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Getting ready for the 2023 tax season? The best overall advice is to e-file to avoid the IRS backlog of paper returns and to get help if you need it. This year, changing guidelines on tax credits and a new reporting requirement for business transactions on Venmo, Paypal and Cash App could cause a bit of confusion. Don't be afraid to work with a tax pro, especially if you need to report self-employment income or online sales for the first time.
It's never too soon to start prepping. Here are seven tips to make filing your return easier in 2023.
1. Start Early to Avoid Delays
Even with additional IRS employees working to help taxpayers deal with changing and potentially confusing filing requirements, this year's filing season could still be a tough one. If your return is flagged for review, your refund will almost certainly be delayed.
What can you do to speed things along?
- If your tax return is simple (filed with a single W-2 and the standard deductions), get it done early and e-file. Avoid potential mail delays by setting up direct deposit with the IRS.
- If your tax return is more complex, start gathering your information and engage help ASAP. The sooner you start the process, the more time you'll have to track down missing information, smooth out discrepancies or find a qualified tax professional.
2. File an Accurate Return
Inaccuracies in your tax return are a common trigger for an IRS audit. The IRS checks the information you provide against W-2 forms from your employer; 1099s from clients, banks or investment companies; and payment data from the government itself. If your tax return differs from what the IRS has on file, it may be flagged for a manual review, which could lead to a full-blown audit and possibly delay your refund.
Before you file, check your return for accuracy against the information the IRS has on file. Get a free digital copy of your tax transcript by visiting the IRS' Get Your Tax Record site.
3. Plan for an Extension Now if You Need One
If you can't get your tax information together by the April 18 deadline, you can file an extension to automatically move your deadline to October 16. But don't wait to pay the taxes you owe: The IRS expects you to make a good faith estimate if you want to avoid penalties and interest. Also be mindful of all IRS deadlines this year, including estimated tax payments for 2023.
4. Check New Rules on Credits and Deductions
Tax credits and deductions can reduce your tax bill significantly or increase your refund if you have one coming. The American Rescue Plan Act temporarily increased certain tax credits and added a special rule for charity deductions. Now that these programs are ending, check the eligibility rules and deduction amounts to see what's currently available.
Here are a few credits and a deduction to consider:
- Child tax credit: In 2021, you may have received a temporary child tax credit of up to $3,600 per eligible child, half of which was sent as monthly advance payments. In 2022, the Child Tax Credit returns to its 2019 amount: up to $2,000 per eligible child.
- Child and dependent care credit: The child and dependent care credit credit topped out at $8,000 in 2021. In 2022, it has a maximum of $2,100.
- Earned income tax credit: Generally speaking, earned income tax credits are lower this year than last. Check with the IRS for details on new income eligibility and credits for 2022.
- Premium tax credit: If you purchased health insurance through the health insurance marketplace in 2022, the American Rescue Plan Act temporarily expanded eligibility for this credit by including taxpayers with household incomes above 400% of the federal poverty line.
- Clean energy vehicle credit: Tax credits of up to $7,500 are still available for qualifying electric and plug-in hybrid vehicles, but eligibility rules changed with the passage of the Inflation Reduction Act in 2022. Check to make sure your vehicle purchase qualifies before claiming the credit.
- Donations to charity: In 2021 only, charitable donations were deductible as a separate line item even if you took the standard deduction. This year, you'll have to itemize your deductions if you want to claim a deduction for charitable giving.
5. Don't Worry About Form 1099-K―Yet
You may have heard about a new reporting requirement for payments processed by digital payment companies like Venmo, CashApp or Paypal. According to a provision in the American Rescue Plan, third party payment companies were going to be required to report transactions to the IRS using Form 1099-K for business account holders who received at least $600 in transactions in 2022—up from a threshold of $20,000 in 2021.
Thanks to a last-minute change in the law, implementation of this new rule won't go into effect until 2023, which means you won't have to worry about reporting income from a 1099-K form for the 2022 tax year. However, with or without a 1099-K, you still have to report income from self-employment, gig work (details below), sales of goods or other business transactions on your tax return. And, in preparation for new reporting rules in 2023, now is a good time to make sure your personal Venmo, Cash App and Paypal accounts aren't set to record your personal transactions as business.
6. Count Your Gig Work as Income
If you earned money in the gig economy—driving for a delivery app, for example—you must report your income and pay taxes on it. Depending on whether you've worked as an employee or a contractor, you may need to file Schedule C: Profit or Loss from Business. The good news: If you are considered self-employed, you may be able to deduct some car or home office expenses. The bad news: Business taxes can be a bit more complicated. For more, visit the IRS' Gig Economy Tax Center.
7. Report Profits, Deduct Losses on Investments
Remember that capital gains taxes aren't based on the value of your investments: They're based on the profits you realize when you sell an investment for more than you paid. If you didn't sell any investment assets in 2022, you don't owe anything, at least for capital gains (dividends or interest payments count as income). However, if you sold stocks, mutual funds, real estate, cryptocurrency or another investment for a profit, you must report the gain (or loss) on your tax return and pay applicable capital gains taxes.
If you sold investments for a capital loss, you can use your loss to offset your capital gains for the year. You may also deduct up to $3,000 in capital loss against your ordinary income and do the same as a carryover loss of up to $3,000 a year until the loss is used up. You may also use a carryover loss to offset capital gains in future years.
Get Set and Go
Using IRS hotlines may be challenging again this year, so the IRS offers online resources that may help answer your questions. Their guide to getting a jump on your taxes offers tips for preparing and tracking your return, including electronic filing options for individuals and resources for e-filing your return—the fastest route to a refund this year.