Many of us drag our feet when it comes to filing our taxes. In fact, according to IRS data, 29 percent of tax returns were filed in the last three weeks of tax season last year. If you’re panicking that this year's deadline is approaching and you're not sure where to get started, the good news is that you still have time. As a certified financial planner at SoFi, a personal finance company, I can help you navigate the tricky ins and outs of the IRS. Let’s start by gathering the documents you need, identifying important tax advantages, and learning how you can put your tax return money to good use.
Know When to Ask For Help
The first decision you’ll need to make is whether you’ll want to file your taxes on your own through an online platform or work with a Certified Public Accountant (CPA). If you have a more complicated tax situation, working with a CPA might be the best option for you. Their job is to help you navigate and understand the tax code. Working with a CPA will come with an additional cost. You can often find a great local CPA through your network or word of mouth.
Gather Your Paperwork
Compile the documents you’ll need to file online or give to an accountant—half the battle is organizing what you already have. When working with SoFi members, I tell them to first start by taking a plain manila envelope and write the tax year plus taxes. That folder should be where you start to drop in all of your important documents to file your taxes.
In most cases, you’ll need income documents such as a W-2 for salaried employees, or a 1099 if you’re self-employed. You may also need to provide investment documents, student loan interest forms, or IRA contributions. You can find more info on all of the forms you might need on the IRS website. As these forms come in the mail or email, keep them in a labeled folder so you stay organized and ready during the tax-filing season. It is important to keep these documents even after you submitted your return in case you are audited (you must keep them for at least three years).
If you're filing jointly with your spouse, you will need copies of their documents, too. There could be other documents you need for specific circumstances like alimony, selling a business, or if you have rental properties.
Take Advantage of Ways to Lower What You Owe
It’s not too late to contribute to an IRA for the year. You have until the tax filing deadline (April 18, 2023) to make a 2022 IRA contribution up to $6,000 which is a deduction as long as you meet the requirements. These requirements are: If you participate in a retirement plan at work, you must have a gross income of less than $68,000 if filing single or less than $204,000 married filing jointly. If you do not have a retirement plan at work, there is no income limit to be eligible for the deduction.
Look For Ways to Save Money Next Time
While your current focus may be on 2022 taxes, there are also some things you may want to keep in mind that could help reduce your tax burden when filing your 2023 taxes. Keep in mind the following tax benefits that you can leverage to maximize your return or reduce your tax liability in future years.
- Tax-Loss Harvesting: This is when you sell an investment at a loss and then use that loss to offset against other gains you had in the year. It is important to keep in mind that there is a “wash sale” rule, meaning if you sold an investment at a loss and repurchased it (or a substantially identical investment) within 30 days you cannot claim that loss for tax purposes. However, cryptocurrency does not currently have a wash sale rule, so if you had losses in crypto, you may be able to leverage those losses to offset taxes.
- Inflation Reduction Act Tax Opportunities: Last year, President Biden signed the Inflation Reduction Act into law, which features sweeping tax reforms. The package includes new “green” tax credits, which encourage taxpayers to lean into renewable energy options, like solar and wind. Homeowners can, for instance, collect a 30 percent tax credit, or up to $1,200, for installing residential solar panels. There is also the high-efficiency electric home rebate, where low and middle-income families can get a 50 percent rebate on electrification projects of up to $14,000 (heat pumps, electric stoves, breaker box, wiring, and weatherizing). Vehicle owners can also recoup up to $7,500 for new qualified clean vehicles and up to $4,000 for used qualified clean vehicles.
- Increased Retirement Contribution Limits: For 2023, contribution limits have increased to help consumers combat inflation and play catch up when it comes to saving for retirement. The 401k contribution limit increased to $22,500 (up from $20,500 in 2022). Individuals over age 50 can now make an additional $7,500 (up from $6,500 in 2022) as a catch-up contribution. IRA contribution limits increased to $6,500 (up from $6,000 in 2022). If you haven’t contributed to your IRA for the 2022 tax year, you can still do so by the tax deadline of April 18. Lastly, HSA contributions increased to $3,850 for individuals and $7,500 for families (up from $3,650 for individuals and $7,300 for families in 2022).
File on Time
Make sure you’re submitting your taxes by this year's deadline of Tuesday, April 18, 2023. Failure to file and pay your taxes on time can result in various penalties that can cost you up to a maximum of 25 percent. If you are nervous you can discuss with a CPA who can best guide you to avoid these in the first place.
Think Twice About Spending That Refund
Maybe the government is sending you a check this year, hooray! But before you book an exotic vacation or splurge on a new wardrobe, consider using that money to improve your personal finances by paying off any bad debt (high-interest credit cards, for example), funding (or replenishing!) your emergency savings, contributing to your retirement account, or investing in other financial goals you may be working towards. If you’re not sure where to start, a financial planner is always a good option to set you on the right path for your individual needs.
Understand the Baseline Tax Vocabulary
Last but not least, know the lingo. Taxes are complicated. If you’re just starting out or want to get a better understanding of the process, there are five key terms to know:
- A tax deduction reduces the amount of your income that is taxable
- A tax credit reduces the amount of taxes you owe to the government, dollar for dollar.
- Standard deduction is a specific dollar amount that the IRS lets you deduct from your income. This amount for 2022 is $12,950 for single filers and $25,900 for those who are married and jointly filing. For most people, this may be a larger amount than itemizing and is simpler, but it can be worth looking at both.
- An itemized deduction is an expense that is subtracted from your income to reduce your overall taxable income, and thus, reduce the amount of taxes you owe. Itemized deductions are only available if you forgo the standard deduction and instead itemize such expenses. These can include things like mortgage interest, state and local income taxes, property taxes, medical expenses, and charitable donations. If you have many of these items it may be worth calculating both types of deductions to see whether itemizing or the standard deduction would be a better move for you.
- Capital gains occur when you sell an asset such as stocks, bonds, or real estate for more than you paid for it. Long-term gains (an investment held longer than one year) are taxed at capital gains tax rates which can be found here. Short-term gains (held less than one year) are taxed at ordinary income tax rates (like your wages).
Kendall Meade is a Registered Representative of SoFi Securities, LLC and an Investment Adviser Representative of SoFi Wealth, LLC
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP®, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney about your specific needs.
©2023 Social Finance, Inc. All rights reserved.
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Kendall is a Certified Financial Planner™ at personal finance company SoFi and spends her time working with members one on one, leading financial education events, and engaging with the media on personal finance topics. Prior to joining SoFi, Kendall was part of the private wealth management group at Robert W. Baird & Co and she is a CFP® professional. Kendall Meade, CFP® at SoFi.
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