September 2023

Top 7 IRS Tax Forms You Need to Know

Updated for 2023.

When you file an annual tax return, it’s easy to get overwhelmed by the sheer amount of tax forms available. To help you break it down, we picked out seven of the top Internal Revenue Service (IRS) tax forms you might need to know about this year and what they mean.

At a glance:

Form W-2 and various 1099 forms are commonly used to report income.
Sometimes, Schedules A or C must be filed along with the typical Form 1040.
Tax forms can change from year to year, so always ensure you are using the updated versions.

1. Form 1040, U.S. Individual Tax Return

Form 1040 is the basic IRS tax form most U.S. filers use for annual tax returns. You might have to use this form depending on your age, filing status, and gross income. Even if you have no taxable income but are eligible for a tax refund or credit, this might be the correct form for you. It also allows you to itemize deductions and claim numerous expenses and tax credits.

There used to be a shortened version of this form available, Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents. However, this form was discontinued in tax year 2018 and is no longer used.

2. Form W-4, Employee’s Withholding Allowance Certificate

You don’t file Form W-4 with your annual tax return or send it to the IRS. Instead, you give it to your employer to instruct them on how much tax to withhold from your gross paycheck and remit to the taxing authorities. Form W-4 includes a worksheet to help you calculate the amount. If you want assistance determining how much tax to withhold from your paycheck depending on your goals, give our W-4 calculator1 a try.

You file a new W-4 if you change employers. You can also file a new Form W-4 with your current employer if your circumstances change, for example, if you get married or have a baby and want to claim an additional dependent.

3. Form W-2, Wage and Tax Statement

People often confuse Form W-4 and Form W-2. Your employer gives you Form W-2 at the end of the calendar year to show the total amount of tax they withheld from your paychecks.

Your employer also provides a copy of the Form W-2 to the IRS, Social Security Administration, and some state taxing authorities. These taxing entities match the amounts you claim as income with the amounts your employer reports they paid you. Because your employer sends this form to the IRS, you do not need to file it with your tax return, but it will help you accurately report your taxable income.

4. Schedule A to Form 1040, Itemized Deductions

You might hear people say that some personal expenses are “deductible” from your gross income to potentially lower the amount of taxes you must pay. That statement is true. And if your total deductible personal expenses are greater than the standard deduction amount set by the IRS, you can itemize them using Schedule A.

Schedule A has seven categories of expenses, including charitable donations, medical expenses, and mortgage interest. Strict rules apply for calculating and claiming these deductions, however. Sometimes, you might not be able to deduct the full amounts.

You also don’t have to complete every line of the schedule. If you don’t have expenses in a certain category, simply skip over it. Once you’re finished, add your total deduction amount to Form 1040.

5. Form 1099-INT, Interest Income

You might receive a Form 1099-INT from banks or other financial institutions if they paid you a certain amount of interest on your deposits. In many cases, you’ll have to pay tax on the interest and report it on your income tax return.

All amounts listed on the form need to be added to your return. You’ll also typically use Schedule B to list the name of each payer and the amount of interest received if the total taxable interest is over the $1,500 threshold.

6. Schedule C to Form 1040, Profit or Loss From Business (Sole Proprietorship)

If you are self-employed, you may need to file Schedule C to report your business’s gross profit or loss. Expenses include insurance, travel, business meals, taxes, office supplies, wages, and other business-related items.

7. Form 1099-NEC, Nonemployee Compensation

Self-employed people generally receive a Form 1099-NEC from each client that pays them throughout the year. It reports the total earnings received, and you must report that income on your tax return. As a freelancer or independent contractor, this form replaces a Form W-2 you would receive working for a traditional employer.

Before 2020, non-employee compensation was reported to self-employed taxpayers on Form 1099-MISC. This form is still around but is no longer used to report non-employee pay. Instead, Form 1099-MISC is used as a catch-all for other types of miscellaneous income such as rents, prizes, awards, medical and health payments, and fishing boat proceeds.

The bottom line

No matter which forms you must file, always make sure you use the correct tax year versions, as the IRS can update forms yearly. Also, remember that your personal situation may change, and you might need to file more or fewer forms each year, depending on your situation.

Thankfully, TaxAct® is here to make the tax filing process as painless as possible. If you file with us, we’ll take you through a Q&A, pull any necessary tax forms, and fill out the forms for you based on your answers and current tax situation.

1W-4 Calculator (Refund Booster) may not work for everyone or in all circumstances and by itself doesn’t constitute legal or tax advice. Your personal tax situation may vary.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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Inflation Adjustments for Tax Year 2023

While there is no escaping inflation, the IRS adjusts certain tax numbers every year to account for reduced purchasing power. There were some significant inflation changes for 2023, so let’s take a look at them.

At a glance:

The standard deduction has increased, as have contribution limits for retirement accounts.
The IRS updated federal income tax brackets and capital gain tax brackets.
Some tax credits also saw changes, including the EITC and Adoption Credit.

What are the IRS inflation adjustments for 2023 taxes?

The IRS made several inflation adjustments for tax year 2023. We go over some of the most important changes below.

What is the standard deduction for 2023?

The IRS adjusts the standard deduction for inflation every year. The amount you can claim depends on your filing status. Here are the current amounts for 2023 compared to last year:

If you are blind or age 65 and up, you can claim an additional standard deduction:

If you can be claimed as a dependent in 2023, your standard deduction limit is $1,250, or your earned income plus $400 — whichever is greater.

Has the federal tax rate changed for 2023?

The top marginal tax rate for 2023 remains at 37% for individual single taxpayers with incomes above $578,125 ($693,750 for married couples filing jointly).

Here are the other tax rates for this year:

35% for incomes over $231,250 ($462,500 for joint filers)
32% for incomes over $182,100 ($364,200 for joint filers)
24% for incomes over $95,375 ($190,750 for joint filers)
22% for incomes over $44,725 ($89,450 for joint filers)
12% for incomes over $11,000 ($22,000 for joint filers)

What are the 2023 tax brackets?

The tax brackets for 2023 are as follows:

What are the capital gain tax rates for 2023?

If you sold assets and investments in 2023, your profits are subject to capital gains tax rates. This applies to everything from stocks and bonds to real estate and crypto.

Short-term gains are taxed like your ordinary income (refer to the tax bracket table above). These rates apply to any assets you sell after holding for less than one year.

Long-term gain rates apply to any assets you hold for over one year before selling, maxing out at 20%. The long-term rates for 2023 are:

What are the Earned Income Tax Credit amounts for 2023?

The Earned Income Tax Credit (EITC) is available for low- to middle-income working taxpayers. The amount you can claim is determined by your income, filing status, and the amount of children you have.

For 2023, the maximum EITC you can claim is $7,430. Here are the income limits for claiming the credit this tax year:

What contribution amounts changed for 2023?

401(k) contributions: As an individual, you can contribute up to $22,500 to your 401(k) in 2023. This is up from $20,500 in 2022. If you are 50 or older, you can contribute up to $30,000 ($29,000 in 2022).
IRA contributions: The annual contribution limit for IRAs in 2023 is $6,500, up from $6,000 in 2022. If you are 50 or older, you can contribute up to $7,500. If you have a SIMPLE IRA, you can contribute up to $15,500 in 2023, (up from $14,000 in 2022). There were also some changes to income phase-out ranges for determining eligibility to deduct IRA contributions, which the IRS discusses in detail in their official announcement.
Health flexible spending accounts: In 2023, you can contribute up to $3,050 in employee salary reductions to fund your health flexible spending arrangement.
Medical Savings Accounts: Deductible ranges and out-of-pocket expenses for Medical Savings Accounts also increased. For individuals with self-only coverage, the plan must have an annual deductible of at least $2,650, at most $3,950, and an out-of-pocket expense limit of $5,300. For families, the annual deductible must be at least $5,300 but no more than $7,900, with an out-of-pocket expense limit of $9,650.

What else is changing for 2023?

Social Security tax limit: There is a limit on how much of your income is subject to Social Security tax. For 2023, the maximum earnings subject to the Social Security payroll tax increased to $160,200 (up from $147,000 in 2022). This means the maximum Social Security tax you can have withheld from your paycheck in 2023 will be $9,932.
Fringe benefits: The monthly limit for tax-free qualified transportation and parking fringe benefits increased to $300 (up from $280 in 2022).
Gift tax exclusions: The annual gift tax exclusion increased to $17,000 for 2023 (up from $16,000 in 2022). You can gift someone up to this amount without filing a gift tax return. The lifetime exclusion also increased to $12.92 million.
Qualified adoption expenses: The maximum credit for adoption expenses increased to $15,950 (up from $14,890 in 2022).
Foreign earned income exclusion: For 2023, the foreign earned income exclusion is $120,000 (up from $112,000 in 2022). If you qualify, you can exclude foreign earnings from your income up to this amount.

What has NOT changed for 2023?

There continues to be no limit on itemized deductions.
The personal exemption remains at 0.
The modified adjusted gross income (MAGI) amount used by joint filers to determine the Lifetime Learning Credit (LLC) reduction was not adjusted for inflation. The LLC begins phasing out once your MAGI exceeds $80,000 ($160,000 for joint filers).

This article is for informational purposes only and not legal or financial advice.

The post Inflation Adjustments for Tax Year 2023 appeared first on TaxAct Blog.

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Lottery Tax Calculator: How Your Winnings Are Taxed

Updated for tax year 2023.

No doubt about it, winning the lottery dramatically changes a person’s life. A financial windfall of that magnitude quickly grants you a level of financial freedom you probably have trouble imagining.

But becoming a Mega Millions or Powerball jackpot winner doesn’t change everything. If you are the lucky winner, you still have to worry about bills and taxes. This is when a lottery tax calculator comes handy.

Jump to the Lottery Tax Calculator

At a glance:

Lottery winnings are considered taxable income for both federal and state taxes.
Federal tax rates vary based on your tax bracket, with rates up to 37%.
Winning the lottery can bump you into a higher tax bracket.
Lottery winnings don’t count as earned income for Social Security benefits.

How are lottery winnings taxed under federal and state?

Lottery winnings are considered ordinary taxable income for both federal and state tax purposes. That means your winnings are taxed the same as your wages or salary. And you must report the entire amount you receive each year on your tax return.

For example, let’s say you elected to receive your lottery winnings in the form of annuity payments and received $50,000 in 2023. You must report that money as income on your 2023 tax return. The same is true, however, if you take a lump-sum payout in 2023. You must report that entire amount as well. For this, a tax calculator is an essential tool.

Tax Tip: Before you receive one dollar, the IRS automatically takes 24% of your winnings as tax money. You’re expected to pay the rest of your tax bill on that prize money when you file your return.

What is the tax rate for lottery winnings?

When it comes to federal taxes, lottery winnings are taxed according to the federal tax brackets. Therefore, you won’t pay the same tax rate on the entire amount. The tax brackets are progressive, which means portions of your winnings are taxed at different rates. Depending on the number of your winnings, your federal tax rate could be as high as 37% as per the lottery tax calculation.

State and local tax rates vary by location. Some states don’t impose an income tax while others withhold over 15%. Also, some states have withholding rates for non-residents, meaning even if you don’t live there, you still have to pay taxes to that state.

Do I have to pay state taxes on lottery winnings if I don’t live in the state where I bought the ticket?

Most states don’t withhold taxes when the winner doesn’t reside there. In fact, of the states that participate in multistate lotteries, only two withhold taxes from nonresidents. Arizona and Maryland both tax the winnings of people who live out of state.

Can I change the amount of tax the lottery withholds?

Unfortunately, you don’t have a choice on how much state or federal tax is withheld from your winnings. The only piece you can control is how much money you save to cover any extra money you may owe. For this, you can use a federal tax calculator.

Do lottery winnings count as earned income for Social Security purposes?

Lottery winnings are not considered earned income, no matter how much work it was purchasing your tickets. Therefore, they do not affect your Social Security benefits.

Does winning the lottery affect my tax bracket?

Winning the lottery can affect your tax bracket in a big way. An average family’s top federal tax rate could go from 22% to 37%. But remember, if that happens, you likely won’t pay the top rate on all your money. That is unless your regular household income already places you in the top tax bracket prior to winning. In that case, all of it is taxed at 37%. This can be calculated using a tax calculator. Lottery winnings are combined with the rest of your taxable income for the year, meaning that money is not taxed separately.

If you want to play around with some numbers, check out our tax bracket calculator.

What are the benefits of taking a lump sum payment versus annuity payments?

If you take a lump sum, you have more control over your money right now. You can choose to invest it into a retirement account or other stock option to generate a return. You could also use it to buy or expand a business.

Several financial advisors recommend taking the lump sum because you typically receive a better return on investing lottery winnings in higher-return assets, like stocks. If you elect annuity payments, however, you can take advantage of your tax deductions each year with the help of a lottery tax calculator and a lower tax bracket to reduce your tax bill.

The decision of which option is better is complex. It all depends on the size of the lottery winnings, your current and projected income tax rates, where you reside, and the potential rate of return on any investments. If you win big, it’s in your best interest to work with a financial advisor to determine what’s right for you. However, you can also determine the taxes using a federal tax calculator.

Are you a lucky winner? Determine what you owe in taxes with this Lottery Tax Calculator.

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Gift Tax: The Tax Implications of Supporting Adult Children

Updated for tax year 2023.

Do you currently have adult children who are not your dependents living under your roof?

If you are supporting adult children, or even giving them a helping hand now and then, you’re not alone. In today’s tough job market, getting a good career started can take a little longer than planned.

The last thing you need when you’re trying to be helpful, however, is to be worried about paying gift tax. Fortunately, your chances of actually owing gift tax are very low. To set your mind at ease, first, determine if you’ve given any one child more than the limit for a calendar year.

At a glance:

You can gift your adult child up to $17,000 in 2023 without filing a gift tax return. 
Filing a gift tax return doesn’t necessarily mean owing gift tax unless lifetime gifts exceed $12.92 million (in 2023).
Paying your adult child for services rendered is not a gift and can be deducted as a business expense.
Adult children over 24 can be claimed as dependents if they meet specific IRS criteria.

Is your adult child your dependent?

When your adult child qualifies as a dependent, you can spend money on them without it being considered a gift for tax purposes.

If your adult child aged 19-24 is a full-time student for at least 5 months of the year, they can qualify as your dependent. To claim them as a dependent, you must provide more than half of your child’s support during the year.

If you support your non-disabled adult child age 24 or older, you cannot claim him or her as a “qualifying child” to be a dependent by IRS definitions. However, you may be able to claim them as a qualifying relative.

You can claim your son, daughter, stepchild, eligible foster child, brother, sister, half-sibling, step-sibling, or descendant of any of these as a qualifying relative. Your adult children do not need to live with you to be considered a dependent.

To qualify as a dependent, your adult child must have less than $4,700 in gross income for 2023 ($4,400 for 2022), and you must provide over 50 percent of their total support.

What counts as a gift for tax purposes?

The IRS considers any transfer of substantial value (such as money or property) to someone where you don’t receive the full value in exchange to be a gift. This can include cash, real estate, vehicles, and even interest-free loans given to your adult children.

For more information about gift tax nuances, check out the IRS’s frequently asked questions on gift taxes.

How much can you give?

As of 2023, you can give an adult child up to $17,000 in a year before you must file a gift tax return.

If your adult child is married, you can also give up to $17,000 to their spouse. If you’re married, you and your spouse can both make gifts, meaning the maximum gift one married couple can gift their married child and spouse without filing a gift tax return is $68,000.

This amount is per calendar year and does not roll over from year to year. Try not to give all your assistance in one year if you want to avoid filing gift tax returns. This annual exclusion can change from year to year (it was $16,000 in 2022), so make sure you know what the exclusion amount is for a given tax year.

Not all money transfers are gifts

The IRS isn’t interested in the rental value of your adult child’s old bedroom, or the amount of food that disappears from your refrigerator. If you are ever audited, however, the IRS may notice large checks written to your adult child, or a transfer of a valuable asset, such as a car.

You can pay as much as you want for tuition, medical expenses, or health insurance premiums on behalf of your adult children without worrying about gift tax returns. Just make sure you pay the school, hospital, or other organization directly, rather than sending a check to your adult child.

Payment for services

Any amount you pay your adult child, either in your business or for personal services, is not a gift. However, the amount you pay must be reasonable, and the child must have actually done the work.

If you pay your adult child in your business, you can deduct the amount you pay them as a business expense. It’s a win-win situation — you avoid the possibility of gift tax and lower your tax bill, while your child feels useful and doesn’t need to feel guilty about accepting help.

Your adult child may even be able to contribute to a retirement plan, such as an IRA, if they earn income by working for you.

If your child is over age 21, you generally owe payroll taxes if you pay your child wages.

Filing a gift tax return doesn’t mean you owe gift tax

What happens if you give your adult child more than $17,000 in a year?

Not much. You must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Until your total gifts reported on gift returns reach the $12.92 million lifetime exemption amount, you won’t owe any tax. That puts most of us in the clear.

This lifetime exclusion amount is accurate as of 2023 and may change in future years (for example, it was only $12.06 million in 2022).

But even if you do not owe gift tax, you must file Form 709 for each year in which you gift your adult child more than $17,000.

This article is for informational purposes only and not legal or financial advice.

More to explore:

3 Easy Ways to Avoid Paying A Gift Tax
How Tax Brackets Work
Taxable Income Calculator
What Does My Wedding Dress Have to do With My Taxes?
11 FAQs About Estate Taxes and Inheritance Planning

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