January 16, 2024

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.

– ​Tax Tips and Tax Planning Resources | 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.

The post Attention, Gig Economy Workers: You Have to Pay Taxes! appeared first on TaxAct Blog.

– ​Tax Tips and Tax Planning Resources | TaxAct Blog

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