Staying Ahead of the Tax Game
Tax season 2023 is underway, and there are some changes you should be aware of. From increased standard deductions, new tax credits and adjusted tax brackets, filing your taxes this year might look slightly different from 2022. Tax deductions and tax credits can save you significant money, but how can you leverage them? This article gives insight into all you need to know to file your tax confidently and make the best use of tax deductions and tax credits.
2023 Tax Season: What You Need To Know
The Federal tax filing deadline is slated for April 18, 2023. Although some exceptions exist, the state income tax deadline is also fixed for April 18, 2023.
Alaska, Florida, New Hampshire, Nevada, South Dakota, Texas, Tennessee, Washington and Wyoming – do not request state income taxes. Iowa and Virginia's state income tax deadline is May 1, while Delaware and Louisiana have their income tax deadlines fixed for May 2 and May 15, respectively.
If you want to request an extension to file your taxes, the deadline will be set to October 16, 2023. You should be aware that extensions don't change your payment deadline. You still have to remit what you owe to avoid late penalties.
For standard deductions, there's been an increase to $12,950 for single taxpayers and $25,900 for married couples filing jointly. Also, due to the surging inflation rates, income tax brackets leaped in 2022.
Important Tax Forms
The tax season for this year started at the end of January, and you'll be filing taxes for 2022. Your employer will provide a W-2 form to your mailbox. Alternatively, you may use an e-copy of the document online. You should receive a 1099 form from your clients if you're a freelancer.
You may also need your mortgage interest, charitable contributions and investment income statements. If you're planning on itemizing your deductions, build a habit of storing your receipts. If your tax situation sounds complicated and you need to figure out what documents you need, it's best to contact a tax professional.
Tax Deductions for Tax Season 2023
Many taxpayers crave tax deductions, and the reason is plausible. Tax deductions help reduce how much of your income is taxable. Tax deductions are tricky because you may qualify but never know.
Most times, tax deductions are available for you when you itemize them—it may take time, but it's worth it. However, if you choose the standard deduction method, you can still qualify for some tax deductions.
Standard deductions are specific figures deducted from your income, reducing the overall income you're taxed on. Your standard deduction amount depends on your age, medical status, income and filing status.
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5 Popular Tax Deductions
1. Retirement account deductions. You can deduct contributions if your traditional individual retirement account or IRA is tax-deductible. Also, IRAs are tax-deferred, meaning any earnings the account makes before a withdrawal is not taxed.
2. Educational expenses. If you're a student, you can claim deductions on your tuition, fees and student loan interests. But, you must have a transparent copy of Form 1098—T to qualify. Based on the Biden administration's student loan forgiveness plan, you won't owe federal income taxes on loans forgiven before 2025. Depending on where you live, you might still be indebted to pay state income taxes.
3. Medical bills. Taxpayers are at liberty to deduct medical expenses that account for not more than 7.5% of their gross income.
4. Property taxes and mortgage interest. You can claim home loan interest for tax deductions if your mortgage payment includes an amount escrowed for property taxes. This is usually part of Form 1098 your lender sends you.
5. Charitable donations. To claim tax deductions on charitable donations, keep your receipts to itemize your deductions when due.
Tax Credits
Tax credits are a dollar-for-dollar amount that taxpayers can subtract from their tax bill. There are two categories: refundable and nonrefundable. You get refundable tax credits when you pay above the amount you owe—it's a refund. In a nonrefundable credit, your tax bill is notched down to zero, and you don't get any refund.
3 Common Tax Credits
1. Child tax credit. You can get up to $2000 tax credit per child for the 2022 tax year. If you adopt children, they may also qualify for a child tax credit, but they must be under 17. You can get up to $1500 in refunds.
2. The Child and Dependent Care Credit. Parents can claim the child and dependent care credit if they pay for child care so they can work. If you're a parent, you can qualify for up to 35% of up to $3000 childcare costs per child of not more than 12 years. Alternatively, you can choose credit of up to $6000 for two or more children under 13.
3. The Earned Income Tax Credit (EITC). Earned Income Tax Credit (EITC) is designed to help lower-income earners. It's refundable and available to you depending on your income and the number of dependents. However, if you have more than $10,300 in investment income, you can't qualify for it.
Conclusion
Getting ready for tax season requires calmness and great attention to detail. You can use tax software to stay on track with your finances. If doing your tax yourself seems overwhelming, it might be smarter to hire a tax accountant to help. When it comes to paying fewer taxes, tax deductions and credits are your friends. Aside from the above examples, you can also claim tax credits for green options like using renewable energy or buying an electric car. The key is making smarter financial choices, which begins by keeping track of your financial processes.