3 financial moves to get a better tax refund this year
Income taxes, for savvy taxpayers, tend to be viewed as a year-round experience rather than a single event. As the filing date approaches, taxpayers can prep now to ensure they receive the best possible tax refund.
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Mark Steber, chief tax information officer at Jackson Hewitt, joins GOBankingRates to discuss the impact of inflation on tax brackets and emerging tax trends to watch out for next year. Steber also shares practical tips taxpayers can make now for a better tax refund.
Annual Inflation Adjustments
On Oct. 18, 2022, the IRS announced in the tax year 2023 there would be annual inflation adjustments for more than 60 tax provisions. These include tax rate schedules, energy credit changes, a higher maximum Earned Income Tax Credit amount — $7,430 for qualifying taxpayers who have three or more qualifying children — and more, as well as notes on unaffected items, available on IRS.gov.
Steber said the inflation adjustments for the 2022 taxes were announced last year. What taxpayers are now seeing are inflation adjustments for 2023 taxes.
“You may see a higher paycheck due to inflation, but the new standard deductions and tax tables in the IRS Revenue Procedure 2022-38 are for the 2023 taxes we will do in 2024,” Steber said.
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New Rules for Form 1099-K
In April 2022, a significant tax law change stated those who use third-party apps, like Venmo and PayPal, will receive Form 1099-K if they received more than $600 on these platforms. Once the maximum amount received through the vendor exceeds $600, third-party payment networks and others who process payments will be required to issue Form 1099-K.
This continues to be a tax trend to watch in 2023. In the past, Steber said Form 1099-K was issued once the taxpayer received more than $20,000 and had at least 200 transactions. This change, Steber said, is intended to close the tax gap by collecting taxes owed on all of the income versus the mistaken impression the first $20,000 wasn’t taxable if a form wasn’t issued.
“The income has always been taxable so the only change is issuing the form much sooner,” Steber said.
Additionally, there may be confusion based on personal transactions. These include repaying a friend or family member for items like going out for dinner. This income remains non-taxable, Steber said.
Child Tax Credit Changes
There may be some confusion around the child tax credit in the 2023 tax season, so let’s try to make this easier to understand now. Steber said the credit amount will drop by $1,000 for children 6 and older and $1,600 for children under age 6.
Not only has the amount of the credit changed, the child tax credit is partially nonrefundable. The credit is limited to 15% of income from a job or self-employment over $2,500.
“The child and dependent care credit has also reverted back to pre-2021 rules,” Steber said. “The credit is again no more than 35% of allowed expenses and the expenses are limited to $3,000 for one qualified child and $6,000 for more than one child.”
How To Get Ahead of Tax Season
Taxpayers can start getting ahead of tax season as early as now by making these three moves:
Get Organized
As you start gathering all your tax-related documents, Steber recommends organizing them into four categories:
Income Items
Deductions
Life Changes
Other
“If you have a more complicated financial situation, it’s better to have even more categories — like self-employment, investments and more,” Steber said. “Doing this now, instead of waiting until later during tax filing season, ensures you’ll have an easier time filing.”
Look For Ways To Reduce Your Taxable Income
If you’re able to do it, contribute a higher amount to your retirement accounts. For those with an IRA, Steber said you have until April 17, 2023, to make 2022 IRA contributions.
“If you are age 72 or older and you have a traditional IRA or conventional pension plan, be sure you have taken your annual required distribution to avoid penalty,” Steber said.
Find a Tax Professional Now
Don’t wait until the last minute to consult a professional, especially if you have questions. Steber recommends finding a tax professional now who can provide you with tips and insight for your unique financial situation.
“Not everyone is the same and you and your family might qualify for a credit a neighbor or friend might not. It’s good to directly talk with a tax pro to know your situation and not make assumptions.”
For Next Tax Season, Consider Updating Form W-4
A common misunderstanding is you can only fill out and update Form W-4 when you start a new job. The truth is taxpayers may consider updating this form because it allows you to control how much federal income tax is automatically withheld from each paycheck.
Although it’s too late this year, get a start on improving your tax situation for next year. Steber said the tax withheld is based on your filing status, how often your employer pays you, the expected income from the job and your other income and deductions. If you are close to owing taxes, are going to owe or will have a low refund, Steber recommends increasing your withholding to minimize or eliminate owing taxes or to increase your refund.
You have until your last paycheck of the year to update Form W-4.
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This article originally appeared on GOBankingRates.com: Tax Trends 2023: 3 Financial Moves To Get a Better Refund This Year
