March 2024

5 Reasons to Stop Worrying About a Tax Audit

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Updated for tax year 2023.

If there’s one thing many of us don’t want to see in our mailbox, it’s a letter from the Internal Revenue Service (IRS). Even worse, we don’t want to get a letter from the IRS informing us that we are subject to a tax audit.

While you can never guarantee the IRS won’t audit you, understanding a few facts about IRS tax audits during the tax filing process may help ease your fears. Here are some reasons not to spend a lot of time worrying about it this tax season.

1. Your audit risk is likely very low.

If you are in the middle- or lower-income range, and your taxes are relatively straightforward, your chances of being audited by the IRS are fairly low. In fact, from 2011 to 2019, the IRS only audited 0.55% of individual returns filed.

When choosing who to audit, the IRS tends to target high-income earners instead. For example, from 2011 to 2019, the IRS audited 8.9% of individual returns for taxpayers with incomes greater than $10 million. Taxpayers who are above-average earners are more likely to be audited because higher-income taxpayers tend to have more complex returns, and the IRS typically collects more money from them, which can increase their audit risk.

2. A tax audit doesn’t automatically mean you’re in trouble.

While it’s true that the IRS can audit people suspected of doing something wrong, that’s not always the case. As part of the audit process, the IRS audits a portion of the taxpaying public every year. You can be selected purely as a matter of chance, even if you did everything right.

In other cases, discrepancies in your return can be an audit trigger and put you at higher risk of an audit. If the information on your tax return doesn’t match up with the data the IRS received from another source, such as your reported taxable income, the IRS may consider that an audit red flag and initiate an audit. If it’s just a simple math error or typo, you shouldn’t have to worry too much — the IRS might simply ask you for additional documents to fix things on their end or request an amended return.

3. IRS tax audits generally go back two or three years.

When you file multiple income tax returns over the years, you may wonder what would happen if the IRS audited an old return. Would you be able to find the necessary tax forms and remember all the details about that tax season?

Fortunately, you don’t need to worry about audits on tax returns from a decade ago. According to the IRS, most tax audits are regarding returns filed within the last three years. If they find a substantial error, they may choose to go back further than three years. But even then, they seldom go back more than six years.

4. You can reduce your chances of an audit.

Certain items on your tax return may attract the attention of the IRS and make you a more likely target for a tax audit. Some examples of potential audit triggers include:

Business losses that are actually hobbies: As an example, let’s say you raise horses or dogs and take a loss every year. In this case, the IRS may disallow it because your “business” only classifies as a hobby.
Deductions and income tax credits for unusual amounts: For instance, if you claim you give a large portion of your income to charity through non-cash contributions, the IRS may want a closer look.
Business deductions: The IRS may take particular interest in unusually large travel or entertainment business expenses.
Large casualty losses: You can only deduct losses not reimbursed by your insurance company, so if you write off a large casualty loss, the IRS may want to look closer at the situation.

Despite this, don’t be dissuaded from taking a home office deduction or casualty loss you qualify for because you’re afraid of a tax audit. Just be aware that the IRS may want to investigate certain items more closely and keep your records in good shape in case they do.

Similarly, the IRS is less likely to audit returns that are free from mistakes. Using TaxAct® can help in this area. Following the interview questions in our tax software and inputting all the correct information will help you easily prepare a complete and accurate return. To give you even more peace of mind, TaxAct® offers Audit Defense1 to provide audit protection services for your income tax return. During the filing process, you can take advantage of our Audit Defense offering. If you do and the IRS audits you down the road, an experienced audit professional will respond to inquiries from the IRS and state taxing authorities on your behalf.

5. If the IRS audits you, don’t panic.

Some IRS tax audits are different from what you might expect. The IRS may just want additional documentation or a response about a particular item. In this case, you should reply as quickly as possible and move on.

If the IRS requests an office or field audit, you can gather your information and represent yourself if you are comfortable doing so. You also have the right to choose someone to help. If you file your income tax return using TaxAct, you can take advantage of Audit Defense provided by Tax Protection Plus1.

You have certain rights as a taxpayer when subject to an audit. Besides the right to representation, you also have the right to know why the IRS is requesting information, to make an audio recording of an interview with notice and not to be repeatedly examined for the same information.

The bottom line

Receiving a letter from the IRS can be scary, but your chances of getting audited when filing a complete and accurate return are pretty low as an average filer. However, if you’re worried, there are some steps you can take to help lessen your chances of an audit. Careful, mistake-free filing can decrease your audit risk, and maintaining accurate records can help you confidently navigate an unexpected audit. Remember, if faced with an audit, it’s best to remain calm, respond promptly and know your rights as a taxpayer to ensure a fair outcome.

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.

1 See Audit Defense provided by Tax Protection Plus (PDF) for further details of services and requirements. May not apply to certain forms and credits. Certain customers may not qualify for services based on past tax audit history, residency, or other factors. Audit Defense is not insurance. Audit Defense is subject to terms and conditions (PDF) located on Tax Protection Plus’s website.

TaxAct, Inc. gets fees from some third parties, including Tax Protection Plus, that provide offers to its customers. This compensation may affect what and how we communicate offers to you. TaxAct is not a party to any transactions you may choose to enter into with Tax Protection Plus, does not itself offer legal or financial advice, and disclaims any liability arising out of such transactions. Please see the third parties’ websites for full terms and conditions.

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Tax Deductions for Non-Business Bad Debts

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Updated for tax year 2023.

Have you ever lost money to a loan you’ll never collect? If you answered yes, the good news is you’re not alone. Many of us have lent money to a friend or relative at some point. And while the intent might have been good, there are times when things don’t go according to plan. Sometimes, the payments stop coming, and eventually, you realize you’ll never get your money back.

While finding yourself in this situation is unfortunate, you may be able to take consolation in the form of a tax deduction — even if you don’t own a business. If the amount you lent was substantial, it’s possible to write off the money in the year the debt becomes uncollectible.

At a glance:

Even if you aren’t a business owner, you might be able to write off bad debts.
To take a non-business bad debt deduction, you must have documents showing you had a legal debt that is now uncollectible.
TaxAct® can help you deduct non-business bad debts.

Step 1: Identify if it’s non-business or business bad debt.

Bad business debt is precisely how it sounds — debt from operating a trade or business. A non-business bad debt is basically anything else. If you loan money from your personal bank account to a family member and they never repay you, that’s a non-business bad debt.

Step 2: Determine if you can claim the bad debt on your tax return.

The debt must have been declared completely uncollectible to claim non-business bad debt as a deduction on your tax return. A debt becomes uncollectible after you have tried every reasonable way to collect on it and have been unsuccessful. It’s also deemed uncollectible if the borrower files for bankruptcy and the debt is discharged.

Once a non-business bad debt becomes uncollectible, it is considered completely “worthless,” meaning you have no chance of being repaid, and you can provide proof you guaranteed the debt to protect your investment. At that point, you can then deduct the bad debt on your tax return.

However, if you guarantee a debt as a friend with no consideration in return and the debt goes bad, it is considered a gift instead of a loan. And as you may be able to guess, gifts can’t be used as a tax write-off on your income tax return as non-business bad debt.

Step 3: Document your bad debt.

To take a tax deduction for bad debt, you must show that you, the lender, had a legal debt and cannot collect on it. Be sure to keep track of the following information:

Note or loan agreement proving you had a legal, enforceable debt: You don’t need mountains of legal paperwork, but you will need to have at least one document showing there was an understanding with the borrower that you were to be repaid. Otherwise, the IRS will determine that you made a nondeductible gift. An oral agreement may be permissible, but a written one is always better.
Name of the debtor: Be sure to include their business information or relationship with you.
Records showing your basis in the debt: Keep a record of the amount of money you loaned. Note that you can’t take a bad debt deduction for certain money you never received, such as uncollected alimony.
Documentation showing you tried to collect on the debt: Any letters, emails and notes from phone calls are examples of documentation that will work here.
Additional documentation indicating why the debt is worthless: You can only deduct debts if they are totally worthless, so you’ll want any and all evidence showing the debt is worthless. If, for example, the borrower went bankrupt, you’ll want to keep that documentation to help prove that it’s a worthless debt.

Step 4: Enter the bad debt on your tax return.

While having bad debt is never a good situation, you have a few options to help offset the loss. There are just a couple of details to pay attention to.

To deduct a bad debt, you must have included the amount in your income or loaned out cash. For example, you cannot claim a bad debt for money you expected to receive for repairing your sister’s air conditioner, even if she promised to pay. You will need hard evidence, preferably in writing, to prove all parties understood the repayment obligations, and the debt must be declared totally worthless.

If you can claim the bad debt on your tax return, you must complete Form 8949, Sales and Other Dispositions of Capital Assets. The bad debt loss will then be treated as short-term capital loss on Schedule D by first reducing any capital gains on your return and then reducing up to $3,000 of other income, such as wages.

TaxAct can help walk you through taking a non-business bad debt deduction if you choose to file with us. We will ask you to attach a statement detailing a description of the debt, the debtor’s name and their relationship to you, the efforts you made to collect the debt and how you decided the debt was worthless.

If you cannot take the full deduction in the year of the loss, you can carry it forward to later years. You have seven years from the due date for your original tax return to file a deduction for uncollectible bad debts or two years from the date you paid the tax for that year, whichever is later.

What if I already filed my tax return for the year?

If you’ve already filed a tax return for the year in which the debt became worthless, you’ll need to amend your return by filing Form 1040-X, Amended U.S. Individual Income Tax Return, with Form 8949 attached to your amended return.

What happens if a bad debt comes back to life?

Say you’ve given up on getting paid back on a loan and decided to take a tax deduction for a non-business bad debt. If you later collect on that debt, part or all of the amount you received may be counted as taxable income. However, you’ll only have to pay income tax on the amount of bad debt that actually reduced your tax. This could be less than the amount you deducted when you filed your return with the bad debt deduction.

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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6 Things You Should Know About the Alternative Minimum Tax (AMT)

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Updated for tax year 2023.

Don’t let the alternative minimum tax catch you by surprise this tax season. The alternative minimum tax (AMT) was created in 1969 to keep a small number of wealthy taxpayers from using tax loopholes to avoid paying taxes. Instead of closing the loopholes, Congress devised a plan to calculate a person’s tax two different ways — once with the traditional tax system and once with a special “alternative” system. The taxpayer then pays the higher of the two results.

As you may imagine, this double system can be complex and confusing. Initially, the system didn’t bother many people as it only applied to especially well-off taxpayers. However, the AMT amounts did not keep up with inflation and, unfortunately, quickly began to affect more and more Americans.

Here’s how to know if the alternative minimum tax could affect you and what you can do about it.

1. If your income was less than $81,300 in 2023, you generally won’t have to pay AMT.

A certain amount of income per year is exempt from the AMT. This is called your exemption. If your income is less than the exemption, you generally don’t have to worry about the AMT.

For tax years 2023 and 2024, the AMT exemption amounts for each tax filing status are:

Your income for this purpose is calculated from your adjusted gross income (AGI), with certain changes required by the AMT. It’s best to use these amounts as a rule of thumb for determining whether the AMT may apply to you. Even if your income exceeds the exemption amounts listed above, it doesn’t automatically mean you’ll be taxed at AMT rates.

For reference, the AMT tax brackets for 2023 are:

The AMT exemptions phase out at 25 cents per dollar earned once your AMT income reaches the phaseouts listed above.

2. Some tax breaks are not allowed under AMT rules.

Some kinds of income and tax deductions are deductible for the regular income tax but not under AMT rules. A few examples include the standard deduction or personal exemptions, state and local taxes, and tax breaks that affect mostly high earners such as incentive stock options.

However, that doesn’t automatically mean these deductions and exemptions won’t do you any good. As we mentioned before, the AMT uses its own set of tax rates, 26% or 28%, and your total AMT may still be lower than the regular income tax amount.

Remember, you pay the highest amount between the regular income tax and the AMT. Unless you have significant deductions and other tax preference items not allowed by the AMT, you probably still only owe regular income tax.

3. You may need to file Form 6251 if you have specific AMT items.

If you need to report any of the following items on your tax return, the IRS requires you to attach Form 6251, Alternative Minimum Tax – Individuals, to your federal income tax return, even if you do not owe AMT:

The qualified electric vehicle credit.
The personal-use part of the alternative fuel vehicle refueling property credit.
The credit for prior year minimum tax.
Any general business credit (and either line 6 or 25 of Form 3800 is more than zero).

Other less common items include Section 1202 exclusions, intangible drilling, circulation, research, experimental or mining costs, tax-exempt interest from private activity bonds, etc.

Don’t worry if this sounds confusing. If Form 6251 is required, TaxAct® will populate the form for you based on the information you give us.

4. A little tax planning can help you avoid the AMT.

The best way to plan for the AMT is to read your annual tax return, including Form 6251, carefully.

Your tax strategy depends on your income and the type of tax benefits that trigger the AMT in your case. For example, if accelerated depreciation deductions cause you to pay AMT, you may want to choose a different depreciation method.

Simply knowing how the AMT works can help you make better tax decisions. If you have itemized deductions close to the amount of your standard deduction, you may be better off taking the itemized deductions to avoid the AMT because the standard deduction is not allowed under AMT. TaxAct can help you determine if itemizing or taking the standard deduction will result in a lower tax bill.

If you are subject to the AMT in some years but not others, you can try to time deductible expenses for the years in which you get the most tax benefit.

5. If you pay AMT, you may get a credit later.

Some of the tax items that affect the AMT are what the IRS calls deferrals. These items “defer” tax under the regular tax system rather than simply lowering it within a given year.

For example, accelerated depreciation lets you take depreciation deductions early on within an asset’s life and defers any tax liabilities to later years. Once the depreciation of an asset has been recognized, it is no longer available to shelter taxable income in the following years.

The IRS makes up for this in the following years by giving you an AMT credit when applicable. TaxAct can help calculate potential AMT amounts available to you on Form 8801, Credit for Prior Year Minimum Tax.

6. The AMT is complicated, but TaxAct does the hard work.

TaxAct can help determine if you’re required to pay the AMT when you file using our tax preparation software. Our guided Q&A interview will help us determine if you need Form 6251 to finish your tax return. If you do, TaxAct will complete the form using your provided information.

For tax planning purposes, if you used a tax professional or other tax software product in previous years, you can find Form 6251 in your return and see how the AMT affected you, allowing you to make more informed tax decisions.

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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14 Tax Tips for Self-Employed People

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Updated for tax year 2023.

As a self-employed taxpayer, do you ever envy your traditionally employed friends at tax time? Having your own business as a freelancer or independent contractor definitely increases the record-keeping you must do for tax purposes. And when you’re digging through all your self-employed income tax records and business receipts, it’s easy to wish for the days when you only had to enter taxable income from a W-2 form.

However, as a self-employed individual, you get some tax breaks that your employed friends don’t. For one thing, you can deduct business expenses — these expenses even reduce your Social Security and Medicare tax, which you pay in the form of self-employment tax.

Here are 14 self-employed tax tips that can make tax time less painful and help you take advantage of some of the tax benefits of working for yourself.

1. Estimate your business income.

Unless you estimate your business income, tax planning is guesswork at best. It’s essential that you find out where you stand tax-wise before you start taking other tax planning steps. For example, you don’t want to make expenditures in a year when you don’t need the deduction as much. If you expect to be in a higher tax bracket this year or next, you’ll want to take as many deductions as possible in the year you are subject to the highest tax rate. Estimating your business income can help you plan how to time your business expenses so they benefit you the most.

2. Time your business income.

Income is generally taxable when it is available to you. While you can’t postpone income simply by not cashing checks, you have some control over when you bill your customers and receive payment for your services. Plus, one type of income you have more control over is your capital gains. For instance, you might decide to sell assets at a gain before or after the end of the tax year, depending on what would better benefit your tax situation.

3. Time your business expenses.

There’s typically a surge in business equipment sales at the end of the year — and it’s not entirely because computers and printers are a popular holiday gift.

Business expenditures are counted as made in the year you purchase them, even if you use a credit card or other deferred payment plan and don’t pay for them until the following year. For example, if you buy a business asset on Dec. 31, you can start depreciating it almost immediately when filing your next tax return the following year. You may even be able to take a Section 179 deduction and expense the entire cost of the asset in one year.

One thing to note — don’t buy a bunch of inventory or supplies that will be part of the inventory before the end of the year unless you really need them. This is because you generally don’t deduct the cost of goods sold until you sell the product.

4. Make the most of medical insurance deductions.

If you are ineligible for health insurance benefits through an employer, you can qualify to deduct health insurance premiums you bought for yourself, your spouse, and your dependents as an adjustment to income. This includes premiums for long-term care insurance. The policy does not need to be in the business name — it’s deductible even if it’s in your name.

5. Keep your business structure simple.

Unless you need to form a partnership or a corporation for business reasons, it may be best to stick with a sole proprietorship and report your business income and expenses on your personal income tax return using Schedule C. It’s the simplest way to file, and there’s nothing you have to disband if you move on to something else. If you’re a sole proprietor looking for legal protection, it’s always best to consult your lawyer, who can help determine if you may also want to get liability insurance or form a single-member limited liability company (LLC).

6. Automate your record-keeping.

Small business record-keeping doesn’t have to be hard these days. In fact, shoeboxes or grocery bags full of crumpled receipts should be a thing of the past. Instead, you can use various available personal finance software to track everything for you. Often, these apps can easily sync with your bank accounts, making it a stress-free way to track your income and expenses all in one place. Automatic record-keeping not only saves you time, but it’s less prone to mistakes, too.

7. Understand itemized deductions vs. business deductions.

By taking a business deduction instead of an itemized deduction, you reduce your adjusted gross income (AGI) and your self-employment tax. Whenever possible, it’s best to deduct an expense or a portion of an expense as a business expense rather than an itemized deduction, as this generally increases your tax savings.

8. Pay your kids.

If you’re a parent, you can deduct the amounts you pay your kids to work in your business. Kids generally pay less tax than you would since they are likely in a much lower income tax bracket.

Say you hire your child for your business, and they are under 18 (or under 21 for domestic work). In this scenario, you don’t need to pay or withhold FICA tax or federal unemployment tax. You can also deduct the payments made to your child — just make sure the amount you’re paying them is reasonable and they are actually doing the work. There’s no need to worry about the “kiddie tax” in this instance either, as the kiddie tax does not apply to earned income.

9. Take a home office deduction.

If you have a qualified home office, you can deduct office supplies and some of your otherwise nondeductible expenses, such as a portion of your home insurance, utilities, and rent or mortgage payment. To simplify this process, the IRS also allows you to take the simplified home office deduction, where you deduct a flat rate per square foot. This method allows you to take advantage of small business tax perks without the stress of lengthy calculations and record-keeping.

10. Avoid the IRS hobby trap.

If the IRS deems your business to be a hobby, you’ll have to report any income you made from your hobby, but you won’t be able to write off hobby expenses like you would business expenses.

To ensure your business doesn’t get classified as a hobby, it helps to have made a profit in three out of five consecutive years. But even if you haven’t done this, you may still prove to the IRS you are a for-profit business if you operate in a businesslike manner and keep good records.

On the other hand, if you make a small amount of income every year from a hobby, such as breeding dogs or carving lawn ornaments, you may want to keep it that way. Sure, you won’t be able to deduct your expenses, but hobby income is also not subject to self-employment tax, which otherwise would be 15.3% of your net income from the operation.

11. Turn charitable contributions into business expenses.

Under normal circumstances, you can’t deduct charitable contributions on your Schedule C. However, the donation can be considered a business expense if you give money to charities in exchange for something in return (like advertising for your business). This method will give you a greater tax benefit than a typical itemized charitable donation deduction. Just be sure to keep detailed records of what you received in return for the donation.

12. Increase your self-employed retirement contributions.

As a self-employed small business owner, you have the option to fund your own retirement plan. While contributions to typical IRAs are limited, you can contribute significantly more to a retirement account by opening something like a SEP IRA. There is no company size requirement for a SEP IRA, and contributions to one are tax-deferred, so you won’t pay federal income tax until you make a withdrawal. In 2023, you can contribute up to 25% of your total compensation or $66,000 (increasing to $69,000 for 2024), whichever amount is lower.

13. Track all business mileage.

Whether you take the standard mileage deduction or you keep track of actual expenses for gas, oil, etc., you must have good records to deduct vehicle expenses. Your records must include mileage driven, the business purpose, and the date. Make sure you count every trip to the post office or to meet a client — those miles add up. To estimate your mileage deduction, try out our Mileage Reimbursement Calculator.

14. Check out your liability for the alternative minimum tax (AMT).

Tax planning usually means finding more deductions and postponing income, but not always. You might want to do the opposite if you could lose certain self-employed tax deductions because of the alternative minimum tax.

The alternative minimum tax is a parallel tax system to our standard tax system — it just uses different tax rates. It also calculates your tax liability without the benefit of certain tax breaks, such as deductions for state and local taxes (like real estate taxes) or certain business items. You can check out IRS Form 6251 for more details on which tax breaks would be impacted by the alternative minimum tax.

You may trigger the alternative minimum tax if your income is above the annual AMT exemption amount. AMT rates are 26% or 28%. Basically, if your income tax calculated by AMT rules is greater than your tax under standard income tax rules, you pay the excess as AMT tax.

Sound confusing? This is where tax preparation software like TaxAct® comes in handy — once you input your information, we’ll crunch the numbers for you to ensure your taxes are calculated correctly.

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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How Much of My Mortgage Payment is Tax Deductible?

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Updated for tax year 2023.

If you’re a homeowner and a taxpayer, you’ve probably heard about the mortgage interest deduction. But exactly how much of your monthly mortgage payment is tax deductible, according to the IRS?

The short answer is more than you might think, but maybe not as much as you might hope. Here’s a breakdown.

At a glance:

You can write off certain parts of your mortgage payment, like interest and property taxes, but not your entire mortgage payment.
The deductions discussed below are typically only available as itemized deductions.

As a homeowner, how much of my mortgage payment can I write off when filing my tax return?

Depending on how your mortgage is set up, your monthly payment likely includes more than just your house payment, such as principal, interest, taxes, and insurance (also known as PITI). Let’s look at each of these categories to see whether there’s a deduction that can lower your taxable income:

Principal: no

The principal is the total amount you borrow from the lender. Your principal is not deductible. The portion of your house payment that goes toward the principal is generally smaller during the first years of the mortgage term but increases as the term progresses. This is because you pay more interest in your mortgage term’s first years. Over time, you will pay less interest and more in principal as your loan amount decreases.

Interest: yes

Mortgage interest payments are deductible, but only if you itemize your deductions. The IRS has different limits on how much interest you can write off for a mortgage loan, depending on when you took out the loan. You can deduct mortgage interest paid on up to $1 million for loans taken out on or before Dec. 15, 2017, or up to $750,000 for loans taken out after that date.

IRS Publication 530, Tax Information for Homeowners, has some great information about the home mortgage interest deduction. For the interest to qualify for a tax deduction, it needs to be on a loan secured by either your main home (primary residence) or second home.

At tax time, your mortgage lender will send you a statement, Form 1098, that outlines how much you paid in principal and interest. You should report that information on your tax return.

Home equity loan interest: no

Unfortunately, you cannot deduct the interest on a loan secured by your home for tax years 2018 through 2025 unless the funds were used to buy, construct, or make significant improvements to your home.

Real estate taxes: yes

Property taxes on your home and its land can be deducted. You likely paid property taxes at closing if you bought your home during the tax year. Your closing statement should have the amount you paid. Generally, this is the only deductible part of your closing costs.

If you paid local taxes to your county, city, or both during the tax year, your state tax authorities should send you a statement of how much you paid on Form 1098 in Box 4. When filing your federal income tax return, you can deduct property taxes paid on Schedule A (Form 1040) line 5b. Like the mortgage interest tax deduction, real estate taxes can only be written off as an itemized deduction.

Insurance: no

Homeowners insurance protects your house and its contents from fire, wind, and other specified perils. Your mortgage company requires you to purchase coverage, but the premiums — often bundled into your monthly mortgage payment — are not deductible.

Title insurance is a policy that guarantees the title for a piece of property is valid. Your lender often requires it, but it is also not deductible.

Most lenders require private mortgage insurance, or PMI when a buyer cannot make a down payment of at least 20% of the home purchase price. This coverage protects the lender in case you default on the loan. PMI used to be deductible, but you can no longer deduct PMI in tax year 2023.

Mortgage insurance premiums are also no longer deductible for premiums paid after Dec. 31, 2021.

Outlook for coming tax years

You can likely expect the deductions and limitations we listed above to hold true through tax year 2025. The $750,000 principal limit on the home mortgage interest deduction was put in place by the Tax Cuts and Jobs Act (TCJA) back in 2018, as was eliminating deductible interest on home equity loans up to $100,000.

If new legislation is not passed, the mortgage interest deduction loan limit will revert back to $1 million after 2025.

Claim homeowner tax deductions with TaxAct®.

As a homeowner, you can benefit from tax deductions on mortgage interest and property taxes, but there are limitations, and you must itemize to take advantage of these tax benefits. It usually only makes sense to itemize if your itemized deductions outweigh your standard deduction.

Thankfully, it’s easy to claim either type of tax deduction when you file with us at TaxAct. As you input your information, we’ll do the calculations behind the scenes and let you know which method would be more beneficial to you — claiming the standard deduction or itemizing your deductions.

More to explore:

Tax Reform: What Happened to My Mortgage Interest Deduction?
Mortgage Rates: Is It Too Late For a Great Deal?
Home Mortgage Tips: Don’t Do These 6 Things
Understand These Tax Breaks When Buying a Home
What is Form 1098?

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What Happens If You Don’t File Taxes?

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It’s easy to put off filing your taxes. Life is jam-packed with places to be and things to do, and finding time to organize your tax information and complete your tax return may not be high on your list of priorities.

But if you wait too long to file and miss the April deadline, you might find yourself contemplating skipping filing altogether. After all, we’ve all heard about that one person who doesn’t file their taxes — ever. Some people go years without reporting income or filing a tax return, and they seem to get away with it. If they can do it, why can’t you?

In reality, filing late is better than never filing at all, even if it’s past the tax deadline. Here’s a closer look at why you shouldn’t simply choose to opt out of filing your taxes.

What happens if you don’t file a tax return with the IRS?

It’s important to file your income tax return with the Internal Revenue Service (IRS) by the Tax Day deadline to avoid potential tax penalties. Failure to file on time may result in having to pay additional money to the government. Even if you can’t pay the full amount at once, it’s recommended to file your taxes on time and pay what you can to prevent further complications. For instance, if you don’t pay your tax bill, the government can issue a legal claim against your property called a tax lien.

You can also file a tax extension which allows you some extra time to figure out your taxes; however, it’s important to note that an extension will not give you extra time to pay your tax bill.

Here are five reasons why you should file your taxes this year:

1. It is harder than ever to get away without paying taxes.

The IRS may be large and sometimes overwhelming, but the agency has one thing on its side: information. An incredible amount of taxpayer information gets sent to IRS computers every year, and there’s a good chance some of that information concerns you.

For example, each year, your employer sends a copy of your Form W-2 to the IRS. The agency then waits, expecting a tax return from you based on the wages reported on your W-2 form. In addition, banks, investment companies, and businesses send 1099 forms to the IRS to report various types of income you receive throughout the year. If you sell real estate, the IRS receives a form showing how much you received from the sale.

It may take the IRS some time to match your income up with your tax return, but eventually, they will find out, meaning you will owe back taxes.

2. Falling behind on your taxes creates unnecessary stress.

Getting behind on any bill is stressful. Falling behind on filing your tax return(s) and paying your tax bill(s) can feel even worse. Fortunately, accruing tax debt is a stress you can avoid.

With TaxAct®, you can file your tax return before its due date and feel confident that our tax software will help you claim all the tax deductions and benefits that apply to you. If you find out later that you may have missed something, you can always amend your return. However, it is better to file your return before the deadline to avoid paying any penalties or interest that may come with filing late and having unpaid tax.

3. The longer you wait to file taxes, the more serious the consequences.

Once the IRS determines you should have filed a federal income tax return and didn’t, you’ll start hearing from them. You’ll likely receive a notification letter from the IRS stating you will be penalized for not filing a return.

The IRS may also create a return for you. For example, if your employer reported your wages to the IRS, the agency may create a tax return showing those wages to determine your tax liability. The catch? The IRS doesn’t know about any deductions or other tax benefits you may deserve to claim. They typically only know about your income, and unless you straighten things out, you could end up paying a lot more in taxes than you should.

If the IRS doesn’t hear from you once you’ve been contacted, things can get more serious. Your bank may send you a notice indicating your money has been seized by the IRS. The agency may also put a lien against your property or garnish your wages. And, during all this time, interest and penalties are piling up, meaning the IRS can take even more of your money.

4. Don’t owe taxes this year? You might be owed a refund.

The IRS has set well-defined guidelines that specify who is required to file a tax return. If your income during the tax year is equal to or exceeds the minimum income requirement, you must file your tax return, even if you don’t expect to owe any taxes or receive a tax refund. You have a period of three years from your filing deadline to claim your tax refund and get that money back.

But thanks to certain tax credits, such as the Earned Income Tax Credit, you may be entitled to a refund even if you aren’t required to file. In order to receive your tax refund, you must file a return. Filing a return promptly will ensure that you receive your refund in a timely manner.

5. It’s better to file now, even if you can’t pay, to avoid a failure-to-file penalty.

Some people avoid filing taxes because they can’t afford to pay their tax bill. However, you should always file on time, even if you can’t pay all the taxes due. If you wait to file, you’ll be faced with a late failure-to-file penalty, which is just one more thing you’ll have to pay. The failure-to-pay penalty is 7% interest rate per month based on the amount of tax you owe.

If you are unable to pay your tax bill quickly, the IRS offers payment installment plans. Depending on your situation, you can request a short-term or long-term payment plan. You may be able to apply online if you filed all required returns and you owe $50,000 or less, can prove you cannot pay the total amount you owe at the time it’s due, and are able to pay off the tax in three years or less. In addition, you or your spouse can’t have had an installment agreement with the IRS in the past five years. You may still owe a late payment penalty, though, and the IRS does charge a fee for setting up installment agreements.

In some circumstances, you may be able to request an offer in compromise with the IRS. This allows you to settle your tax debt for less than the full amount.

The bottom line

If you’re someone who tends to procrastinate, you may find it difficult to motivate yourself to file your taxes. While filing your taxes may not be your favorite activity, it’s best to get it over with and file on time to avoid potential penalties and the possibility of owing even more or leaving a tax refund on the table. Start your return with TaxAct® today — our tax preparation software will save your information, so you can fill out the tax forms you have now and finish filing whenever you’re ready.

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 What Happens If You Don’t File Taxes? appeared first on TaxAct Blog.

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Comprehensive Guide to Filing Taxes as a Gig Worker

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Welcome to the exciting world of the gig economy, where flexibility meets opportunity — and more tax obligations.

In recent years, the gig economy has seen explosive growth, with more individuals opting for the freedom and autonomy of gig work. Whether you’re driving for a rideshare service, freelancing, or selling items online on a site like Etsy, it’s crucial to understand the ins and outs of filing taxes as a gig worker.

In this comprehensive guide, we’ll walk you through the essential steps to navigate the tax landscape as a gig worker, helping to ensure you stay on the right side of the IRS and make the most of the tax deductions available to you.

Getting started with gig taxes

Let’s clear up a common misconception — just because you’re not punching a clock from 9 to 5 doesn’t mean you’re exempt from taxes. You still need to pay taxes on gig income.

As a gig economy worker, you fall into the categories of an independent contractor or freelancer. This could be your full-time job, or it could just be a side hustle you use to supplement your primary source of income. Whether you earn gig income full-time or part-time, you’ll need to recognize yourself as self-employed and know how to pay taxes as a self-employed worker.

Paying these taxes as a self-employed individual involves estimated tax payments, a process more complex than the straightforward withholding done for traditional employees who receive a W-2. You must make estimated payments to avoid tax penalties as you earn income. We’ll go over this in more detail in the next section.

How should you file taxes for your new side gig? Let’s break it down.

If you have a side gig, you must report income as a self-employed individual, even if you have a full-time job. You’ll do this using a Schedule C form when filing your individual 1040 tax return.

The key factor in deciding whether you need to file a tax return for your gig income is your total net earnings during the tax year. Generally, you must file a return if your net self-employment earnings are at least $400. You’ll likely be responsible for paying income and self-employment taxes (Social Security and Medicare).

Accurate record-keeping will save you time and headaches when filing your income tax return. Apps used for side gigs often simplify income tracking and don’t forget ordinary and necessary small business expenses can be deducted. Collecting tax forms such as Form 1099-K or Form 1099-NEC is essential, as these documents will help you correctly report your gig income to the IRS. Always check these forms against your own records to ensure accuracy.

To ensure you file taxes accurately, especially with the added complexities of a side gig, you may benefit from using tools like TaxAct Self-Employed.

Determining your tax status

Understanding your tax status is a crucial step in the gig economy journey. But how can you tell whether you are self-employed?

The IRS generally considers you to be self-employed if you fit into any of the following categories:

Independent contractor or freelancer
Sole proprietor
Limited liability company (LLC)
Member of a partnership

Even if you work part-time for one employer while also freelancing for various clients, you still fall under the self-employed category. The distinction is crucial because self-employed individuals are responsible for managing their own taxes, unlike traditional employees whose employers withhold and remit taxes on their behalf.

While traditional employees receive Form W-2, freelancers receive Form 1099-NEC, Nonemployee Compensation, for projects or services earning at least $600. If paid through third-party platforms like PayPal, you may also receive Form 1099-K.

Navigating tax regulations for gig workers

Understanding Form 1099-K

Tax regulations are ever-evolving, and Form 1099-K has been a hot topic lately. Let’s dive into the recent changes in 1099-K reporting for tax years 2023 and 2024.

Previously, third-party payment platforms — like Venmo, Square, or Cash App — only reported to the IRS if you had at least 200 separate transactions totaling $20,000 or more in a calendar year. These thresholds still apply for tax year 2023. However, starting Jan. 1, 2024, payment apps must report business transactions totaling $5,000 or more to the IRS (with no transaction minimum). This $5,000 threshold is due to drop even more to just $600 in 2025.

This change will only affect you if you sell goods and services for profit, accept payment cards, or use third-party payment networks. If you use third-party payment apps for personal transactions, like reimbursing a roommate or sharing expenses with friends, you don’t need to worry about being taxed on those transactions.

It’s crucial to keep business and personal finances separate on payment apps and correctly report taxable income. This is especially important if you’ve recently entered the gig economy or haven’t received a 1099-K before.

Calculating and making estimated tax payments

As a gig worker, you are responsible for ensuring that taxes on your net earnings are paid to the IRS, a crucial aspect of which is the self-employment tax (SE tax). The self-employment tax rate is 15.3%, covering your Social Security and Medicare taxes. The Social Security tax rate is 12.4%, applicable to earnings up to $160,200 in 2023, while the Medicare tax rate is 2.9%, without an earnings limit.

The SE tax impacts anyone self-employed. Even if you have a traditional employment arrangement but earn income through a side hustle, you are likely required to pay SE tax on those side hustle earnings. However, you can report half of your self-employment tax as an adjustment to income on your tax return, thereby reducing your AGI and the corresponding income tax.

If you need help calculating your SE tax, our self-employment tax calculator is a useful tool. TaxAct® can also help you pay your estimated taxes online using Electronic Funds Withdrawal. With this method, you have quarterly payments deducted from your bank account automatically when quarterly taxes are due.

Hobby income vs. gig income

Is your side gig a hobby or a bona fide business? The tax implications vary, so let’s learn how to tell the difference.

Here’s the gist: If your side gig is a business, you can claim tax deductions for things like startup costs, travel, and internet bills. But if your side gig is just a hobby, you won’t be able to claim tax deductions to offset associated costs.

Knowing if your gig is a hobby or a legit business involves knowing the IRS distinctions. Generally, for your side gig to meet IRS business guidelines, you should have made a profit in at least three of the last five consecutive years. You also need to look at whether you treat your side gig like a business, put in the effort to turn a profit, and depend on your side gig income to get by. If the answer is yes to any of those questions, you’re likely running a business. If you’re just doing it for fun and not intending to make a profit, it’s probably a hobby.

Hobby income still gets hit with income tax, but you won’t need to pay SE tax on hobby earnings.

Maximizing tax deductions and tax benefits

Gig work often comes with unique expenses. If you’re a gig worker seeking to maximize your tax savings, it’s crucial to be aware of what tax deductions are available to you. Some common ones that might apply to you include:

Self-employment tax deduction: You can deduct 50% of SE tax owed.
Home office deduction: To claim this deduction, you must use a portion of your home exclusively for your gig work. This allows you to deduct a percentage of related expenses like rent, utilities, real estate taxes, or insurance (you calculate the deductible percentage based on the square footage of your home office).
Business startup and organizational costs: Immediately deduct up to $5,000 each in business startup and organizational costs if you spent less than $50,000 total.
Retirement contributions: You can deduct contributions made to a Simplified Employee Pension (SEP) IRA with a 2023 contribution limit of $66,000. Traditional IRA contributions are also deductible, with 2023 limits at $6,500 ($7,500 for 50 and older).
Health insurance: You can deduct health insurance premiums if you are self-employed and paying for your coverage (eligible for medical, vision, dental, and qualifying long-term care insurance for you, your spouse, and any dependents under 26).
Vehicle expenses and business travel: Deductible vehicle expenses include fuel, maintenance, repairs, insurance, and depreciation when used for business purposes. Business travel costs, such as hotel, airfare, and meals (50% deductible), can also be deducted.
Other business expenses: Deduct ordinary and necessary business expenses like office supplies, business equipment, furniture, advertising, and internet expenses.

Maximizing these deductions as a freelancer or gig worker can significantly reduce your tax liability, allowing you to keep more of your hard-earned money.

Tax deductions for Uber and Lyft drivers

Rideshare drivers and delivery drivers, this one’s for you. When navigating the gig economy as a Lyft driver, Uber or Uber Eats driver, Postmates driver, Instacart driver, Grubhub driver, or DoorDash driver, it’s not just about getting passengers or food from point A to point B. Understanding the intricacies of tax deductions specific to your role is crucial for maximizing your earnings and staying tax-compliant. Here’s a guide to help you make the most of specialized tax deductions for rideshare drivers and the best practices for documentation:

Mileage deductions:

Best practice: Keep a meticulous record of your business-related miles.
Documentation: Log every mile driven for work purposes. Use apps like MileIQ for accurate mileage tracking.
Tax benefit: Deduct the standard mileage rate for each business mile, covering expenses like gas, maintenance, and depreciation.

Car-related expenses:

Best practice: Save all receipts for car-related expenses.
Documentation: Keep records of expenses such as service and repairs, car payments, insurance, tolls, and parking fees.
Tax benefit: These expenses can be deducted on Schedule C, reducing your taxable income.

Cell phone expenses:

Best practice: Designate a portion of your phone usage to business activities.
Documentation: Keep detailed records of your business-related phone calls and internet usage.
Tax benefit: Deduct a portion of your cell phone bill as a business expense.

Vehicle depreciation:

Best practice: Understand the rules for depreciating your vehicle.
Documentation: Maintain records of your vehicle’s purchase price and any improvements made.
Tax benefit: Deduct a portion of your vehicle’s depreciation yearly, spreading out the cost over time.

By diligently documenting your expenses and leveraging specialized tax deductions, you can minimize your tax liability and ensure a smoother tax filing process. Stay organized, use technology to your advantage, and claim all eligible deductions to maximize your rideshare business.

Special considerations for gig economy members (rideshare drivers)

There are several often-overlooked tax deductions for rideshare drivers that can significantly impact your bottom line. Don’t forget about these potential tax breaks if you’re a Lyft or Uber driver:

Passenger amenities:

Deduction: Snacks, water bottles, and extra phone chargers provided for passengers can be tax-deductible.
Best practice: Keep detailed records of the expenses, such as receipts, to substantiate these deductions. Categorize them separately for easy identification during tax preparation.

Fees and commissions:

Deduction: Any fees or commissions charged by the rideshare platform, as listed on your 1099 Form or driver dashboard, are deductible.
Best practice: Regularly review your 1099 Form and online account for a comprehensive list of fees. Document these figures meticulously to ensure accurate deduction.

Vehicle cleanliness:

Deduction: Car washes, upholstery cleaning, and air fresheners contribute to maintaining a clean ride and are considered tax-deductible.
Best practice: Keep receipts for all cleaning-related expenses. Consider creating a separate folder or digital archive to organize and track these deductions.

Cellphone expenses:

Deduction: If you have a separate phone or phone line exclusively for business, it’s deductible. You can also deduct a percentage of personal phone expenses if you use your personal phone for rideshare purposes.
Best practice: Maintain a log of business-related calls and expenses. Utilize online phone service records to retrieve information for tax reporting easily.

Roadside assistance:

Deduction: Membership fees for services like AAA, ensuring a safe ride for passengers, are tax-deductible.
Best practice: Document the membership costs and clearly indicate their association with your rideshare business. This ensures you claim the appropriate deduction during tax filing.

Proactively plan for these lesser-known deductions and maintain meticulous records to reduce your taxable income and take advantage of all tax benefits available to you as a rideshare driver.

The bottom line

Filing taxes as a gig worker doesn’t have to be scary. You can ensure a smooth and financially savvy tax season by understanding your tax obligations, navigating tax regulations, and maximizing tax deductions.

Remember, staying informed and compliant with tax regulations is a continuous process. As you embark on your gig economy journey, don’t forget to leverage resources like TaxAct® to streamline your tax filing experience. By doing so, you’re not just managing your taxes — you’re optimizing your financial success in the gig economy.

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 Comprehensive Guide to Filing Taxes as a Gig Worker appeared first on TaxAct Blog.

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How to File Your Taxes with Side Income

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Updated for tax year 2023.

Did you earn income from a side gig during the tax year? Whether you’re driving for a rideshare service, freelancing in your spare time, or selling handmade crafts online, earning a side income can be an entrepreneurial leap into the gig economy. However, with the extra income comes the responsibility of reporting it correctly on your tax return. In this guide, we’ll walk you through the essential steps to ensure you file your taxes accurately and efficiently, specifically if you are a gig worker with a side hustle.

At a glance:

If you have side income, make sure you have all the necessary tax forms before you start filing, including Form 1099-NEC or Form 1099-K.
Keep meticulous records of your business expenses during the year so you have them handy at tax time.
Use tax filing software like TaxAct® Self-Employed to file your taxes with ease.

1. Get your income tax forms together.

When it comes to filing your taxes with side income, the first and most important step is to gather all the necessary income tax forms. This includes Form W-2 if you have a regular job, as well as Form 1099-NEC or Form 1099-K if you earned income from being self-employed (like freelancing or gig work). You’ll report 1099 income on Schedule C. Keep in mind that even if you didn’t receive a tax form or were paid in cash, you still need to report all your income. The IRS requires that all income, whether it’s from a regular job or freelance work, be reported on your tax return, so it’s essential to keep track of it no matter how small.

If you’re both an employee and a freelancer, you’ll likely receive a mix of the previously mentioned forms. If it sounds overwhelming to keep track of all the different forms and to know which tax deductions and tax credits apply to your situation, don’t stress. Fortunately, TaxAct® Self-Employed is a tax filing software that can help you file your own taxes accurately and efficiently. Our product guides you through each step of the process, making sure you don’t miss any important tax deductions or credits.

2. Download other documents relating to income, deductions, and insurance.

It’s crucial to keep track of all your financial documents, especially during tax season. In addition to your income forms, there are other important documents that you shouldn’t forget about. These include the Form 1099-INT from your bank or other financial institution if you earned more than $10 in interest, as well as the Form 1099-DIV for any dividends or capital gains you had during the year.

To ensure that you have all the necessary paperwork, it’s best to log in to all your financial providers’ websites and download any year-end forms that may be available. If you’ve opted for paperless communication, you’ll need to be particularly vigilant in checking your account portals for these forms.

By taking the time to gather all the relevant financial documents, you can be sure that your tax return will be accurate and complete. This can help you avoid any penalties or issues with the IRS and may even result in you receiving a larger tax refund.

3. Build your business expense paper trail.

As a self-employed individual, you have the advantage of being able to deduct business expenses from your taxable income, which can significantly reduce your overall tax bill. However, to take advantage of these deductions, you need to keep detailed records and receipts of all your business-related purchases throughout the year.

Fortunately, there are several tools and resources available to help you track your expenses and identify potential deductions. Additionally, it’s a good idea to jot down a brief explanation of the business purpose on each receipt to help you remember why the expense was incurred.

The bottom line

Filing taxes with side income doesn’t have to be daunting. By following these steps and utilizing tax filing software like TaxAct Self-Employed, you can confidently navigate the tax filing process and maximize your tax deductions. Remember, reporting your income accurately is not only a legal obligation but also ensures you’re taking full advantage of available tax benefits.

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 How to File Your Taxes with Side Income appeared first on TaxAct Blog.

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Tips to Meet the Small Business Income Tax Filing Extension Deadline

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The deadline to request an extension for filing your small business income tax return differs depending on your business structure. For corporate and sole proprietorship returns, the deadline to file for tax year 2023 is April 15, 2024. The deadline for partnerships and S corps is even earlier, on March 15, 2024.

If you took an extension to file your business income tax return, the new deadline is six months after the original tax deadline. Partnerships and S corps must file extended returns before Sept. 16, 2024, while sole proprietors, multi-member LLCs and corporations have until Oct. 15, 2024, to file. If you don’t file by the extension deadline, you’ll face penalties for late filing.

What if you’re still missing that last piece of information?

Do your best to get it, but if that’s not possible you may want to make a good estimate and file anyway. You can always amend your return if necessary, which is a better alternative than getting hit with a penalty for missing the tax filing deadline. You also need to file your business returns so you and other partners or shareholders in the company can use the information to file individual tax returns.

Read the tips below to help you finish and file Form 1120, 1120-S, or 1065.

1. Gather what you need.

Preparing your return will be easier and more efficient if you don’t have to repeatedly stop to look for necessary information.

Make sure you have the following items before you start preparing your business return (download the 1120, 1120S, or 1065 tax return checklist):

Last year’s business tax returns, unless this is a new business
Financial statements: income statement and balance sheet
Transaction history and summary statement of shareholders’ capital accounts
Shareholder information, including names, current addresses, and Social Security numbers.
Payroll tax returns or summaries
Form W-2 statements
Sales tax returns
Records of federal, state, and local taxes paid
Business tax preparation software

2. Get organized.

Grouping and putting your information in order makes it a lot easier to answer the questions TaxAct® will ask as you move through the program. Our tax preparation software prompts you for the required information and helps identify the tax benefits to which you are entitled.

Keep your last year’s business tax return handy for reference. The answers to many questions, such as business codes, are the same from year to year. In addition, it’s important that the amounts of beginning assets, liabilities and shareholder or partner accounts on your return match the ending amounts on last year’s return.

3. Keep good notes as you prepare your business return.

Good records are important because there may be many occasions when you need to remember how you arrived at a particular amount or the details around other information on your return. Keeping detailed notes as you prepare your return can save you time later. For example, you may need supporting information when you prepare next year’s return or if you sell a business asset.

As you prepare your return, take note of things like how you allocated expenses between business and personal use, additional expenses, and differences between financial statements and your tax return. Print your notes if necessary, and keep them for as long as you save the related tax returns.

4. Read and review your return.

When you think you’re done, read the entire return one more time. This may be easier to do if you print it first. It’s tempting to file without reading and reviewing your return, but don’t skip this step — it’s vital to make sure you file a complete and correct business tax return.

Reading your return accomplishes two very important things:

It helps you understand your business tax return, including your overall business success and how various items, such as depreciation, affect your tax bill.
It makes it easy to identify any missing information or anything that doesn’t look quite right.

If you don’t trust that you’ll catch everything by doing a manual review, be sure to take advantage of the TaxAct Alerts feature. Alerts can identify missing or incomplete information that may bring your income tax return to the attention of the IRS. Plus, you’ll be alerted to possible tax-saving opportunities that you may have missed.

Following these tips to prepare and file your business tax return should help you get it out the door before the extension deadline. Better yet, now that you’re organized and are keeping good notes, next year’s taxes should be even easier. From now on, you may be able to file your business returns earlier in the year — perhaps without needing an extension at all.

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 Tips to Meet the Small Business Income Tax Filing Extension Deadline appeared first on TaxAct Blog.

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5 Tax Advantages of Getting Hitched

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Updated for tax year 2023.

If you recently got married or are thinking about tying the knot soon, it’s never too early to start thinking about the tax implications of marriage. Many times, getting married and filing jointly with your spouse can bring some nice tax advantages along with it.

At a glance:

Filing jointly can be especially beneficial for couples with disparate incomes.
You can gift as much cash to your spouse as you want without filing a gift tax return.
Depending on your income, you may be able to qualify for more tax deductions or tax credits when you file jointly.

Here are five tax advantages married taxpayers may have to look forward to for tax year 2023:

1. You may pay a lower total tax if one of you earns significantly less.

If you and your spouse both work but one of you makes less money, the federal income tax brackets can work in your favor when you get married and file a joint tax return.

The tax code is written so that people who make more money pay a higher percentage of their income in tax. On the flip side, taxpayers who make less pay a smaller amount of federal income tax.

Say a person in a high-income tax bracket files jointly with someone in a much lower income tax bracket. Their income together is taxed at a rate somewhere in the middle. Generally, this results in a lower total tax than they previously paid as two single taxpayers.

2. Filing together can get you more deductions and other tax benefits.

For many people, getting married and filing a joint tax return allows for more tax deductions.

As an example, let’s say you have a business loss for the year and no other income. As a single tax filer, the tax benefits from your loss are slim to none. But if you’re married and your spouse earned a good income, your business loss can help offset your spouse’s income on a joint tax return. While you shouldn’t lose money as a tax strategy, it’s a good tax benefit if you endure a business loss.

Additionally, lower income levels limit deductions and credits when you file as a single person.

Let’s look at an example. Typically, you can only deduct up to 50% of your adjusted gross income (AGI) for charitable contributions. As a single person, this means that if you make a charitable contribution during a year where you earn less, the maximum deductible amount is lower. However, filing a joint return combines your income with that of your spouse. So, the total deductible amount for the same charitable contribution could be much higher. That helps save more on taxes.

On the other hand, your income as a single person can also be too high for some tax benefits. Many individuals often run into this problem when they try to take the American Opportunity Tax Credit (AOTC) for education expenses.

For tax year 2023, the AOTC starts to phase out when your AGI as a single filer reaches $80,000 and disappears when your income is $90,000 or above. But, if you are married filing jointly, these phase-out numbers increase to $160,000 and $180,000, respectively.

3. Filing jointly means unlimited gift giving and rights of survivorship.

If you’re not married and your significant other gives you more than $17,000 in a year (in 2023), they must file a gift tax return. After you marry, however, you can give each other as much as you like with no tax consequences (this is only true if you’re both U.S. citizens).

Likewise, when you die, you can leave as much money as you want to your spouse without generating estate tax. Special rules and limitation amounts apply to non-U.S. spouses.

4. Getting married lets you double the personal residence gain exclusion.

If you own a home that has gone up in value and file single, you can only qualify to exclude up to $250,000 in capital gains from your income. However, filing jointly allows you to exclude up to $500,000 in capital gains from the sale of your home. To qualify for this exclusion, you typically must own and live in the house for two of the last five years or meet a qualifying exception due to unforeseen circumstances — such as a job loss or natural disaster.

In the instance that you owned the house by yourself before you got married and sold it after tying the knot, only one of you must meet the ownership test. The same rule applies if you purchased the house while married, but only one of your names was on the deed. However, you can’t exclude the full $500,000 in this case. To exclude the total amount, you both must meet the residency period.

5. You only have to file one return, not two.

Filing only one tax return between the two of you can save you a lot of money. This is especially true if you combined a few finances before you got married and you’re used to sorting those out for tax purposes.

Now, as a married couple, filing jointly can greatly simplify the tax filing process — you won’t have to worry about details like who paid the property taxes or if a non-cash charitable contribution was from you or the other person. Instead, it all goes together on one income tax return.

The bottom line

If you gained some tax advantages by getting married recently, consider them a wedding gift from the IRS. From reducing overall tax liabilities to expanding tax deductions and simplifying the tax filing processes, there are several different tax benefits available for married couples. Before you file this year, make sure you understand the potential tax advantages available to you when you file jointly vs. separately to help you make informed financial decisions.

TaxAct® can help you do this — we’ll ask you interview questions about significant life events, such as a recent marriage. Then, based on your individual circumstances, our tax preparation software will suggest the most advantageous tax filing status for you.

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 5 Tax Advantages of Getting Hitched appeared first on TaxAct Blog.

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