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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8 Changes You Can Make Now to Prepare for Next Tax Season

Updated for tax year 2023.

Let’s all breathe a collective sigh of relief — this year’s tax return has been filed. But now that tax filing is behind you, what could you have done differently?

One common mistake taxpayers often make is waiting until tax time to think about their taxes. But by thinking ahead and making some financial tweaks now, you’ll be better equipped to save time and money when filing your tax return next year.

Here are our top tax season preparation tips and tricks to follow that could enhance your tax savings on next year’s tax filing.

1. Revisit your Form W-4.

Not happy with your tax bill or refund amount this year? Adjusting your W-4 is a simple way to ensure you control how much tax is withheld from your paychecks.

If you started a new job in the past four years, you might have noticed that the W-4 form looked slightly different. The IRS simplified the W-4 form starting in 2020 to improve employee withholding accuracy and get you close to “breaking even” on your taxes. Ideally, this would mean your tax refund or bill after filing would be as close to $0 as possible.

However, you still have the power to decide if you want more money in your refund or more money in your paycheck. Use our Refund Booster1 to learn how you can tweak your W-4 to work better for your financial needs.

2. Maximize your retirement contributions and other employee benefits.

Try to max out any tax-deferred retirement, such as an IRA or employer-sponsored 401(k). Just make sure not to go above the contribution limits — that could mean some hefty tax penalties. And if your employer offers to match a percentage of your 401(k) contributions, don’t leave that money on the table!

It’s also a good idea to take advantage of health savings accounts (HSA) and flex spending accounts offered by many employers. HSAs and flex plans allow you to set aside tax-deferred or tax-free savings to spend on qualifying expenses like medical care (or sometimes childcare).

Like retirement accounts, these plans also have maximum contribution limits. For tax year 2023, filers can contribute up to $3,050 to a flex spending account or $3,850 for an individual HSA ($7,750 for a family HSA).

3. Lose stocks that aren’t working for you.

Are there any stocks that have been weighing down your investment portfolio? Consider selling them this year and using the losses to offset any realized gains you made or reduce your taxable income for next year. This strategy is called tax-loss harvesting,

You can deduct up to $3,000 in realized losses per year (or $1,500 each for those married filing separately). But if your losses total more than the annual limit, you can carry over any excess into the next tax year.

One thing to keep in mind — you can’t sell a stock just to deduct the loss and then turn around and immediately repurchase it. This is called a wash sale, and the IRS won’t allow you to claim the loss for tax purposes if you repurchase the stock (or a “substantially identical” investment) within 30 days.

4. Turn your hobby into a side hustle.

The gig economy is growing and being part of it comes with some handy tax benefits. Whatever your hobby might be, monetizing it could open the door to tax advantages like the home office deduction and more. Plus, you’ll be able to write off the cost of any supplies and potentially a portion of your utilities and internet costs.

5. Plan your purchases ahead of time.

You can increase the number of tax breaks you qualify for by making any tax-deductible purchases before the end of the year. Once Jan. 1 rolls around, you’ll have to wait until the following year to reap any tax benefits.

For instance, if you know you need a high-cost medical procedure, see if you can schedule it before Dec. 31 to claim it as an unreimbursed medical expense on your taxes. If you’re a homeowner and an itemizer, you could make an extra mortgage payment to increase your mortgage interest write-off next year. If you’re a small business owner or self-employed, make any big business purchases before December ends to deduct the expenses on your tax return.

6. Save on child and dependent care.

If you have a child under 13 years old and pay someone to take care of them while you work or look for work, you may qualify for the child and dependent care tax credit. This tax benefit is calculated based on your adjusted gross income, and it allows you to deduct a certain percentage of qualifying childcare expenses.

And don’t forget about these other tax credits available for families with children!

7. Stay in the know about tax season updates.

Tax law changes can easily fly under our radar if we aren’t paying attention. This was especially true in 2020 and 2021 due to the pandemic’s temporary tax changes.

Luckily, we’re here to make things easier for you. When you sign up for our newsletter, we’ll provide you with timely tax updates and financial news delivered to your inbox every month.

8. Use TaxAct as your tax professional.

If you’re intimidated by DIY tax preparation software, don’t be! When you use TaxAct® to file your federal tax return, we’ll walk you through the filing process by asking you interview questions and then use your answers to determine which tax deductions and credits you might qualify to receive. We’ll provide you with all the proper forms and documentation to help you e-file with confidence and ease.

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.

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.

The post 8 Changes You Can Make Now to Prepare for Next Tax Season appeared first on TaxAct Blog.

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Attention, Gig Economy Workers: You Have to Pay Taxes!

Updated for tax year 2023.

You’ve probably heard that the gig economy is overtaking how we work — especially since the COVID-19 pandemic. But how extensive is this phenomenon that smashes the standard of the 9-to-5 job?

Between 2021-2022, the number of freelancers in the U.S. increased by 20%. More than 70 million Americans are now freelance workers. That represents 36% of the total U.S. workforce. And the number of freelance workers continues to rise — it’s projected over 90 million workers will be freelancers by 2028.

Who’s a gig economy worker?

A gig economy worker is also known as an independent contractor, a contractor, or a freelancer. If you fall into any of those categories, you’re self-employed and part of the vibrant small business community.

Some examples include:

A writer paid on per word basis
A graphic designer who charges based on an hourly rate
A wedding photographer charging a flat rate

Remember that “self-employment” includes any income you receive while in business for yourself. That means whether you work as a sole proprietor, independent contractor, or partnership member — even if only on a part-time basis — you should consider yourself self-employed.

Whatever the source of your gig economy income, once you pass certain threshold amounts you might have an obligation to file tax returns and pay taxes.

Why do you have to pay taxes?

When you work for a traditional employer, you instruct their payroll department on how much money to withhold for federal and state income taxes, if applicable. Your employer also determines how much to deduct for Social Security and Medicare taxes based on the current tax rates.

However, when you work for yourself, it’s your responsibility to figure out which taxes to pay, how much you owe, and when the deadlines are.

Do you need to file a tax return?

The key factor in determining if you need to file a tax return is the total amount of net earnings from your self-employment during the tax year.

Generally, if your net earnings are at least $400 (for 2023) you might have an obligation to file a return. Additionally, you’ll likely be on the hook for paying income and self-employment taxes for Social Security and Medicare.

What are estimated payments?

Unfortunately, your tax filing obligations as a self-employed individual aren’t quite as straightforward as they are for the traditionally employed. It’s not as simple as calculating your tax liability for the prior year and paying the IRS based on that amount.

As a general rule, the IRS requires anyone self-employed to pay taxes as they earn income.

While a regular 9-to-5 employer typically withholds taxes from their employee’s gross income, no one withholds taxes on your behalf when you’re self-employed. That means you’ll likely need to make estimated payments as you earn money to avoid tax penalties.

Who has to pay estimated taxes?

If you calculate that you will owe at least $1,000 in taxes, you typically are required to pay estimated taxes during the current tax year.

Additionally, you may have to pay if you owed any taxes in the prior year. That typically occurs if you had too little withheld from your traditional paychecks throughout the year or received supplemental income — like through your business — that increased your tax liability. In those instances, the IRS expects you to make payments to avoid future tax bills.

How do you calculate estimated tax?

Use the Estimated Tax Worksheet in IRS Form 1040-ES to figure out whether you must pay estimated tax. You’ll need to calculate this information:

Adjusted gross income
Taxable income
Taxes
Tax deductions
Tax credits

Read How To Calculate the Self-Employment Tax for more detailed information on calculating your payment. You can also check out the IRS Publication 505 (2017), Tax Withholding and Estimated Tax.

We also have a self-employment tax calculator you can use.

When do you pay estimated taxes?

Quarterly taxes are due on the following dates:

Note: The above dates can vary slightly each year due to holidays or if you are a fiscal-year taxpayer.

What if you don’t pay enough taxes?

If you don’t pay enough by the tax deadlines or skip a payment altogether, you might be charged an underpayment penalty. The IRS requires independent contractors to file and pay taxes on a quarterly basis even if you anticipate getting a refund at the end of the tax year.

Note: Different rules may apply to farmers and fishermen.

For more information

Keep in mind that you need to calculate your taxes based on your own business situation and recent tax law changes.

Check the IRS’s Small Business and Self-Employed Tax Center, or try out our self-employed tax software, which helps gig economy workers easily calculate estimated quarterly payments and file their tax returns each year.

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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The Way Tax Reform Changed the Inflation Calculation

One of the least talked about parts of tax reform is the change in how inflation is calculated for the tax code. Perhaps it’s not considered big news because many people don’t understand it. Or maybe it’s because the change in the inflation calculation won’t make a huge difference in the short term.

However, over the long term, inflation calculations in the tax code can be very important. Here’s how it works, and what it may mean for you.

What is inflation, and why does it matter how the IRS calculates it?

Simply stated, inflation is the devaluing of money over time.  When the general pricing for certain items or services increases over a period, that means the value of each dollar used to pay for those items decreased. After years of inflation, what was once considered to be a lot of money is no longer viewed the same. For example, 40 years ago, a $10,000 salary was respectable, and a millionaire was a very rich person. Now, it’s incredibly hard to get by on $10,000 (impossible in many places), and you’d probably expect to have more than $1,000,000 before you felt wealthy.

Looking at it that way, however, gives inflation a negative spin. But in reality, inflation is not all bad. In fact, a healthy, growing economy should generally experience inflation. Where the negative, unintended consequences begin is when laws don’t adequately consider inflation throughout their changes.

Some tax calculations are true to the inflation rate as the IRS calculates it. For example, the annual exemption for the gift tax laws, the Earned Income Tax Credit, and limitations based on income for education credits all rise with inflation. Either as a dollar amount or when the adjusted amount reaches a certain level. For instance, in 2005 you could give another person up to $11,000 per year without having to file a gift tax return. And now in 2018, you can give up to $15,000 to each person before you may need to file a gift tax return.

Ultimately, the inflation calculation influences how the tax calculations that are dependent upon the inflation rate are performed. It is usually to most taxpayers’ benefit for the IRS limitations and other tax amounts to be calculated at a higher rate than determined by a lesser one.

How does the new tax law change the inflation calculation?

Previously, the IRS used inflations measured by the consumer price index for urban consumers, known as the CPI-U. That index tracks the cost of certain goods and services the typical household buys, from bread and soap to the cost of utilities.

Under tax reform, inflation is measured using something called Chained CPI. With Chained CPI, the people measuring inflation assume buyers have choices when they spend money, and they shift from one product to another when the price of that product goes up. For example, if the price of coffee beans increases too much, you may start drinking tea. If you don’t like tea as well as coffee, you may argue that you are worse off now because you can’t afford your favorite beverage. But to the economists measuring Chained CPI, you found a cheaper replacement, and that’s what matters.

Using Chained CPI, tax benefits and limitations don’t rise as quickly or as high as they would under the old measurement system.

Will this affect me now?

You won’t notice any difference in current tax law because of this change. That’s partly due to the much larger changes in the tax code for 2018. But it’s also because the effect of lower inflation adjustments is small at first.

Over time, however, a small difference in the inflation calculation makes a bigger difference. Each year’s inflation rate is applied to last year’s tax limitations and other amounts, compounding its effect. Even a small change in the inflation calculation can make a big difference over five, ten, or more years.

Is this method of calculating inflation likely to change again?

If there’s one thing you can be sure of with the tax code, it’s that it is always subject to change. The legislation enacted by the Tax Cuts and Jobs Act is in effect until 2026, but there is no way to predict if anything will change before then – or after.

How can I calculate inflation and how it has impacted my wealth?

TaxAct offers a US dollar inflation calculator that makes it easy to see how inflation has affected your purchasing power. 

More to explore:

How to Calculate My Net Worth
How to Calculate the Self-Employment Tax
How to Calculate and Make Estimated Tax Payments
W-4 Withholding Calculator

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Guide to Social Security Taxes

Social Security benefits are crucial to many Americans’ retirement plans, providing a safety net to ensure financial stability during your golden years. But are Social Security benefits subject to taxation?

Let’s dive into the complexities of Social Security benefits and their potential tax implications.

At a glance:

Social Security benefits provide a source of income for retirees and are funded by a payroll tax.
Taxation of Social Security benefits depends on your income level and marital status.
Certain strategies can help minimize taxation on your Social Security income.

Are Social Security benefits taxed?

Yes, Social Security benefits can be subject to federal income taxes depending on your total income, including other sources besides Social Security. Your annual combined income and marital status play significant roles in determining the taxable portion of your benefits. Additionally, while most states do not tax Social Security benefits, some states have specific rules and income thresholds that may affect the taxation of these benefits.

Understanding Social Security benefits

Social Security benefits are designed to offer financial assistance to retired workers, their survivors, and those with disabilities. These benefits are funded through payroll taxes, providing a source of retirement income for those who paid Social Security taxes on their income.

Qualification for Social Security benefits primarily hinges on your work history. You accrue “credits” based on your earnings over time, with most individuals requiring 40 credits (equivalent to about 10 years of work) to qualify for benefits. The amount of Social Security income you receive correlates with your average earnings over your working years. The more you earn while working, the more you’ll receive when you retire.

To get an estimate of your personal Social Security benefit, you can create a my Social Security account on the Social Security Administration’s website. They have a tool to help you estimate your payments, and you can also play around with different retirement age scenarios to see how that might affect your Social Security income.

There are various types of Social Security benefits, including retirement benefits, disability benefits, survivor benefits for spouses and children, and Supplemental Security Income (SSI) for individuals with limited income and resources. For detailed information about each type, check out this guide by the Social Security Administration.

The Social Security tax: How benefits are funded

Because of the Federal Insurance Contributions Act (FICA), all employers must withhold two taxes from your pay: Social Security tax and Medicare tax.

Employers and employees split the cost of Social Security taxes, each paying a 6.2% tax rate for a combined total rate of 12.4%. Self-employed people pay the full 12.4% Social Security tax rate as part of the quarterly estimated taxes the IRS requires them to submit.

The federal government limits how much of your income is subject to the Social Security tax. In 2023, the Social Security tax limit is $160,200, making the maximum Social Security tax amount $9,932.40. The Social Security tax limit is set to increase to $168,600 in 2024, making the maximum tax amount for that year $10,453.20. You will not have to pay Social Security tax on income you earn beyond the Social Security tax limit.

Taxation of Social Security benefits

How much tax you pay on your Social Security benefits depends on your total income, including other income sources besides Social Security.

The federal government taxes retirement benefits for many people, but a portion of those benefits are tax-exempt. Generally, the lower your retirement income, the larger the exemption you’ll receive.

To determine the percentage of your Social Security income that’s taxable, the government looks at two things:

Your annual combined income: This includes your adjusted gross income (AGI) — any income you earn from wages, capital gains, retirement plan distributions, pension payments, etc. — plus any tax-exempt interest you receive and half your Social Security benefits.
Your marital status: If you are married, your taxable limit will be higher.

Most states do not tax Social Security, but 11 states do: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont. Each state has its own income thresholds and taxation requirements, so it’s good to do your research to know what to expect when filing your tax return.

SSI is not taxable. This benefit is for people with low income or few resources who are blind, 65 or older, or have a qualifying disability.

Income thresholds and taxation rates

You will need to pay tax on Social Security payments once your annual taxable income reaches $25,000 (or $32,000 if you are married and file jointly).

How much tax you pay depends on how far over the limit you are:

As an individual earning between $25,000 and $34,000, up to 50% of your benefits may be taxable. If you earn over $34,000, you may have to pay income taxes on up to 85% of your benefits.
As a joint married filer earning between $32,000 and $44,000, up to 50% of your benefits may be taxable. If you make over $44,000, you may have to pay income taxes on up to 85% of your benefits.

This IRS worksheet can help you determine your taxable benefits.

But let’s look at a quick example. Say you are married and filing a joint return, and you and your spouse earn a combined income of $40,000 annually. This would make $20,000 (50% of $40,000) of your Social Security benefits subject to federal income tax.

Your total tax bill depends on your income tax rate, which is decided by your tax bracket. If you’re unsure which tax bracket you fall under, our tax bracket calculator can help you. We also have a helpful article explaining how tax brackets work.

Strategies to minimize Social Security taxes

In some cases, you may be able to reduce your tax liability on Social Security benefits. The simplest way to do this is to keep your total earned income below the taxable limits we mentioned above, but here are some other strategies to consider:

Utilize Roth accounts: Contributions to Roth accounts are made with after-tax dollars, meaning withdrawals from a Roth IRA or Roth 401(k) are tax-free. Because of this, Roth withdrawals will not affect your taxable income calculation and won’t increase any tax owed on your Social Security benefits.
Maximize taxable income before retirement: To minimize your taxable income when receiving Social Security benefits, some people may opt to increase their taxable income before retirement. You can do this by taking distributions from a tax-advantaged retirement account like a traditional IRA or 401(k). You can withdraw from these accounts without penalty once you reach age 59½. Note that you must still pay income tax on the amount you withdraw from these accounts, but the goal is to pay less tax by making these withdrawals before you start receiving Social Security benefits. Taking withdrawals early could also allow you to delay applying for Social Security benefits, meaning your payments will be higher.

As always, consulting a financial advisor can help you tailor these strategies or provide additional methods for your specific tax situation. Retirement planning can differ for everyone, so it’s essential to consider all the factors when deciding how much to withdraw and when.

How to report Social Security income on tax returns

When reporting Social Security income on your federal tax return, you’ll typically use Form SSA-1099. This form shows the total Social Security benefits you received during the tax year, including monthly retirement, survivor, and disability benefits. Any SSI you receive will not be included, as it is not taxable.

To report Form SSA-1099 in TaxAct®, navigate to Social Security Benefits within your federal tax return and follow the instructions. You’ll need to enter the amount in Box 5 of your SSA-1099. Box 5 details the net amount of Social Security benefits you received.

If you need additional assistance, check out our Form SSA-1099 FAQ page.

The bottom line

Navigating the taxation of Social Security benefits can seem overwhelming at first, but don’t forget that TaxAct can help you accurately report your Social Security income, allowing you to file with confidence.

Meanwhile, employing smart strategies can help optimize your retirement plan and potentially minimize the taxes on your benefits. Everyone’s financial circumstances differ, so crafting your own personalized approach (with a professional, if necessary) for managing your Social Security benefits and taxation is crucial.

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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Tax Forms & Schedules

Updated for tax year 2023.

What are tax forms?

Income tax forms are the official government documents the IRS requires you to fill out when you file your taxes. Usually, the more complicated your finances are the more tax forms you may need to fill out.

On top of the federal tax forms, many states and cities (like Portland) have their own tax forms you may need to complete. Often, the local tax forms are modeled after the federal forms.

Where to get IRS tax forms?

You can download tax forms from many places, including the IRS website. However, many of those sites don’t help you fill out the forms. TaxAct® can help you fill out your tax forms if you file using our intuitive tax prep software.

Below is a list of the most common IRS tax forms you may need to file your taxes this year.

Federal tax forms

Form 941 – Employer’s Quarterly Federal Tax Form
Form 1040 – Long – Individual Federal Income Tax Return
Form 1040-SR – Tax Return for Seniors
Form 1040-ES – Estimated Tax for Individuals
Form 1040-V – IRS Payment Voucher
Form 1040-X – File Amended Tax Return
Form 8863 – Education Credits
Form 8962 – Premium Tax Credit
Form W-4 -Employee Federal Withholding
Form W-7 – Individual Taxpayer Identification Number
Form W-9 – Request Your Tax Information

Informational tax statements

Form W-2 – Federal Tax Withheld
Form 1095-A – Health Insurance Marketplace Statement
Form 1095-B Form – Health Coverage
Form 1095-C – Employer-Provided Health Insurance Offer and Coverage
Form 1099-B – Stocks & Investment Sales
Form 1099-G – Unemployment Compensation
Form 1099-K – Payment Card and Third-Party Network Transactions
Form 1099-R – Retirement Distributions
Form 1099-S – Real Estate Proceeds
Form 1099-NEC, Nonemployee Compensation
Form 1099-MISC – Miscellaneous Information
Form 1098-T – Tuition Statement
Form 5498 – IRA Contributions

What are tax schedules?

Tax schedules are another type of tax form you may be required to prepare and submit with your tax return when you have certain types of income or deductions. This can include income from interest, the sale of property, or charitable contributions. Here’s a list of common schedules.

Tax schedules

Schedule A Tax Form – Report Itemized Deductions
Schedule B Tax Form – Interest & Dividend Income
Schedule C Tax Form – Self-Employed Income
Schedule D Tax Form – Capital Gain or Losses
Schedule E Tax Form – Real Estate Gain or Losses
Schedule SE Tax Form – Self-employment Tax
Schedule K-1 – Business Tax Form

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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The IRS Is Open for Business: Why E-Filing Is a Smart Choice

The IRS is expected to officially kick off the 2023 tax season on Jan. 23, 2024, which would make this the first day the agency begins accepting both e-filed and paper income tax returns.

If you’ve already completed your 2023 return — great! Your return should be one of the first in line for processing by the IRS. But if you haven’t filed your taxes yet, don’t fret. You have plenty of time to get started.

In fact, you can easily begin today by selecting the 2023 TaxAct® product that best fits your tax situation.

Why e-file your taxes?

Choosing to electronically file (e-file) your tax return is the quickest and most efficient way to submit your taxes to the IRS. But that’s not the only reason you should consider e-filing your return this year. Let’s go over a few more reasons why e-filing may be the best option for you this year.

1. Fast and accurate filing: no math required

When you e-file using tax prep software such as TaxAct, you can complete your return faster and with greater accuracy. That’s because tax software like ours does the math for you and guides you through every step of your return, even potentially helping you identify opportunities for tax savings.

Not only that, but the IRS can process your income tax return faster when you e-file your taxes. You don’t have to rely on snail mail, which tacks on extra time before the IRS has your return in hand.

E-filing also lessens the risk of someone at the IRS mistyping your information from a paper form into their system, so it can reduce the likelihood of human error causing a problematic typo on your tax return.

2. Get your tax refund faster

If you’re due a tax refund for 2023, e-filing usually means your money will hit your bank account much quicker. When you e-file your tax return, it’s immediately sent to the IRS for processing, whereas paper tax returns take much longer. You can use the IRS Where’s My Refund? tracking tool 24 hours after e-filing your tax return, but you’ll have to wait up to four weeks to track your refund if you paper filed your tax return.

Want your tax refund even faster? Make sure to select direct deposit as your method of receiving your tax refund to have your money in hand as quickly as possible.

3. Receive confirmation for peace of mind

One of the main benefits of e-filing is that you can elect to get an electronic confirmation when the IRS receives your tax return. No more waiting and wondering if the return you gave to the mailman has reached its intended destination. Once you file your return using TaxAct and it’s accepted by the IRS, we’ll send you an email or text notification letting you know processing is underway.

4. E-file now, pay later

It is a common misconception that you must pay any taxes owed immediately when you e-file your tax return. In truth, you have some flexibility.

You can pay tax amounts owed when you e-file, or you can e-file early and set up an automatic payment to be made on the tax deadline (April 15, 2024). Payments can be sent electronically from your bank account, with a check, through a money order, or by credit card.

While you still must pay your tax bill by the tax filing deadline, filing early gives you more time to prepare and save for any unexpected taxes owed.

5. Stay organized

Using DIY software to file your taxes creates a permanent electronic record of your tax return. This allows you to easily access it for future use, like when tax time rolls around next year. If you continue to use TaxAct as your means of e-filing, we’ll already have your 2023 tax return data from the previous year, meaning we can immediately transfer last year’s information into your new tax return to save time.

Plus, let’s be honest, it’s much easier to keep track of a digital copy saved on your computer than having to track down a paper copy. With TaxAct, once you file this year’s tax return, you can access it for seven years at no charge. Goodbye, cluttered filing cabinets!

6. Keep more money in your pocket when e-filing

Don’t spend more money than necessary to file your income tax return. With just a little comparison shopping, it’s easy to identify affordable options, and our prices are hard to beat.

Ready to beat the rush and put tax filing behind you? Start e-filing your tax return today.

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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