January 2024

What Your Tax Return Can Teach You For Next Year

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Updated for tax year 2023.

With each passing tax year, it’s possible to find more efficient ways to file your taxes. As you file your taxes each year, you gain new knowledge about your tax situation — you may even learn how to maximize your tax refund next year or determine how to owe less in taxes the next time around.

Whether you’ve filed your income taxes for this year or you’re still planning to do it soon, here are some of our top tax tips to teach you about better tax preparation and hopefully get you the tax outcome you desire next year.

Tax deductions and tax credits

There are many tax deductions and tax credits available to taxpayers, but each has its own requirements you have to meet to claim it.

When you file, you’ll want to know what tax deductions and credits you can take and their worth. Ask yourself: Are there any tax deductions you planned to take that you missed out on this year? What was the cause? Would finding ways to lower your taxable income next year help you qualify for more tax breaks next time?

Some common tax deductions you may be able to take include the student loan interest deduction, the IRA deduction, a medical expense deduction, and more. Common tax credits you may qualify for include the Child Tax Credit, Earned Income Tax Credit, or educational tax credits like the American Opportunity Credit or the Lifetime Learning Credit.

To learn more about what tax deductions and tax credits might be available to you, check out our article Know More About Tax Deductions and Credits.

How much of a tax refund you’ll receive

If you expect to be in the same job or make the same amount of money as a freelancer or business owner next year, how much of a tax refund you receive will likely stay the same from last year (unless new tax laws go into effect).

However, if your income amount or tax situation changes drastically, it may be a good idea to use our Refund Booster1 to ensure your tax refund doesn’t come as a shock next year. This tool helps you fill out a new W-4 form to give to your employer. How you fill out your W-4 form can determine how much of a tax refund you receive next year. Whether you want a large tax refund or you want to come out as close to $0 as possible, we can help you fill out your W-4 form to get the result you desire next year.

For more information about tax refunds, check out our comprehensive tax refund guide.

Can I apply my tax refund to next year’s tax return?

Yes, you can allocate any overpayment of this year’s tax toward next year’s federal or state taxes if you wish. TaxAct® can help you do this if you file your taxes using our tax preparation software.

Determining how much tax you may owe next year

Along with figuring out how much of a tax refund you could receive next year, this year’s tax return may also indicate how much you’ll owe the IRS next tax season. This would apply if you’re staying in the same job or expect to make the same amount of money and take the same tax credits and tax deductions next year. It likely won’t be precisely the same, as your expenses could fluctuate throughout the year, you may be able to claim more or less in tax deductions, etc. But there typically won’t be much discrepancy if your income, filing status, and dependents stay the same.

Ways to make tax planning easier next year

There are a few ways you can make tax planning easier next year:

Tracking and organizing receipts

For instance, let’s say that this year, you weren’t consistent about separating your business expenses from your personal expenses, and at the last minute, you had to scramble to figure out where your money went. To better prepare for next year, having a separate business credit card or business bank account may be a good idea to keep your records separate. Using a spreadsheet or utilizing tax planning software to track your expenses could also be a good option.

Plan for your tax deductions ahead of time

Another way to make filing taxes easier next year is to look at the possible tax deductions you can take and plan accordingly. For example, if you’re taking the business interest deduction, you can calculate what you paid in interest at the end of the year before filing your taxes. If you use a home office, you can figure out how much square footage of your home it occupies so you know how much your tax deduction will be. And if you drive a business vehicle, log how many miles you drive as you go so you can deduct that mileage from your return.

Finding a better method for filing

Filing your own taxes shouldn’t have to be complicated. If you struggled with filing taxes this year, you may want to find a more efficient filing method for next year. You want to find a way that is both easy and cost-effective, whether you do it yourself or enlist a tax expert’s help. Thankfully, you can utilize TaxAct for all your filing needs.

Using TaxAct to file your taxes

TaxAct offers several different filing options. You can also take advantage of our Xpert Assist add-on feature, which lets you connect with a tax expert to answer questions that may come up when filing2.

To get started, simply head over to TaxAct and pick out the best plan for you. With our help, you’ll be well-prepared for this tax year and the years to come.

 

1Refund 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.

2TaxAct® Xpert Assist is available as an added service to users of TaxAct’s online consumer 1040 product. Additional fees apply. Unlimited access refers to an unlimited quantity of expert contacts available to each customer. Service hours limited to designated scheduling times and by expert availability. Some tax topics or situations may not be included as part of this service. Review of customer return is broad, does not extend to source documents and is not intended to be comprehensive; expert is available to address specific questions raised by customer. View full TaxAct Xpert Assist Terms and Conditions.

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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Taxable vs. Nontaxable Income: What’s the Difference?

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Updated for tax year 2023.

If you receive money, goods, or services, it’s likely considered taxable income. This is true for any money you earn, as well as interest and dividends you receive on your investments. You are required to pay taxes on all income unless the Internal Revenue Service (IRS) specifically calls out a type of income as nontaxable.

Here’s a quick breakdown of various forms of income you may receive, and whether they’re generally taxable or nontaxable.

Earned income

Taxable:

You pay tax on wages, salaries, and tips.

Bonuses are taxable and included on your Form W-2. Cash paid “under the table” is also taxable, even if you do not receive a Form 1099-NEC to report it.

Jury duty pay may not amount to much, but it’s still taxable unless you turn it over to your employer in exchange for continuing to receive salary pay.

Earned income is taxable even if it’s generated from your favorite hobby. However, you cannot deduct expenses from hobby income like you would for business expenses.

Nontaxable:

Your employer can provide benefits that you don’t have to include in taxable income. For example, the cost of life insurance up to $50,000, qualified adoption assistance, child and dependent care benefits, and contributions you make to health insurance may not be subject to taxes.

Income given or paid to you by other people

Taxable:

Any court awards you receive for lost pay and punitive and business damages are subject to taxes.

Nontaxable:

Gifts, regardless of size, are not generally taxable to the recipient. The donor can gift up to $17,000 in 2023 (increasing to $18,000 in 2024) without filing a gift tax return as well.

Combat pay and child support are more examples of nontaxable income.

Alimony payments do not have to be reported as taxable income for divorce or separation agreements finalized Jan. 1, 2019, or later.

Damages you receive for physical injury, sickness, or emotional distress (as long as you did not take an itemized deduction for medical expenses related to the injury or sickness in prior years) are also not taxable. However, you must include in your income the portion of the settlement that is for medical expenses you deducted in any prior year to the extent the deductions provided a tax benefit.

Retirement and disability income

Taxable:

You pay tax on retirement and disability income if you did not already pay tax on contributions, or if you did not pay the premiums to receive income.

You must pay tax on withdrawals from a traditional IRA or 401(k) plan because you made pre-tax contributions to the plan. You also pay tax on disability benefits for which your employer paid the premiums.

Up to 85% of your Social Security income may be taxable if your income is above certain levels.

Nontaxable:

You don’t pay tax on disability income if you paid the premiums yourself, or if the benefits are connected to government service.

You also don’t pay tax on withdrawals from Roth IRA or 401(k) retirement plans since you already paid tax when you made the contributions to those types of accounts.

If you rely mostly on Social Security benefits for income, your benefits may not be taxable depending on your income amount and whether you file as single or married filing jointly.

Investment income

Taxable:

Interest and dividends are taxable income, unless specifically exempt.

Nontaxable:

Municipal bonds are nontaxable on your federal return. Any dividends that are a return of capital are also not subject to taxes, as opposed to dividends that are a share of profits.

Income from the sale of assets

Taxable:

Your gain from the sale of an asset is generally taxable. Your gain is typically your basis (the amount you paid for an asset), minus the amount you received when you sold it.

For example, if you buy a stock for $100 and sell it for $200 (after selling expenses), you have a $100 gain ($200 – 100 = $100). You also pay tax on your gain from selling business property, stocks and bonds, investment real estate, collectibles, and personal items that have gone up in value.

You may need to adjust your basis for other items. For example, you reduce your basis for any depreciation you take on a business asset. You increase your basis (and reduce your gain) for additional expenses, such as major improvements.

Nontaxable:

One nice tax break available to homeowners is when you sell your home, you may not have to pay tax on the first $250,000 of gain ($500,000 if filing jointly). You must have owned and lived in the home for two of the last five years to have this gain be nontaxable, and you must not have taken this exclusion in the two-year period before the sale of the home.

If you receive money from a garage sale, you typically do not need to report the sales because most garage sale items are sold for less than their original cost. You only need to pay taxes on any profits you make from reselling.

Other income

Taxable: 

Gambling winnings are taxable. However, you can deduct gambling losses if you itemize your deductions.

Unemployment income is also fully taxable.

Nontaxable:

If you receive an inheritance, it is not taxable. The person’s estate pays estate and inheritance taxes before it gives money to any heirs. But, if there is interest or other income generated from inherited cash, it is taxable.

 

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

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What Do the Letter Codes Mean in Box 12 of My W-2 Form?

Box 12 on your W-2 form reports several different types of compensation and benefits. If applicable, this box will indicate a single or double letter code followed by a dollar amount. Here’s what those codes mean:

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Schedule C: Reporting Self-Employment Income from Multiple Sources

Updated for tax year 2023.

If you’re self-employed and have many different business activities or side hustles, it can be confusing to know how to report them all on your taxes. There are certain rules you need to follow, like grouping similar activities together and keeping different ones separate. Let’s take a closer look at how to report your business activities so you can avoid problems with the IRS and make things easier for yourself this tax season.

At a glance:

You can group similar business activities on one Schedule C, but keep unrelated activities separate.
Spouses running separate businesses can’t combine them on one Schedule C.
You can’t group activities together to hide losses, but losses from one activity can still offset gains from another.
Report all self-employment income, regardless of the amount, for tax purposes.

How to decide if you have one or more Schedule C business

Many self-employed individuals often have more than one activity going at once. To make things a little easier when record-keeping and filing your self-employed taxes, you can report closely related activities together on one Schedule C. However, if you make income from two or more unrelated activities, you must report them all on separate Schedule Cs.

For example, let’s say you are a self-employed dog groomer, but you also offer pet-sitting services occasionally on the side. These two activities are similar enough that you could simply consider yourself a pet care business and group them together on one Schedule C.

As another example, let’s say you earn income selling handmade items online and you also drive for Uber or Lyft on the weekends. These are two distinctly different types of business activities, meaning you’d need to fill out separate Schedule C forms for each income source.

Tax Tip: Businesses run separately by two spouses are considered unrelated activities. If you are actively participating in one business but not in another, you cannot combine them on one Schedule C.

Can I group all my activities into one business to avoid keeping track of separate income and expenses?

It would be great if you could just keep track of one set of income and expenses, even if you have more than one business activity. But in reality, this isn’t in your best interest. Keeping separate records, including separate records for business expenses — such as office supplies for your Etsy store and vehicle mileage for your Uber side gig — may be more work, but it’s worthwhile to make sure you can take all the tax deductions for which you qualify.

Can I combine different activities into one business to avoid showing a loss from one activity?

The IRS expressly states that you cannot combine two activities for the purpose of hiding a loss from one of the activities.

Besides, combining the two activities into one business probably would not affect your total tax liability. As long as your losses are not from passive activities, the loss from one business will reduce your total gain from all businesses.

Won’t my business be considered a hobby if I don’t show a profit in two out of five years?

Your business may be considered a hobby if you don’t make a profit for two out of the last five tax years, but that’s not always the case.

Some businesses never make a profit but are still never considered a hobby. That’s because the profit rule-of-thumb is only one thing the IRS looks at to decide if a business is a hobby.

If your business is operating at a loss, you can still show that it is a business, not a hobby, by operating it in a business-like manner. This means keeping good records and intending to make a profit. And if you own a business that is unlikely to be a hobby, such as a retail store or a construction company, you should have no problem convincing the IRS that you are operating a serious business.

Is there a minimum amount of money I have to make in an activity before I report it?

There is no minimum amount of self-employment income you must earn before you have to report it. You must always report all income, including barter income and income received in cash, regardless of the amount.

This misconception may come from the rules for self-employment tax, which state that you do not have to pay self-employment tax unless you earn $400 or more in total self-employment income.

How is self-employment tax calculated when I have more than one business?

Your self-employment income from all sources is combined to determine if you must pay self-employment tax.

You must pay self-employment tax if your total self-employment income is $400 or more.

Reporting multiple activities as separate businesses won’t reduce your self-employment tax liability. Your net income from one business or another may be under $400, but it’s your total self-employment income that counts. So, if you earned $300 selling items online and another $1,000 driving for Uber, your combined self-employment income would be $1,300, meaning you’d need to pay self-employment taxes on the entire $1,300.

On the other hand, if you have a loss from one business and a gain from another business, the loss from one business reduces your gain from the other. Say you have a clothing store with a net profit of $20,000. You also own an espresso stand, which had a net loss of $10,000. This would give you a net self-employment income of $10,000 ($20,000 – $10,000).

The bottom line

As a self-employed taxpayer, it’s important to know how to report your business activities for tax purposes. Although it may seem complicated, you can simplify the process by grouping similar activities together on one Schedule C form. However, you’ll want to keep unrelated activities separate and keep separate records for each activity to determine what tax deductions you can take.

Ready to file your Schedule C income? TaxAct® Self-Employed can help you report your self-employment income and corresponding tax deductions accurately and confidently.

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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7 Creative Ways to Make Extra Money With Passive Income

For many people, passive income sounds like the dream. After all, who doesn’t want to earn extra income on autopilot? Especially now, as we are all dealing with the effects of high inflation rates.

Let’s look at what society considers to be passive income, how to get started earning passive income, and how much work it actually takes to maintain passive income streams.

Passive income explained

When you hear the term “passive income,” you’re probably envisioning an effortless side hustle or investment opportunity that you can use to “get rich quick” or obtain financial freedom.

While it’s true that passive income is a great way to pad your salary and make extra money with minimal effort, it’s important to set realistic expectations. There is no “one size fits all” approach when it comes to choosing which income streams work for you. In the beginning, many passive income streams require a lot of upfront work or a significant monetary investment (or both) before you can sit back and start reaping the benefits.

What does the IRS consider passive income?

In this article, we’re going to be discussing what society considers to be passive income. But on the more technical side, the IRS has strict rules for what qualifies as a passive activity from a tax standpoint.

You can read more about the formal passive activity rules and how to report that income on your taxes in this article.

Beginner-friendly ways to generate passive income

Renting out your house or other property
Renting out or selling household items
Advertising and affiliate marketing
Investing your money
Opening a high-yield savings account
Using credit cards that offer cashback or other rewards
Creating or selling goods online (eBooks, photography, designs, apps, Etsy, etc.)

How to build wealth with passive income

Let’s dive into the passive income ideas listed above and how to report each income source on your federal income tax return.

1. Renting out your home or other property

If you live in an area with a lot of tourism, renting out your space could be a great passive income opportunity. Websites like Airbnb and VRBO make it easy for you to market your listing, connect with tenants, and set your own rental rules. You could choose to rent out one room in your house or your whole place — the choice is yours. (Although, if you are a renter yourself, always be sure to check your lease or ask your landlord about their subletting rules.)

For tax purposes, you generally report rental income on Schedule E. For more guidance on reporting residential rental property income and deductions, check out IRS Publication 527.

Planning on being gone for a short period? You could also consider renting out your house while you are away.

The IRS has a special “minimal rental use” rule allowing you to rent out your residence for less than 15 days a year without needing to report any rental income. However, you cannot deduct any rental expenses to reduce your taxable income. This could be especially lucrative if you live in an area near a major yearly event that draws many visitors to your city for a short period.

You can learn more about the tax implications of owning different kinds of rental properties in this article.

2. Renting or selling household items

If you want something even more low-risk, you could start renting out useful household items that not everyone has but occasionally needs. When you already have certain items on hand, there could be little to no upfront cost for you. Think hobby-specific items like tents, campers, and camping supplies or expensive gear for household projects like power tools, lawnmowers, etc. Carsharing apps like Turo even allow you to rent out your vehicle.

Reporting this income on your tax return depends on if you are in the business of renting your personal property or not. If you are a business, you’ll report that rental income and any expenses on Schedule C. If you are not a business, you can report that income on Schedule 1, line 8k, of your 1040.

You can also consider selling items you have around the house that you rarely use or need. Just be aware that in 2024, the IRS implemented new reporting thresholds for goods sold via third-party payment apps and online marketplaces (like Venmo, eBay, etc.). If you accept credit cards or payment through these apps, or plan to start doing so in 2024, it might be a good idea to familiarize yourself with these changes.

3. Affiliate marketing

Do you have a large online following? Maybe you run a website, write a blog, or have thousands of Instagram followers — if so, affiliate marketing could be an option to earn some extra cash.

Here’s how affiliate marketing works: You promote a third-party product on your social media account or website. Every time someone clicks on your promotion and makes a purchase, you earn a small commission.

Income tax, Social Security, and Medicare taxes for income earned by affiliate marketing are generally not withheld upfront, so you must remember to set some cash aside to pay any income taxes or self-employment taxes when the time comes.

4. Use your money to make money (dividend stocks, bonds, other investments)

Why not use the money you already have to make even more money?

If you have some extra cash on hand, there are many ways to invest it and watch it grow. Dividend stocks are one way to go. As a dividend stock shareholder, you’ll typically receive quarterly dividend payments from the company — and all you have to do is own the stock.

Your dividend income will be reported to you during tax season on Form 1099-DIV. Ordinary dividends or stock sales are taxed at capital gains tax rates. Qualified dividends that meet certain requirements are taxed at lower capital gain rates.

How much dividends are taxed also depends on how long you held the stock before selling. Short-term capital gains (when you held the item for a year or less) are taxed as ordinary income, while long-term capital gains (when you held the item for longer than one year) can be taxed at a rate of 0, 15, or 20%, depending on your filing status and taxable income.

Another method some investors like to use is a “bond ladder,” where you stagger purchases of multiple bonds set to mature at different times over the years. Once one bond matures, you collect any interest and use the principal to buy a new set of bonds. After redeeming a bond, you’ll receive Form 1099-INT for your taxes detailing how much interest the bond earned. Treasury bills, notes, and bonds are subject to federal income tax but exempt from all state and local income taxes.

5. High-yield savings accounts

Some online banks offer savings accounts with higher interest rates than you would typically receive at your standard local bank. While a high-yield savings account won’t make you rich, it can act as a way for you to maximize your earning potential on your emergency fund or other savings. And since these banks are often online, you’ll be able to pick the highest interest rate available rather than settling for whatever rate your local bank offers.

Like savings bonds, any interest you earn on your high-yield savings account will be reported to you on Form 1099-INT.

6. Cashback credit cards

If you already pay your bills with a credit card, it could be advantageous to apply for a credit card with a cashback rewards program (just be wary of any annual fees).

The IRS generally considers cashback rewards to be a discount or rebate rather than a source of income, so the cash you receive from these types of credit cards is typically not taxable.

7. Creating or selling goods online

Sometimes you can turn your hobby into a source of revenue. Artists can sell their designs or art online via sites like Etsy, photographers can offer digital or photo prints for sale, tech-savvy developers can design an app for public use, writers can put an eBook up for sale — just to name a few ideas.

The bottom line

While all these options require a lot of upfront work, they could be potential sources of passive revenue in the future if you manage to find the right demand.

As long as you aren’t selling as a formal business such as a corporation or partnership, you’d report any income generated through online sales as a sole proprietor using Schedule C.

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

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