January 29, 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.

The post Taxable vs. Nontaxable Income: What’s the Difference? appeared first on TaxAct Blog.

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