It’s Filing Time!
Tax Season is upon us, fellow taxpayers! It’s been a crazy year, from the crypto crash to the ubiquitous effects of inflation. But, as always, paying the tax man is one of those things we can count on year after year. With the recent expansion of the IRS, it’s more important than ever for taxpayers to get accurate information about filing their 2022 tax returns. There are many free resources and tax-prep software for filing your tax returns, including some from the IRS. Here are some of the best tax tips for minimizing your tax burden and maximizing your tax returns.
1: Check with Your Parents
This one is for the young taxpayers. Do yourself a favor, call your parents to ask if they’re claiming you as a dependent on their federal and state taxes come tax time. If you’re out of college and working full-time with a steady income, most likely, it’s time to start filing on your own. But it’s worth a shot!
2: Refine Your Withholdings
Getting a big tax refund check from the IRS after you file your taxes is exciting. Whether you spend it on a vacation or a wardrobe upgrade, it’s like Christmas in the middle of the year. But the reality is, that was always your money! Rather than letting the IRS sit on it all year before you even see it, try using the IRS’ online calculator to refine and minimize your paycheck withholdings. There’s a lot you can do to grow that money in a year (like invest it) and give yourself an even bigger reward than the tax refund check would allow next tax season.
3: Are You Self-Employed?
Self-employment is at a 15-year high right now – one of the many workforce changes to result from the pandemic. While a corporate payroll department will ensure you withhold taxes from each paycheck to avoid a big IRS bill in April, you’re on your own if you’re self-employed. Make sure you have money set aside when the time comes to file your taxes or try paying quarterly to ease the burden. FYI – the IRS may pose penalties if you try to pay it all at the end of the year.
4: Remote Work Benefits
Another major shift in the last few years has been the widespread acceptance of work-from-home models. There are tons of tax benefits to be utilized if you do work from home, and some of your home expenditures can be classified as work expenses, like a portion of your rent, mortgage interest, utilities, insurance, repairs, and even internet service.
5: Itemize, Itemize, Itemize
This may not make sense for everyone, but if you have enough big expenses that can be classified as deductions, it probably makes sense to itemize and avoid the standard tax deductions for individuals or couples. These include your mortgage, state and local taxes, medical bills, and self-employment expenses.
6: Utilize Pre-Tax Opportunities
If you’re already in saving mode, there are a variety of ways to start allocating money to important things BEFORE the IRS tries to tax it. That includes some obvious ones, like 401k and retirement plans or Roth IRAs. You can also convert a traditional IRA to a Roth IRA (before the December 31 deadline) to avoid federal income tax on that money, especially if the value of your traditional IRA investments is down this year. By the way, if your employer contributes to your 401k, take advantage of that ASAP – make sure to meet their match amount, doubling your money, and avoiding taxes on it altogether.
7: Open a Health Savings Account
In addition to your 401k and IRA, consider a Health Savings Account, which allocates your money into a special bank account that can be used to pay for anything from medical appointments to necessities at the drugstore. If you have any kind of ongoing care, like therapy or prescriptions, this is perfect for you. But consider even a small amount to cover your yearly check-up appointments. The money in an HSA rolls over each year so that it won’t go to waste, and the deadline for contributing is the same as the April 18 tax deadline, so there’s still time to save on your tax returns!
8: Did You Move?
For some people, location priorities shifted during the pandemic. Between the ability to work from home, the realities of isolating in a cramped city apartment, and the huge number of individual job changes, there has been lots of relocation in the last three years. Today, Americans are moving to be closer to the family as much as they are moving for work – a radical shift compared to just a few years ago. Make sure you’re paying taxes in the correct state and deducting any moving expenses if you can!
9: Go Green, Plug In
Last year’s Federal Inflation Reduction Act included almost $400 billion in new tax credits designed to combat climate change. Individuals can benefit from this in a variety of ways. If you bought a new car in the last few years (lots of people did), and if that car was electric or hybrid (lots of them were), you’re likely eligible for thousands of dollars in tax credits and refunds. The dealership probably explained this to you when you bought the vehicle, but make sure you provide them with the documentation needed to file. The same applies if you’ve installed solar panels at home and many other clean energy items you’ve purchased in the last year.
10: Start Building Those College Funds
529 Education Savings Plans are a great way to allocate money to your kids’ college funds without incurring a federal gift tax. They often allow you to contribute as much as five times the threshold amount of the annual gift tax exclusion each year. You can also use this fund to pay for private school tuition in many cases, even if you already have the college funds set up for your children.
11: Give it Away!
Ok, hear us out. We’re not talking about handing money to a random stranger. But you can get serious tax deductions from gifts and charitable contributions. Giving to a cause that’s personal to you will not only feel better than letting the government decide where your money goes, but you can write it off once tax season comes around. You could also think about putting years’ worth of charitable donations into a Donor-Advised Fund in a single year to reduce your tax burden, then make the same contributions you would have over the next few years. If you’re planning on gifting money to loved ones, the tax exemption amount for this is higher than ever and may not last much longer.
12: Tax on Investments
It can be confusing to decipher which investments you must pay taxes on, but it essentially all boils down to capital gains. If you sell an asset (like shares of stock), you may have to pay capital gains tax on the income from the sale. For personal income tax, the exact rate you pay is based on how long you held the asset before selling.
Even if you don’t sell any assets over a year, you still have to report dividends on investments to the IRS when filing. This refers to a scenario where you automatically reinvest the returns from your investment into additional shares. To avoid being taxed on dividends, you can hold these investments inside a retirement account to defer them.
Offsetting Investment Losses
2022 was a wild ride for so many kinds of investments. If some of your investments declined last year, consider tax-loss harvesting when filing time comes around. This involves selling some assets that didn’t perform as you expected and reinvesting in other assets that you expect to do well next year. First, you sell an underperforming investment, then you can use that loss to reduce your taxable capital gains (up to $3,000). Next, you can reinvest the income from that sale in another security based on your investment strategy.
Hopefully, some of these tax tips for individuals can help make tax season a little less stressful and make filing your tax returns a chance to save some money. May your tax refund checks be bigger than ever in April, fellow taxpayers!