Tax season is here again. The Internal Revenue Service (IRS) officially opened its doors to filings on January 23. The last day for most people to file, or “Tax Day,” is April 18, 2023.
The IRS swung into its peak season with an expanded service team and upgraded technology. To fund the rollout, the agency is drawing upon the $80 billion Congress assigned it last year, of which half is earmarked for optimizing operations to make filing easier for taxpayers. A few short weeks in, it seems to be making a difference. Already the IRS is getting through a far higher number of filings and issuing more returns faster than in previous years.
Returns so Far
According to IRS data, this year has gotten off to a flying start.
More people are filing earlier. The IRS has already processed 18.95 million tax returns as of February 3. That’s a 13.4% increase on the number the tax department received by this time last year. The tax department is getting through them faster, too, having already processed 16.7 million of those returns, nearly 30% more than the previous year.
Digitalization continues to trend, with the total number of e-filing returns increasing by 9.5% year-on-year. The vast majority of tax returns – 92.4% – are now submitted digitally.
The IRS has also issued almost eight million tax refunds already as opposed to only 4.3 million that had been issued by this time last year. However, refunds are generally smaller, with the average refund amount being $1,963. That’s a $200 decrease since last year’s filings.
The numbers are in flux, however, and will likely change over the coming weeks as the IRS processes millions more returns before April 18.
Before You File
There are several prudent moves individuals can make before filing.
First, check the new set of tax brackets for 2023. Even marginal deductions can significantly affect your total tax bill if you fall into a new bracket. For instance, a single filer earning $42,000 in 2022 would have been taxed at a 22%, while this year, that same income level will only be taxed at 12%.
Before filing, users can create an online IRS account, which enables them to access tax records and make and view payments. Be aware that opening an IRS account does not automatically enable e-filing. Users will still need to register for electronic filing separately. Going online allows easy access to a simple one-stop portal. It also opens the door to the Free File Program for individuals with Adjusted Gross Income (AGI) income under $73,000.
Taxpayers can also attend to their IRA accounts (either Traditional or Roth) around this time to reap the tax benefits for their retirement savings. Traditional IRA accounts allow taxpayers to deduct contributions to their taxable income (above-the-line deduction). For those with Roth IRAs, make your contributions to your fund with your post-tax income; qualified distributions are tax-free in retirement.
Contributions made prior to Tax Day qualify to be deducted from your 2022 taxes.
Above and Below
When it comes to deductions, there are two broad categories of tax deductions – “above-the-line” and “below-the-line.”
In accounting jargon, this “line” delineates a taxpayer’s Adjusted Gross Income (AGI), which determines the tax bracket from their actual taxable income, or what remains after additional tax breaks are deducted.
Contributions to health savings accounts (HSA) are one of the most common above-line deductions, potentially shifting you down a bracket or two. The same is true for company retirement plan contributions.
These are among the top tax-reducing strategies most commonly used by high-income earners – usually those paying above 30% income tax – but can be adopted by all taxpayers to lighten their load.
There are two options for below-line deductions. Individuals can either claim the standard deduction or list several itemized deductions. The latter makes sense if there are enough deductions that aggregate together to exceed the standard deduction, but doing so requires more record-keeping and effort.
The Tax Cuts and Jobs Act of 2017 altered the deduction calculus for the majority of Americans. The bill almost doubled the standard deduction, bumping it up from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for married joint filers.
Charitable donations are one of the below-the-line deductions, which can further lower tax owed. What’s more, donors can “stack” their contributions into grouped clumps in the same taxable year, so their itemized deductions exceed the standard deduction threshold.
There is an additional, less-calculable advantage to charity deductions. Namely that by donating to charity, donors can choose what specific cause their hard-earned money will go towards, whereas they have no say over how the government spends their tax dollars.
The ideal strategy will depend on an individual filer’s circumstances. But it pays to plan – the more one can save during the filing process, the more can be deposited to tax-optimized retirement accounts.
Whether you are self-filing or working through a paid tax preparer, filing electronically or on paper, there are always more benefits to planning ahead for tax season. By organizing your financial papers, exploring various deductions and credits, and getting across changes to the tax code, you are better positioned to reduce your tax burden and maximize your refund.
This post was produced by Top Dollar and syndicated by Wealth of Geeks.
Josh is a financial expert with 15+ years on Wall Street as a senior market strategist and trader. Josh graduated from Cornell University with a business degree in Applied Economics and has held numerous U.S. and European securities licenses. In addition to running an investment and trading firm, Josh is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses himself.