We just blinked; the year-end holidays are over, and we are one month into 2023. January not only ushers in the New Year but also rolls out the red carpet for the 2022 tax filing season. As of January 23, the IRS is accepting tax returns. Before you jump the gun and file your taxes or quickly pass this article by to join the procrastinator crowd until sometime just shy of the April 18 deadline, consider these essential tax tips to help ease the burden of the filing season.
1) Gather your Important Information- P.S. You may still be waiting on documents.
It is a good idea to take an inventory of your income, expenses, and investments to understand what documentation you will need to complete your tax return. Reviewing your previous year's tax return can help you with a good starting place.
While the early bird may get the worm, and in this case, your refund sooner, you still need to have all your documentation to support a complete return. Typically, statements reporting income (W-2, 1099 R, SSA 1099) will be sent before the end of January; however, statements reporting taxable investment gains (1099 B) and dividends (1099 DIV) usually come a bit later to ensure timely tax reporting while limiting corrections. Some reporting statements aren't even available until mid-March (K-1).
2) Consider tax credits and deductions
Lowering your tax liability to Uncle Sam is always welcomed with open arms. It is crucial to have a clear picture of the money you spend throughout the year, as some items are eligible to reduce your tax bill or increase your tax refund.
Deductions reduce the amount of your income before you calculate the tax you owe. There are typically two types, itemized and above-the-line deductions. Some commonly used deductions eligible for itemization include:
- State and local taxes
- Charitable contributions
- Casualty loss
- Business expenses for which you weren't reimbursed
- Medical expenses
- Mortgage interest
Not everyone will benefit from itemized deductions since the IRS allows for a pretty significant standard deduction. For the 2022 tax year, the standard deduction is $12,950 for single filers and $25,900 for married couples filing jointly, or $19,400 for the head of a household.
Above-the-line deductions reduce your adjusted gross income (AGI), which can qualify you for certain itemized deductions and tax credits. Standard above-the-line deductions include:
- Alimony paid
- Educator expenses
- Student loan interest
- Deductible IRA contributions
- Moving expenses of armed forces member
On the other hand, tax credits are worth even more as they reduce the amount of actual tax owed. Tax credits do not impact your tax bracket or your taxable income. The most common types of tax credits include:
- Child tax credit
- Child and dependent care credit
- Lifetime learning credit
- Adoption credit
- Earned income tax credit
- Residential energy tax credit
3) Still looking for a way to lower your tax burden?
Even though December 31 is in the rearview mirror, you may still be able to lower your 2022 tax liability.
You can still make contributions to your traditional IRA up until the tax filing deadline of April 18, 2023. As long as you meet the earning requirements, you can contribute $6,500 to a traditional IRA, plus an additional $1,000 if you are over 50. If an employer-sponsored retirement plan covers you or your spouse, your earned income must be below $72,000 for a single person and $116,000 for a couple, married, filing jointly to make a full contribution. If you or your spouse are not covered by an employer plan, you can take the full deduction if your income is under $218,000.
Not only is this a wise tax move, but your retirement account and your future self will also reap the benefits.
4) Consider the logistics of how you will file
Some taxpayers prefer to use a tax professional to help them prepare and file their taxes hoping to avoid errors. Especially since the tax code is so complex, having a professional who knows all the ins and outs of filing could be helpful. Hiring a professional still requires your participation in gathering and providing pertinent information. So, you are not entirely off the hook.
Of course, many taxpayers will embrace the DIY route, and abundant resources are available if you prefer this route. Tax preparation software is readily available. Enter your information as prompted, and the software will populate your numbers. Utilizing software can help streamline the process further if you take advantage of the automated systems that funnel your reported income, interest, or dividends directly into the software.
Either way, according to the IRS, to ensure your return and refund are processed without delay, they suggest you file electronically with direct deposit. Most taxpayers should expect their refund within 21 days if they forego the paper return.
Bottom Line
I completely understand; the thought of filing your taxes ranks right up there with eating glass, unappetizing at best. Starting early, getting organized, and understanding how you can reduce your tax burden can make the process far less painful. Help yourself, and don't procrastinate.
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