex-husband is required to pay Ty’s college tuition. Ty is not his father’s dependent. Jennifer is Ty’s custodial parent under the divorce decree and properly claims Ty as a dependent. In 2025, the ex-husband pays an eligible educational institution for Ty’s QT&R expenses. Ty is treated as receiving the money from his dad and then using it to pay his QT&R expenses. Jennifer, the custodial parent, may claim an education credit for the QT&R expenses paid by the noncustodial parent (her ex-husband) directly to the college [Reg. §1.25A-5(b)(3), Ex. 2].

Example: Who Claims – Student Not a Dependent

Ty is Jennifer’s dependent, and she pays QT&R expenses for him to attend college. Although she can claim Ty as a dependent, she chooses not to. Only Ty can claim the education credit on his tax return.

If Ty has enough tax, he may claim the nonrefundable AOTC. If he does not have enough tax (or no tax), he may claim the refundable AOTC as long as he is not subject to the kiddie tax.

Parents who do not benefit from the education credits due to having high MAGI may want to consider shifting the education credits to the child by not claiming the other dependent credit (ODC). There may be some benefit, assuming the child has sufficient income.

In some situations, grandparents (or a third party) may have money that they want to get out of their estate, and they pay some or all of the college costs for the student. In this situation, the grandparent is generally subject to the gift tax on these payments to the extent the payments and other gifts to the student exceed $19,000 (the regular annual per-donee gift tax exclusion for 2025) or $38,000 (2025) for married donors who consent to split gifts. Also, if the grandparent (or other donor) pays the student’s tuition directly to the educational institution, there is an unlimited exclusion from gift tax. The unlimited gift tax exclusion applies to direct tuition costs only; room and board does not apply.

Example: Who Claims – A Grandparent Pays Tuition

Ty’s grandfather Robert makes a direct payment of Ty’s QT&R expenses to the eligible educational institution Ty is attending. To claim the education credit, Ty is treated as receiving the money from Robert and, in turn, paying his own QT&R [Reg. §1.25A-5(b)(3), Ex. 1].

The rule of treating the student as receiving the payment from the third party and paying it over to the educational institution only applies for purposes of the education credit [Reg. §1.25A-5(b)(1)].

Special rules also apply where the third-party payment is from a scholarship or other amount that is excludable from the student’s gross income. When determining the amount of an education credit, QT&R expenses for any academic period must be reduced by any tax-free educational assistance allocable to that period.

Note: There is no reduction in QT&R expenses paid with a student’s earnings (wages), a loan, a gift, an inheritance, or personal savings. Restated another way, a student who receives a tax-free gift or inheritance can use those amounts to pay QT&R expenses without reducing the expenses considered when computing the education credit. A taxpayer may also consider including a tax-free scholarship, fellowship, or grant in a student’s income to maximize their education credit [Reg. §1.25A-5(c)(3)].

A student or parent who pays the cost of education, alongside a scholarship, can claim that their payment covered qualifying expenses, provided they choose to report some or all of the scholarship as income and apply it toward non-qualifying expenses, such as room and board. This could result in the student reporting the scholarship as income, which is taxed at a lower rate, while the parent(s) may still qualify for the education credit on their return, assuming all other credit requirements are met.

Elect Not to Claim

Taxpayers can elect out of claiming an education credit if doing so would provide a greater overall tax savings due to the interaction of the credit with other education tax benefits. For example, a taxpayer may not want to claim an education credit when claiming the credit causes some or all of the distribution from a Coverdell Education Savings Account (ESA) or qualified tuition program (QTP or 529 plan) to be taxable. The election is made by not filing Form 8863 by the deadline for filing the income tax return, including extensions, for the year the credit could be claimed.

A taxpayer may claim a tax credit for a tax year and also exclude from gross income amounts distributed from an ESA or QTP on behalf of the same student as long as the distribution is not used for the same educational expenses for which a credit is claimed [§530(d)(2)(C); §529(c)(3)(B)(v)].

When calculating the excludable amount for ESA and QTP distributions, qualified education expenses are first reduced by tax-free education benefits (scholarships, etc.), plus the expenses considered when claiming an education credit (whether claimed by the same taxpayer or another taxpayer) [§529(c)(3)(B)(v); §530(d)(2)(C)].

Kiddie Tax

The kiddie tax rule is a tax rule that may apply if the child has not reached age 18 before the close of the tax year or the child’s earned income does not exceed one-half of their support and the child is age 18 or a full-time student age 19 to 23. The kiddie tax rules are not affected by the child’s dependency status. Therefore, a child who files their own Form 1040, regardless of whether they can be claimed as a dependent by their parents, will still be subject to the kiddie tax if they meet the required criteria. See §1(g) for guidance on when a child is subject to the kiddie tax. The issue was discussed at a high level in the February 2024 TAXPRO CPE article.

The kiddie tax can impact college students if they still qualify as dependents and have a significant amount of unearned income (more than $2,700 for 2025). When unearned income exceeds the set limit, it is taxed at the parent’s marginal tax rate rather than the child’s lower tax rate. The kiddie tax applies regardless of the source of the asset giving rise to the child’s unearned income and regardless of when those assets were transferred to the child.

Two relevant items when considering support for a college student are student loans and college scholarships:

Student loan proceeds used to pay for education count as support from the child if the child is the debtor (obligor).

A college scholarship can only be earned income for the kiddie tax if it is a compensatory scholarship (i.e., reported on Form W-2).

According to IRS Publication 54, scholarships and fellowships are classified as “variable income.” This means a scholarship can be earned or unearned income depending on whether it is payment for services provided. A non-compensatory scholarship, not offered in exchange for services, is not considered earned income for kiddie tax purposes (and is not reported on Form W-2).

Student Loans

Some Gen Zers are repaying qualified student loans, and interest on these loans may be deductible. Interest on loans used for education in a post-secondary school—including some vocational and graduate schools—may qualify. This is an exception to the general rule that personal interest is non-deductible.

The deduction is an above-the-line deduction on Form 1040, Schedule 1, Part II, “Adjustments to Income,” Line 21 (2024 forms).

The maximum deduction is $2,500.

For 2025, the deduction phases out with MAGI between:

$85,000–$100,000 for single filers

$170,000–$200,000 for MFJ

The student loan interest deduction may be claimed only if the taxpayer has a legal obligation to make the interest payments under the terms of the qualified student loan. However, no deduction is allowed to a taxpayer who can be claimed as a dependent on another’s tax return or is MFS.

Example: Student Loan Interest Deduction (No Deduction)

In 2025, Ty paid $800 of interest on his qualified education loan. Ty is the only person legally obligated to make the payments. His mother, Jennifer, claims him as a dependent on her 2025 tax return. Neither Ty nor his mother may deduct the student loan interest paid in 2025

[Reg. §1.221-1(b)(2)(ii), Ex. 2].

Scenario Change: In 2025, Ty paid $800 of interest on qualified education loans. His parents are not allowed to claim him as a dependent. Ty may deduct the $800 interest paid, assuming all other relevant requirements are met

[Reg. §1.221-1(b)(2)(ii), Ex. 1].

529 Plan and Student Loan Repayment

A tax-free distribution of up to $10,000 may be used for student loan repayment (principal and interest) for the beneficiary or their sibling (brother, sister, stepbrother, or stepsister) from a §529 plan

[§529(c)(9)].

However, the portion of student loan interest paid using a tax-free 529 plan distribution cannot be used for the student loan interest deduction.

Advertising and Solicitation Rules

When marketing tax services to Gen Z, tax practitioners must ensure compliance with Circular 230, specifically §10.30 Solicitation. Circular 230 applies to attorneys, CPAs, enrolled agents, and others who practice before the IRS, and it prohibits the use of any public or private communication containing false, fraudulent, coercive, misleading, or deceptive statements or claims.

Refer to §10.30 for additional information.

Note: Gen Z has grown up in an era of digital connectivity, social media, and rapidly changing technology. When marketing and working with this generation, the tax practitioner should have an approach that blends the Circular 230 requirement (authenticity, trustworthiness) with the convenience this generation expects.

Some items to consider when working with this demographic include:

Items to Consider When Working with Gen Z

Item	Summary	Circular 230
Social media presence	Utilize platforms like Instagram, TikTok, and YouTube for engaging, educational content	Ensure all content is truthful, avoids misleading claims, and does not imply guaranteed tax outcomes
Transparency and authenticity	Be clear about services and pricing to build trust	Do not make false, fraudulent, or deceptive statements about services or results
Tech-savvy	Offer digital tools and virtual meetings to appeal to their preference for convenience	Clearly describe services and fees by the requirements for fee disclosures
Educational content	Provide easy-to-understand content on tax-related topics like student loans	Avoid over-promising or using misleading terminology in educational content
Social proof	Use testimonials and peer recommendations to build credibility	Ensure all testimonials are truthful and verifiable, avoiding any false claims or testimonials

As a note, proposed regulations would remove or update parts of Circular 230 related to registered tax return preparers and tax return preparation, as well as contingent fees, to reflect changes in the tax law since the prior amendments made to Circular 230 in 2011 and 2014.

As a reminder, keep clients’ data and your business safe by reviewing Publication 4557, Safeguarding Taxpayer Data, and having a data security plan.

Tax practitioners can play an important role in helping Gen Z navigate their tax responsibilities by providing accessible and trustworthy services. Focusing on clear communication and modern technology, tax professionals can help this generation understand complex tax concepts and offer unique, tailored advice for situations like withholding certificates, education credits, and student loans. With the right approach, long-term relationships can be built, and we can establish ourselves as a valuable and reliable resource for this generation.