Please note that the information provided in this blog post is for general informational purposes only and should not be considered as professional tax or legal advice. Each individual’s financial and tax situation is unique, and it is recommended to seek the advice of a licensed tax professional or attorney before making any financial decisions.
Tax season can be a stressful time for many people, especially if you’re not properly organized. However, with a little bit of preparation and effort, you can make the process much smoother. Here are some tips to help you get organized for tax season 2023 and ensure that you are aware of the most important things you need to know.
- Importance of Tax Planning: Tax planning is the process of anticipating and organizing your finances to minimize your tax liability. By planning in advance, you can reduce the stress and confusion associated with tax season and maximize your potential refund.
- Understanding Tax Changes: Each year, tax laws and regulations can change. It’s important to keep up to date on the latest changes and how they may affect you. This can include changes to the standard deduction, tax brackets, and itemized deductions.
- Gather Required Documentation: To file your taxes, you will need to gather a variety of documents and information. This can include W-2 forms from your employer, 1099 forms for any freelance work, and receipts for itemized deductions such as medical expenses and charitable donations.
- Utilizing Tax Preparation Tools: There are several tax preparation tools available, including software programs and online services. These tools can help you accurately calculate your taxes and simplify the process. They can also help you keep track of your finances throughout the year.
- Common Tax Deductions: Tax deductions are expenses that can reduce your taxable income. Some of the most commonly overlooked tax deductions include charitable donations, medical expenses, and business expenses. It’s important to keep accurate records of these expenses throughout the year.
- Record-Keeping: Accurate record-keeping is critical for tax preparation. It helps ensure that you don’t miss any deductions or credits and provides a clear picture of your finances. You should keep records of all income, expenses, and receipts.
- Filing Options: There are several options for filing your taxes, including using a tax professional, e-filing, or self-filing. Each option has its own advantages and disadvantages, and the best option for you will depend on your individual circumstances.
- Deadlines: Tax season is a busy time, and it’s important to be aware of the key deadlines. This includes the deadline for filing your tax return and the deadline for making contributions to an individual retirement account (IRA). Missing these deadlines can result in penalties and interest charges.
What are Tax Deductions and what qualifies as a deduction?
Tax deductions are expenses that can be subtracted from your taxable income, reducing the amount of tax you owe. Here are some common tax deductions:
- State and local taxes (up to a limit)
- Mortgage interest
- Charitable contributions
- Medical and dental expenses (above a certain threshold)
- Retirement contributions
- Business expenses (for those who are self-employed)
- Job search expenses
- Moving expenses (for certain job relocations)
- Education expenses
- Casualty and theft losses
What is a Standard Deduction ?
Imagine you have a big jar of money, and you want to buy some toys. The government is like a store, and they also want some of your money to help pay for things like roads and schools. But, the government wants to be fair, so they give you a “discount” on how much money they take from you. This discount is called the “standard deduction.”
It means that you can keep a certain amount of your money without having to give it to the government. You don’t have to show any receipts or prove that you spent the money in a certain way, you just get to keep it. This way, the government takes less money from you and you get to keep more of your money to buy toys or save for the future.
The standard deduction for tax year 2022 (filed in 2023) is as follows:
- For individuals: $12,550
- For married couples filing jointly: $25,100
- For heads of household: $18,800
What is a Federal Tax Bracket?
A tax bracket is like a price tag for the government’s cut of your income. Basically, the more money you make, the higher the tax bracket you fall into and the more you have to pay in taxes.
Think of it like shopping for clothes at different stores. Some stores charge more for their clothes because they’re more stylish or high-quality. The same goes for taxes – the government charges more for people who make more money because they can afford to pay a little extra.
But don’t worry, it’s not all bad news! There are different tax brackets, so you’re not just lumped into one big “expensive” category. You move up the tax bracket scale as you make more money, so you only pay a higher tax rate on the income you make above a certain level.
And just like how you can use coupons or wait for a sale to save money when shopping, you can also use deductions and credits to reduce your taxable income and lower your tax bill. So don’t forget to keep your receipts!
For tax year 2022, the federal tax brackets and corresponding marginal tax rates are as follows:
- 10% on taxable income from $0 to $9,950 for individuals; $19,900 for married couples filing jointly
- 12% on taxable income from $9,951 to $40,525 for individuals; $19,901 to $81,050 for married couples filing jointly
- 22% on taxable income from $40,526 to $86,375 for individuals; $81,051 to $172,750 for married couples filing jointly
- 24% on taxable income from $86,376 to $164,925 for individuals; $172,751 to $329,850 for married couples filing jointly
- 32% on taxable income from $164,926 to $209,425 for individuals; $329,851 to $418,850 for married couples filing jointly
- 35% on taxable income from $209,426 to $522,550 for individuals; $418,851 to $628,300 for married couples filing jointly
- 37% on taxable income over $522,550 for individuals; over $628,300 for married couples filing jointly
Let’s break down what a tax bill would look like
Let’s say an individual, we’ll name him Luka, made $75,000 gross and he will be filing as single filer, no dependents.
The amount of taxes owed by Luka who made a gross amount of $75,000 in 2022 would depend on his taxable income and the deductions he’s eligible to claim. To determine taxable income, you would start with the gross amount of $75,000 and subtract any eligible deductions, such as the standard deduction ($12,550 for tax year 2022), personal exemptions, and itemized deductions. For this example, we will stick solely with the standard deduction.
Assuming the standard deduction, the taxable income would be $62,450 ($75,000 – $12,550). Using the 2022 federal tax brackets and marginal tax rates, the taxes owed would be calculated as follows:
- 10% on taxable income from $0 to $9,950: $995
- 12% on taxable income from $9,951 to $40,525: $3,282
- 22% on taxable income from $40,526 to $62,450: $7,064
So, in this example, the total federal income tax owed for a single filer with a gross income of $75,000 would be $11,341.
529 Contributions, are they tax Deductions?
No, 529 plans are not a tax deduction at the federal level, meaning contributions made to a 529 plan are not deductible from your federal taxable income.
However, some states offer tax deductions or credits for contributions made to a 529 plan. It’s important to check with your state’s tax laws to see if contributions to a 529 plan are deductible on your state tax return.
Additionally, distributions from a 529 plan used for qualified education expenses such as tuition, fees, and books are tax-free at the federal level. Some states also offer tax-free treatment for distributions from a 529 plan used for education expenses.
But you can now transfer a 529 into a ROTH IRA
How amazing is that? A recent change in tax law now allows individuals to rollover funds from a traditional 529 plan into a Roth IRA. This change was part of the SECURE Act, which was signed into law in December 2019.
Prior to the change, the only way to access funds in a 529 plan was to use them for qualified education expenses, and any unused funds would be subject to taxes and penalties.
With the ability to rollover funds from a 529 plan into a Roth IRA, individuals now have greater flexibility in how they use their savings for education expenses. They can use the funds in a Roth IRA for any purpose, including education expenses, without paying taxes or penalties.
Ready, Set, File:
Tax season doesn’t have to be a source of stress and frustration. By taking steps to understand the tax laws and opportunities available to you, and by being organized and prepared, you can make the most of your financial situation. Whether it’s by taking advantage of tax deductions, exploring options like rolling over funds from a traditional 529 plan into a Roth IRA, or simply understanding your marginal tax rate, there are many ways to reduce stress and potentially save money during tax season. So take a deep breath, stay informed, and remember to always have a smile on your face, even in the midst of tax season.