Let’s face it. April will be here before you know it. That’s why it’s never too early to start preparing to file your taxes, especially if you’ve had a life change or two. (Or, say, you bought an electric vehicle.) Here are the top 10 things you need to know about filing federal income taxes, which are due on April 18 in 2023.
Payment App Reporting Paused For One Year
There has been much confusion over a new requirement that payment apps – including Venmo, Cash App and Paypal – report individuals’ income of $600 or more. The IRS announced in late December that it is delaying that requirement by one year, meaning those apps must only report income of at least $20,000 for this tax season. But still, those who make all or part of their income in the gig economy must report their earnings to the IRS.
This will give the IRS and the apps another year to figure out the logistics of reporting monetary transactions, which may be business or personal, according to the Taxpayer Advocacy Service. For example, friends splitting a bill at a restaurant should not be counted as income.
Smaller Refunds Likely
You may get a significantly smaller refund in 2023. That’s because some tax credits are being reduced to the 2019 levels, according to the IRS.
Those who received $3,600 per dependent last year may get $2,000 per dependent this year. Taxpayers with no children who received $1,500 from the Earned Income Tax Credit, may now get $500. And the Child and Dependent Care Credit will max out at $2,100, compared to $8,000 previously.
Tax Credit Available for Some New ‘Green’ Vehicles
If you purchased a new electric vehicle after August 16, 2022, when the Inflation Reduction Act of 2022 was enacted, a tax credit is available for qualifying vehicles for which final assembly occurred in North America, according to the IRS. Enter your Vehicle Identification Number (VIN) on the Department of Energy’s website here to see if you are eligible: https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit
If you purchased an electric vehicle prior to that date, check the IRS’s website or with your tax preparer to determine eligibility.
Tax Prep and Chill? Not So Fast
Filing your taxes as soon as possible may feel rewarding, as you check it off your long to-do list. But it’s more important that you wait to make sure all your tax documents have arrived, says Justin Pritchard, a Certified Financial Planner with Approach Financial, Inc. For example, investments you own might report earnings from Form 1099 later than you expect.
“You can go ahead and start filling out returns or providing information to your tax preparer right away,” Pritchard says, “but it might be wise to wait until March to finalize and file your return.” You might even consider filing an extension now. It’s quick, easy and free. “I like to file extensions early in the year just in case I need more time to get everything together.”
Prior Year Contributions: There’s Still Time!
If you didn’t contribute as much as you wanted to your retirement and health savings accounts, you still have time, Pritchard says. Your HSA and IRA can accept contributions into April for the prior tax year.
You might be able to score a deduction or put money into a Roth IRA for potential tax-free income later in life. Be sure to review your eligibility before you contribute.
How To Know If You Need to File
Not sure if you are required to file a return? The IRS has an online tool to answer that: www.irs.gov/help/ita/do-i-need-to-file-a-tax-return.
You’ll need to know your filing status (single, married, widowed, etc.), the amount of federal income tax withheld, and basic information to help you determine your gross income.
The Documents You’ll Need In 2023
Here’s a list of what you will need to file your return, according to The Taxpayer Advocate Service:
- The social security numbers or individual tax identification numbers for yourself and anyone else listed on your tax return.
- The W-2’s and 1099’s for all income you have received, including investments.
- Documentation to support tax credits and deductions (dependent care, homeownership, healthcare, education, etc.).
- The prior year’s adjusted gross income.
- Bank account and routing number for direct deposit of a refund.
Should You Itemize or Take the Standard Deduction?
The standard deduction has greatly increased over the years, so itemizing may no longer be necessary, according to the Taxpayer Advocate Service. Standard deductions vary based on marital status, whether you are blind, and other factors. The IRS has a tool you can use to determine what your standard deduction would be: www.irs.gov/help/ita/how-much-is-my-standard-deduction
Find the Right Tax Preparer
Anyone can be a paid tax return preparer, according to the IRS, so long as they have an IRS preparer identification code. But their level of education and expertise can vary greatly. Do some research before hiring anyone. Ask your friends and colleagues for recommendations, and read online reviews. Once you find someone you like the looks of, you can check their credentials here, before you chat or meet: www.irs.treasury.gov/rpo/rpo.jsf
File Your Own Return for Free
If you’re up for a challenge and feel comfortable doing your own return, you can do so online:
- If your annual gross income is $73,000 or less, you may be eligible for free guided tax preparation, which does the math for you on an IRS partner site.
- If your income is greater than that, you can use the IRS’s free fillable forms. This allows you to enter your information electronically onto a 1040 form, print it, and mail it.
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