Tax laws evolve every year, and 2024 is no exception. Understanding the latest updates can help you maximize your refund, reduce your tax bill, and plan smarter for the future. The 2024 tax year filing is due April 15, 2025, the IRS deadline for most taxpayers.

Standard deduction increases

The IRS has raised the standard deduction for the 2024 tax year to adjust for inflation. The new amounts are:

• Single filers: $13,850 (up from $13,850 in 2023)
• Married filing jointly: $27,700 (up from $27,700 in 2023)
• Head of household: $20,800 (up from $20,800 in 2023)

If you don’t itemize deductions, this increase means you can reduce your taxable income by a higher amount, potentially lowering your overall tax liability.

Expanded child tax credit

The child tax credit remains at $2,000 per eligible child, but for 2024, a larger portion—up to $1,600—is refundable, meaning you may receive a refund even if you owe no tax. This change may benefit lower-income families who previously couldn’t claim the full credit.

Adjusted income tax brackets

For 2024, tax brackets have been adjusted to reflect inflation. While tax rates remain the same, income thresholds have increased slightly, reducing the impact of bracket creep and potentially lowering tax bills for some filers. If you received a raise in 2024, this adjustment may help offset the tax impact.

Retirement contribution limits increase

The IRS has increased contribution limits for 2024, allowing individuals to save more on a tax-advantaged basis. The new limits are:

• 401(k) contributions: $23,000 (up from $22,500 in 2023)
• IRA contributions: $7,000 (up from $6,500 in 2023)
• Catch-up contributions (age 50+): $7,500 for 401(k)s, $1,500 for IRAs

Maximizing contributions can lower your taxable income while boosting your retirement savings. If you’re expecting a tax refund, consider putting a portion into an IRA to maximize tax advantages.

Changes to itemized deductions

Some deductions have been modified for 2024:

• Medical expense deduction: The threshold remains at 7.5% of AGI, meaning expenses exceeding this amount can still be deducted.
• State and local tax (SALT) deduction: The $10,000 cap remains in place, though there is ongoing debate about potential changes in future tax years.

Increased capital gains tax threshold

Long-term capital gains tax rates remain the same, but income thresholds have been adjusted for 2024. This means some investors may qualify for a lower tax rate on their investment earnings compared to last year. If you sold investments in 2024, your tax filing will use these updated thresholds.

Energy tax credits for homeowners

New tax credits are available for homeowners making energy-efficient improvements. The Energy Efficient Home Improvement Credit allows for a credit of up to $3,200 for qualifying home upgrades, such as solar panels, heat pumps, and insulation. If you made qualifying improvements in 2024, you can claim credits on your current return.

How tax filing impacts your credit

Filing your taxes can have a direct impact on your credit and financial well-being. While your tax return itself doesn’t appear on your credit report, unpaid tax bills can lead to financial strain and even collection actions. If you owe taxes and don’t pay by the deadline, the IRS may file a tax lien, possibly making it harder to qualify for loans and credit cards. Additionally, if you receive a tax refund, using it strategically—such as paying down debt or building an emergency fund—can improve your credit score and overall financial stability.

What these changes mean for you

Depending on your financial situation, these tax updates may lower your tax liability or increase your refund. To maximize your benefits:

• Review your deductions and credits carefully
• Adjust your withholdings or estimated tax payments
• Consider maximizing retirement contributions
• Plan ahead for any investment-related tax implications
• Use tax savings wisely to reduce debt and improve your credit profile

Stay informed about the latest IRS guidelines if you’re filing your 2024 taxes by April 15, 2025. Understanding these updates can help you make informed financial decisions, whether maximizing deductions, reducing taxable income, or planning for the future. Taking proactive steps can put you in a stronger financial position for next year’s tax season.

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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice

The post New tax rules for 2024 and how it affects your April 15, 2025 filing appeared first on Credit Sesame.

Filing your taxes doesn’t have to be a headache. Just make sure have everything you need for a smooth and potentially credit-score-boosting tax season 2024.

Gather information

1. Personal information
   • Social Security numbers for yourself, your spouse, and any dependents. Include your Individual Taxpayer Identification Number (ITIN) if applicable.
2. Income documents
   • Collect W-2 forms from all employers.
   • Gather 1099 forms for additional income sources (freelance work, dividends, etc.).
   • Include Social Security income statements (SSA-1098) if applicable.
   • Document any other income you received.
3. Deduction and credit proof:
   • Organize receipts and documentation for eligible expenses (medical bills, education costs, mortgage interest).
   • Keep records of charitable contributions and paperwork for tax credits (child tax credit, education credits).
4. Health insurance info:
   • Locate Form 1095-A, 1095-B, or 1095-C (proof of health insurance).
   • Gather any relevant Affordable Care Act (ACA) documentation.
5. Retirement savings:
   • Find contribution statements for IRAs or 401(k)s.
   • Include records of any early withdrawals or contributions.
6. Educational expenses:
   • Track down Form 1098-T for tuition expenses.
   • Document records of any student loan interest paid.
7. Homeownership documents:
   • Grab your mortgage interest statement (Form 1098) and property tax records.
8. Business income and expenses:
   • If you own a business, gather records of income and expenses along with related receipts and documentation.
9. State-specific requirements:
   • Check if your state requires any specific forms or documentation.
10. Additional deductions and credits:
    • Childcare expenses
    • Alimony payments
    • Other income sources
    • Charitable non-cash contributions
    • Job-related expenses
    • Energy-efficient home improvements
    • Form 1099-NEC for freelancers
    • Proof of educational expenses
    • HSA and FSA contributions
    • Gambling losses
    • Home office expenses

Plan your tax preparation

1. Previous year’s return. Use your prior year’s tax return as a reference to ensure you don’t miss any recurring deductions or credits.
2. Organize your records. Sort and categorize all your documents to make filing a breeze.
3. Choose your filing method.  Decide whether to file online using tax software, hire a tax professional, or submit a paper return.
4. Stay informed.  Keep yourself updated on any changes in tax laws that might affect your filing.

Manage your time

1. Set a filing deadline. Plan to file your taxes before the deadline (April 15, 2024).
2. Consider extensions.  If needed, explore filing an extension, but be aware of potential penalties and interest.

Make sure yo have the following to hand

1. Bank account details.  Have your bank account and routing number handy to expedite refunds or payments.
2. Identification protection PIN (IP PIN).  Keep your IP PIN from the IRS with your documents if you’ve received one due to identity theft concerns.
3. Mileage log.  Maintain a detailed mileage log if you use your car for business purposes (potential deduction).
4. Moving expenses.  Gather documentation for eligible moving expenses if applicable.
5. Investment statements. Include records of investment income and expenses (brokerage statements, capital gains/losses).
6. Estimated tax payments.  Keep copies of receipts if you make estimated tax payments throughout the year.

Remember to adapt the checklist based on your specific financial situation and any unique circumstances. Consulting with a tax professional can provide personalized guidance and ensure you’re taking advantage of all available deductions and credits.

Responsible tax filing and planning aren’t just about following regulations. By filing on time, avoiding tax debt, and ensuring accuracy, you demonstrate financial responsibility, a factor considered in credit scoring models. This can significantly improve your credit score, making it easier to secure loans, rent apartments, and obtain favorable interest rates.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Handy tax preparation checklist appeared first on Credit Sesame.

Planning for retirement? Are you liable for tax on your retirement income? Some retirement distributions are considered income and taxed by the federal government. Some states do not tax retirement income. Some states do tax income of any kind.

Here is our ABC os states that do not tax retirement income. Retirement income is 401(k), IRA or pension income. Most states don not tax Social Security benefits.

Alaska

Alaska has no income tax for anyone. Retired or not, it does not tax incomes. 

For retirees, it doesn’t tax Social Security benefits. For their beneficiaries, Alaska doesn’t have an inheritance tax or an estate tax.

Live in Alaska for a year as a retiree, and you are eligible for the annual stipend that the state pays to legal residents who have lived there for at least one year The Permanent Fund Dividend, as it’s called, was $3,284 in 2022, and the 2023 payout is projected to be $3,800. The money comes from the investment of earnings of the state’s oil reserves.

Florida

Florida also does not have a state income tax for its residents.

Florida also does not tax retiree incomes such as a 401(k), IRA or pension, and Social Security income. There are no inheritance or estate taxes either.

“Snowbirds” who head south to Florida for the winter from other states must establish residency in Florida to take advantage of its tax benefits. The main way to do this is by showing through your actions that Florida is your primary and permanent home. Ways to do this in Florida include:

• Spend six months there.
• Get a Florida driver’s license.
• Register and insure your vehicle in Florida.
• Vote.
• Buy a bigger home.
• Join groups and socialize in Florida.
• Visit doctors and other professionals.
• Bank locally.
• Have all of your bills sent to your Florida home.
• Pay taxes as a Florida resident, including federal income and property taxes.

Illinois

Illinois does not tax pension, Social Security or most forms of retirement income, including a traditional IRA that has been converted to a Roth IRA. The state does have an inheritance tax.

High property taxes, however, may cause retirees or anyone to think twice about moving to Illinois. The statewide median property tax rate in Illinois is the second-highest in the country, at $2,073 per $100,000 of assessed value.

Also keep in mind that Illinois charges a flat state income tax of 4.95%, which retirees must still pay on other types of income. 

Iowa

All retirement income is exempt from the flat state income tax rate of 4.96% in Iowa, including Social Security payments. A new law on exempting retirement income from state taxes took effect in 2023.

Iowa does not have an estate tax but it does have an inheritance tax. The inheritance tax ranges from zero for less than $25,000 in inheritance, to $6,825 plus 6% of an amount over $150,000.

Mississippi

Mississippi does not tax retirement income for anyone 59.5 years or older. Retire earlier than that, and the state takes it share of 401(k), IRA or pension income. 

The state does not tax Social Security benefits. Mississippi also does not charge inheritance or estate taxes.

Nevada

Nevada has no income tax, including on retirement funds or any other type of income.

Social Security benefits also are not taxed by the state, and inheritance and estate taxes don’t exist.

New Hampshire

New Hampshire is the only state in the New England area without a general income tax.

It does, however, impose a tax on interest and dividends, though retirees are exempt from paying it on taxes and interest from retirement plans. The tax on dividends and interest is being phased out and will be repealed on Jan. 1, 2027.

Social Security benefits are not taxed. New Hampshire also does not collect inheritance or estate taxes.

New Hampshire has a high property tax, at $1,766 per $100,000 of assessed home value.

Pennsylvania

Pennsylvania does not tax pension, employer-sponsored retirement plans, or IRAs of retirees. It also does not tax Social Security benefits.

The state’s inheritance tax ranges from 4.5% to 15%, depending on a recipient’s relationship to the deceased and their age. The inheritance tax does not apply to property inherited by the decedent’s:

• Spouse.
• Parents if the decedent is 21 or younger.
• Child 21 or younger.

Pennsylvania has a flat income tax rate of 3.07% for everyone, including retirees. Local governments and school districts may also levy income taxes. Property taxes are a little high, at $1,358 per $100,000 of assessed value.

South Dakota

South Dakota has no income tax and does not tax pension, 401(k) or IRA income in retirement.

The state also does not tax Social Security benefits, and it does not have an inheritance or estate tax.

South Dakota has a property tax homestead exemption for homeowners 70 or older, or their surviving spouses. This delays payment of property taxes until the property is sold. Taxes are a lien on the property and must be paid with 4% interest before the property can be transferred.

Tennessee

Tennessee has no income tax, including on a pension, 401(k) and IRA income for retirees. The state does not tax Social Security benefits, and does not have an inheritance or estate tax.

Property taxes in Tennessee are well below average, at $560 per $100,000 of assessed value.

Texas

Texas has no personal income tax, and retirement income and Social Security benefits are not taxed either. The state also does not have an inheritance or estate tax.

However, Texas makes up for all of these tax exclusions with the seventh-highest median property tax rate in the country, at $1,599 per $100,000 of assessed home value.

Washington

Washington State does not have an income tax. A retiree’s 401(k), pension or IRA income also aren not taxed by the state, and Social Security benefits escape state taxation too.

The state charges estate taxes on estates valued at least $2.19 million. It does not have an inheritance tax.

Property taxes are close to the national average, with the median property tax rate at $836 per $100,000 of assessed home value.

Wyoming

Wyoming is another state with no income tax, and thus no taxes on 401(k) plans, IRAs or pensions. It also does not tax Social Security benefits, and it does not have an inheritance or estate tax.

Property taxes are low in Wyoming. The statewide median property tax rate is the 10th-lowest in the country, at $545 per $100,000 of assessed home value.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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Not paying bills on time and owing money to creditors usually lowers credit scores. If you fail to pay your income taxes on time your credit score is not affected. At least not directly.

The Internal Revenue Service does not report tax debts directly to consumer credit bureaus, so credit scores won’t fall. Credit card companies, mortgage lenders and other creditors report debts, but not the IRS. 

Federal tax liens could hurt 

If you owe the IRS a lot of money, it could file a Notice of Federal Tax Lien in court. A tax lien gives the federal government a legal claim to every asset you own, such as your car, home or other property. The lien gives the IRS first priority over other creditors in collecting on the lien.

You probably get to keep your property, but a lien makes it difficult to sell. Ultimately, however, the IRS could force a sale of your assets to collect any unpaid taxes, penalties and interest you owe.

The credit bureaus stopped reporting tax liens in April 2018, so liens cannot lower credit scores. A lien by the IRS does not appear on your credit reports.

But lenders can still discover tax liens through public records searches when considering your application for a mortgage or other type of loan. They may deny your application based on a tax lien. Landlords and employers may also view the tax lien, which could make it hard to rent an apartment or get a job.

Paying tax debt by credit card or personal loan

You can pay an IRS bill with a credit card or a personal loan. Late repaying of either of those loans could affect your credit scores since credit card and loan transactions are usually part of credit reports and your credit score.

The IRS accepts credit card payments through three processors, with interest rates from 2.35% to 2.95% of the balance charged. Two credit card processors also charge a minimum convenience fee of $3.95.

If you fail to pay off a credit card balance completely within one billing cycle, the debt on your credit card could be reported to the credit bureaus and could raise your debt. Using more than 30% of your credit utilization ratio (the credit balance in relation to how much you can borrow) can lower a credit score.

The same goes for a personal loan, and paying either loan late can also lower credit scores. Personal loans have the advantage of having a set number of fixed payments for a certain amount of time, such as two to five years. This can make budgeting easier than credit card bills, which have varying payment amounts that can last for an indefinite period.

The good news is that if you repay a personal loan or credit card balance on time and in full, then your credit score is more likely to rise.

Consider an IRS payment plan

Before a federal tax lien is imposed, the IRS gives you plenty of notice to pay your outstanding tax bill with payment plans and other options.

Payment plans are preferable to liens. Setting up a plan with the IRS when you receive a tax bill does not trigger reports to the credit bureaus. IRS payment plans are not considered loans and do not affect credit scores.

The IRS has many payment plans. A long-term payment plan from 120 days to six years requires owing $50,000 or less in combined taxes, penalties and interest. No setup fee is charged.

A short-term plan of 120 days or less allows a tax bill as high as $100,000. Setup fees of up to $225 are required, though the interest rates are relatively low at 3%.

It is important to make every payment on time. A missed payment results in the whole amount becoming due immediately, along with penalties and interest.

10 years to collect tax debt

This is no preferred way to get out of a federal tax lien, but the IRS has a 10-year statute of limitations on collecting tax assessments. In theory, you could wait out the IRS for 10 years, when the IRS can no longer legally try to collect taxes you owe. That clock starts on the date of assessment for each tax year.

If you intentionally try to defraud the IRS, called tax fraud, there’s no statute of limitations and the IRS can charge you with a crime at any time.

Other ways to manage your taxes and credit scores

Paying your taxes on time is the best solution. If possible, avoid paying with a credit card or loan so there is no way for your credit score to be impacted.

One way to ensure you’re paying enough taxes is to check the withholding amount through your employer. The IRS has a tax withholding estimator online to help workers estimate how much federal income tax should be withheld so that they don’t owe anything later. 

This pay-as-you-go tax is easier via payroll during the year than with a surprising amount at tax time. You can change your withholding amount at any time and should check it early in the year, especially if you’ve experienced a life change such as a marriage, home purchase, birth or retirement.

If you ever do get a letter from the IRS, pay attention. Failing to pay your taxes on time is a serious matter, and the worst case is that you face a tax lien and could lose your home and other assets to pay the bill. Starting an affordable payment plan early can make that outcome much less likely.

Two ways to improve your credit score are by paying all your bills on time and not carrying too much debt. While tax debt itself does not affect credit scores, failing to repay a loan used to cover tax debt may impact credit scores.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post How does tax debt impact your finances and credit score? appeared first on Credit Sesame.

Knowing which tax records to keep, and for how long, can help keep your life uncluttered. More importantly, it can help if the IRS decides to audit your tax returns.

Keeping your tax records for three years or so is a good way to prove that your tax returns are accurate if the Internal Revenue Service asks for them. Well-organized records can also make filing your taxes easier and help you from losing sleep over where they are and if you can find them when needed.

This doesn’t mean you have to keep your tax records forever.

What records should you keep?

Start by keeping copies of your tax returns, which can come in handy if the IRS says you didn’t file a return for a particular year.

To avoid problems at a potential audit somewhere down the road, you should keep any documents that support the income, credits or deductions you claimed on your return. These can include:

• Receipts for any itemized deductions
• Bills you’ve paid
• Canceled checks
• Legal papers such as property documents
• Brokerage statements
• Loan agreements
• Travel mileage logs
• Job hunting expenses
• Lottery tickets
• Medical and dental account statements
• Theft or loss documents
• Employment documents, such as W-2 forms
• 1099-B or 1099-INT tax documents from banks, brokerages and other investment firms
• 1099-G form detailing unemployment benefits received

If you don’t have paper documents, then you may have electronic records through your brokerage firm, tax software you use, or from other companies you do business with. 

How long to keep tax records

The IRS recommends keeping all the records you used to prepare your tax return for at least three years from the date the return was filed if no fraud was committed and all income was reported. Three years is also recommended if you filed a claim for a credit or refund after your return was filed.

Generally, the IRS can include returns filed within the last three years in an audit. If a substantial error is found it may add additional years, though it usually doesn’t go back more than six years.

It uses these timelines because they’re the limits to how long the IRS can asses a tax someone owes. Six years is allowed if you haven’t reported income that should have been reported and it’s more than 25% of your gross income shown on the return, or it’s a foreign asset of more than $5,000.

Some notable exceptions to these timelines make it wise to keep certain tax documents longer than three years.

Keep tax records forever if:

• You filed a fraudulent return.
• You didn’t file a return each year.
• You bought property and need to show the amount you originally paid for it. 

Keep tax records for 7 years:

• You filed a claim for a loss from worthless securities or a bad debt.
• Tax forms for retirement accounts such as IRAs that have been closed for seven years.

Keeping tax records longer than the IRS requires

Even though the IRS may not require you to keep some documents longer than three years, you may want to keep them longer because some creditors and insurance companies may require them. 

Consequences of poor record keeping

One of the worst consequences of not maintaining proper records is when facing an IRS audit. If old tax records could help prove your case and you don’t have them, you may have to pay higher taxes. The burden of proof is on you to show that your tax returns are accurate, including keeping receipts and other records.

If your tax returns are wrong, potential tax penalties include:

• Pay back unpaid taxes, plus interest and penalties, up to 25% of the tax owed.
• A prison term, though this is unlikely because the IRS prefers to collect money owed.
• Charged with tax evasion if you intentionally lie on a return or try to deceive the IRS. The maximum penalty is imprisonment of up to five years and $100,000 in fines.
• Your account is given to a collections agency.
• You can’t get a passport or renew one through the United States if you owe the IRS $59,000 or more.

Limitations on refund claims

Another consequence of poor record keeping is that the period of limitations, as the IRS calls it, applies to refund requests just as to tax assessments. 

Suppose you file a claim or credit for a refund. In that case, you generally have three years from the date you filed the original return (or the due date for filing if you filed before that date) or two years from the date the tax was paid, whichever is later, to file an amended claim for the credit or refund.

For overpayment from a bad debt deduction or a loss from worthless securities, seven years are allowed from when the return was due to file a claim.

Benefits of staying organized

Keeping your tax documents organized can make tax time less stressful, allowing you to complete your tax returns on time accurately. You should also be able to avoid an audit, provided you do not underreport income or commit fraud. If problems are found with your return by the IRS, you could end up paying back taxes, penalties and interest, which can be avoided by filing accurate returns on time.

Maybe best of all, keeping your tax records organized may allow you a more restful night of sleep. 

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Tax preparation is the annual chore that almost everybody hates. It is no surprise that many of us put it off until the last minute. But 2023’s filing deadline is April 18, which is looming large. What can you do if you’re not ready?

Are you due a tax preparation extension?

If you live in an area that’s been affected by a natural disaster, you may be entitled to delay filing your return by months. For example, those affected by such FEMA-designated events in Alabama, California and Georgia have their filing deadlines extended to Oct. 16. Victims in Mississippi get until Jul. 31 while those in New York can file as late as May 15. Visit this IRS webpage for the full list and more details.

Alternatively, you can apply for a general extension. This gives you extra time (until Oct. 16) for tax preparation. But it does not give you extra time to pay the taxes you owe. You must estimate those and pay them in time for the Apr. 18 deadline. Otherwise, you might incur penalties and interest charges.

Sprint for the line

Extensions are fine but they just postpone the inevitable. You might prefer to lace up your running shoes and make a sprint for the line.

The good news is that there’s help available. The IRS has hired 5,000 more people to support taxpayers through its call centers. But even that number may not be enough to handle call volumes at this time of year. So start with the IRS’s website, which is regularly updated with helpful advice.

Even if you don’t use a reputable tax professional, you stand a good chance of being able to file by yourself.

Use the IRS’s free software for your tax preparation

If your adjusted gross income is below $73,000, you can use the IRS’s free Guided Tax Preparation online service. You answer a series of simple questions and the app does the math. It may even help with your state taxes.

If you earn too much for that free app, the IRS can still help with its Free Fillable Forms service. You download a PDF guide but you don’t get active guidance. You fill in the standard IRS forms online, allowing you to create a paper filing or to file online. Unfortunately, this does not help with state taxes.

If your affairs are complicated, the private sector can help. Use one of the paid-for tax preparation apps that are downloadable or ask a reputable tax professional to do the work for you. Just take care when choosing one.

Special free help for the elderly and disadvantaged

The IRS has two programs that can help those most likely to struggle with tax preparation, Tax Counseling for the Elderly (TCE) and Volunteer Income Tax Assistance (VITA). IRS partners provide these free services, which are often not-for-profits, across the country and one-on-one assistance is on hand from volunteers who are or were tax professionals.

The volunteers have met or exceeded the IRS’s standards for tax law training. They are bound by the same rules of confidentiality as any tax professional. The IRS says, “Each filing season, tens of thousands of dedicated VITA/TCE volunteers prepare millions of federal and state returns.”

Eligibility and finding your local service

You are eligible for TCE if you are 60 years or older. And it will likely be delivered by the American Association of Retired Persons (AARP) Foundation’s Tax-Aide program. To find your nearest AARP TCE Tax-Aide center between January and April use the AARP Site Locator Tool or call 888-227-7669.

Individuals eligible for help under the VITA program must:

• Earn under $60,000 annually (adjusted gross income, AGI)
• Or have a disability OR
• Or have limited English-language skills

Use the VITA Locator Tool or call 800-906-9887 to find your nearest service.

The standard deduction shortcut

The standard imaginary depiction of tax preparation is of somebody hunched over a dining table trying to sort through boxes of receipts as they struggle to itemize their deductions. But things have moved on since then.

In the 2019 tax year, a whopping 87.3% of taxpayers claimed the standard deduction, making wading through a year’s worth of receipts to itemize deductions unnecessary. Why the change? Because the standard deduction is much more generous now than it once was.

In the 2022 tax year (filing now), the standard deductions are:

• $25,900 married couples filing jointly
• $12,950 single taxpayers and married individuals filing separately
• $19,400 heads of households

If your itemized deductions do not add up to the sum in that list that applies to you, there’s no point in itemizing. Indeed, if you stand to save only a small sum by itemizing, you may decide to forego that amount to avoid the headache, especially if you are late preparing your taxes.

Preparing for tax preparation

Before you complete and file your tax return, you must pull together a small pile of documents. These include:

• Last year’s tax return for your adjusted gross income
• Your Social Security number and the ones for your spouse and any dependents who need one and who appear on your return
• Paperwork showing any Social Security benefits and unemployment compensation you received during the year
• Income receipts from rental, real estate, royalties, partnerships, S corporation and trusts
• W-2 forms from all employers showing your annual wages
• Form 1099-INT showing interest you’ve received during the period
• Refunds, credits or offsets received for state and local taxes (Form 1099-G)
• Dividends and distributions received from retirement and other plans (Form 1099-DIV or Form 1099-R)

If you are an Affordable Care Act (ACA) filer, you also need Form 1095-A, your health insurance marketplace statement, and possibly Form 8962 if you claim a premium tax credit.

That may sound like a lot of paperwork, but many taxpayers have uncomplicated finances and do not need all the forms. Whatever the requirements, do not delay if you have not yet started tax preparation for 2022.

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The post 2022 tax preparation and filing: Are you ready? appeared first on Credit Sesame.

There are many ways to make money, including full-time employment, part-time employment, freelancing, side gigs and investing. If you get income from multiple sources or you’re thinking about adding an income stream, you may like to think about the tax implications.

Adding income means more tax to pay, probably, and each type of income may have its own tax implications.

Employees

Working for someone as an employee usually means earning an hourly wage or a set salary. Payment can also be in tips or bonuses.

Employees often have some taxes withheld by their employer. If you earn more than $600 annually, these are listed on the W-2 form you get each year from your employer. This form lists income and Social Security and Medicare taxes withheld, among other things.

Social Security is taxed at 6.2% each for the employer and employee, for a 12.4% total. The Medicare tax rate totals 2.9%, with the employer and employee each paying 1.45%.

Paying taxes on tips

Workers receiving $20 or more in tips in a single month must report those tips as income and pay Social Security and Medicare taxes on them. The tips must be reported to the employer and on an individual income tax return. Employees must also keep a daily tip record.

Tips include not just cash and charged tips, but also noncash tips such as tickets and passes, or any items of value.

Common deductions for employees

Itemizing deductions makes sense if you have deductions that add up to more than the standard deduction for your tax situation. Here are some common deductions that employees, and anyone else, may want to consider:

• Child tax credit of up to $2,000 per child.
• Earned income tax credit of up to $6,935 for low- to moderate-income workers.
• Child and dependent care credit of $3,000 per dependent.
• Adoption credit of up to $14,890.
• American opportunity tax credit of up to $2,500 for education.
• Student loan interest deduction of up to $2,500.
• Charitable donations.
• Mortgage interest tax deduction.
• Saver’s credit of up to $4,000 if filing jointly for retirement account contributions.
• 401(k) contributions deductions from paychecks of up to $20,500.
• Electric vehicle tax credit of up to $7,000.
• Health Savings Account contributions deduction.
• Medical expenses deduction.

Self-employed

If you work for yourself, or sometimes even for a company, the Internal Revenue Service considers you self-employed. This includes running a part-time business or working as a gig worker. Terms such as freelancer, contractor and independent contractor are used for self-employed people. You may consider yourself to work for a ride-share company such as Uber, but you are a contractor and not an employee.

Generally, self-employed people are required to file an annual tax return and pay estimated taxes quarterly. They pay a self-employment tax to pay Social Security and Medicare taxes that employees usually pay through their employers. 

Self-employed individuals must also pay their income tax themselves, as opposed to employers pulling most income taxes out of employee paychecks.

Common deductions for self-employed workers

If you use part of your home for business, you may be able to use home office deduction to lower your taxes.

Other tax deductions may be eligible as self-employed include:

• Mileage and vehicle expenses
• Office supplies
• Insurance premiums
• Credit card and loan interest
• Retirement savings
• Business travel
• Business meals
• Continuing education
• Startup costs
• Advertising
• Self-employment taxes

Investors

If you make a living as an investor and get income from investments, then you must file a tax return. Even if you are an employee or self-employed, you must still report investment income on your tax return.

Investment income may be subject to a 3.8% tax if your modified adjusted gross income is more than $200,000 (single filers) or $250,000 (married filing jointly).

Investment income may be from selling stocks and making a profit, but it can also come from interest and dividends. Some dividends are taxed at your ordinary income tax rate, while others are taxed at lower long-term capital gains tax rates.

Short-term capital gains are for capital assets held for a year or less, and are usually taxed at your ordinary income tax rate. Long-term capital gains are for assets held for more than a year, and the tax rates are typically lower than your ordinary income tax rate and generally max out at 20%. Collectibles such as rare stamps and art can have a long-term capital gains tax rate of 28%.

Investment income can also come from rental and royalty income, and non-qualified annuities. Selling your home isn’t usually considered investment income.

Typically, you must pay taxes on the sale of investments only when you profit. Subtract what you paid for your investment from the sale price to see if you had a gain or loss. A gain likely means paying taxes on it, while a loss may be able to offset other realized gains or you can take a deduction.

Deductions for investors

Losses on investment sales are one type of deduction. A common deduction that employees, self-employed workers, investors and others can use is through tax-advantaged retirement accounts. A tax deduction is allowed today for money you invest in a retirement account such as a traditional IRA or 401(k). Taxes are paid when you withdraw the money in retirement.

Contributions to other retirement accounts like the Roth IRA or Roth 401(k) are taxed now but withdrawals in retirement are tax-free.

Investors may also be able to claim tax deductions for investment interest expenses. This is interest paid on money borrowed to buy taxable investments, such as interest on loans to buy investment property or interest on margin loans to buy stock in a brokerage account.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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Tax deductions and credits can help make filing your taxes in 2023 easier and cheaper, two descriptions not normally associated with income taxes.

You have to know which programs apply to you and must itemize your deductions instead of taking the standard deduction. For most people, itemizing deductions only makes sense if they have enough deductible expenses that add up to more than the savings of a standard deduction.

Tax deductions vs tax credits

First, it helps to know the differences between tax deductions and credits.

Tax deductions

Tax deductions allow a certain amount to be deducted from your taxable income, and can reduce the amount of your income before you calculate the tax you owe. The amount of the tax deduction is subtracted from your income, which lowers your taxable income, and thus your tax bill is lower.

Deductions lower your taxable income by the percentage of your highest federal income tax bracket. If you fall into the 22% tax bracket, a $1,000 deduction saves you $220.

Tax credits

Tax credits reduce the amount of tax you owe on a dollar-for-dollar basis, and can reduce the amount of tax you owe or increase your tax refund. Some credits may give you a refund even if you don’t owe any tax.

A $1,000 tax credit lowers your tax bill by $1,000. Tax credits are usually bigger than tax deductions, and can lower your tax bill by a lot more.

Some credits are refundable, meaning you get a check for the amount, depending on how much you owe in taxes. If you qualify for a $1,000 credit but owe $250 in taxes, you’ll get a refund for the difference of $750. Many credits, however, aren’t refundable.

Popular deductions and credits

The Internal Revenue Service lists many tax deductions and credits that can save taxpayers money. Here are some of the most popular ones:

Child tax credit

The child tax credit provides up to $2,000 per child, with $1,500 potentially refundable. The IRS has an online tool to determine if a persona qualifies for the credit.

Child and dependent care credit

This credit generally covers up to 35% of day care and related costs for a child under 13, a spouse or parent unable to care for themselves, or another dependent so you can work. Expenses are limited to $3,000 for one dependent or $6,000 for two or more.

Earned income tax credit

Called the EITC for short, this tax credit is meant for low-to-moderate-income workers and families. For filers with an adjusted gross income of around $59,000 or less, the EITC provides a tax credit between $560 and $6,935.

Adoption credit

Up to $14,890 in adoption costs per child can be used as a tax credit. An income limit is imposed, up to $263,410 of your modified adjusted gross income for tax year 2022.

American opportunity tax credit

The AOC is an education credit on the first $2,000 spent on tuition, books, equipment and school fees, plus 25% of the next $2,000, for a total of $2,500. Living expenses and transportation costs can’t be claimed.

Lifetime learning credit

This is among the many education tax benefits allowed by the IRS. It allows up to $2,000 paid for tuition and school fees to be used as a tax credit.

Student loan interest deduction

Up to $2,500 can be deducted from taxes on interest paid on student loans.

Charitable donations deduction

Donations you make to charities can be deducted if you itemize. These include cash or property, such as clothes, a car and furniture. You can generally deduct up to 60% of your adjusted gross income. 

Mortgage interest deduction

The mortgage interest tax deduction can be a big savings for homeowners. The mortgage interest they pay is deducted from their taxable income, which lowers their federal income tax.

Saver’s credit

From 10%-50% of up to $2,000, or $4,000 if filing jointly, in contributions to an IRA, 401(k), 403(b) or certain other retirement plans can be taken as a tax credit. The amount of credit you receive is based on the contributions and your adjusted gross income. The lower your income, the higher saver’s credit rate you’ll get.

401(k) contributions deduction

Money moved from your paycheck into a 401(k) retirement plan is not taxed by the IRS. The contribution limit for the 2022 tax year was $20,500, or $27,000 if you were 50 or older.

Electric vehicle tax credit

The electric vehicle tax credit is not refundable, but it can mean deducting from $2,500 to $7,000 from the taxes you owe when buying an electric car. For tax year 2023, the credit expands to used electric vehicles, so consider it when filing your 2023 taxes in 2024.

Solar tax credit

Also called the residential clean energy credit, the solar tax credit gives up to 30% of the installation cost of solar energy systems such as solar water heaters and solar panels.

Health Savings Account contributions deduction

HSA contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.

Medical expenses deduction

Qualified, unreimbursed medical and dental expenses that are up to 7.5% of your adjusted gross income can be deducted from your taxes.

Gambling loss deduction

Gambling losses and expenses are tax deductions up to the amount you’ve won gambling. Spend $100 on lottery tickets or bet that much at a casino, then you can report a $100 deduction if you win at least $100. You can’t deduct more than you win.

How much is the standard deduction?

Tax deductions are either itemized or a standard deduction, not both. Itemizing takes some extra work, but is worth it if it’s higher than the standard deduction. 

How much your standard deduction is depends on your filing status. Here are some of the standard deduction amounts for 2022:

• Married for jointly or qualifying widow(er): $25,900
• Head of household: $19,400
• Single or married filing separately: $12,950

Taxpayers who are 65 and older or blind also get an increase in their standard deduction. It’s $1,750 more for single or head of household, and $1,400 more for married or qualifying widow(er).

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Disclaimer: This guide to buying a house and getting a mortgage is for informational purposes only and is not intended as a substitute for professional advice.

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As if you’re not already busy enough, tax season is in full bloom. It’s time to gather your tax documents and file your tax return. You may not have to file one, however, if you have a low income matching your filing status requirements.

Even if you don’t legally need to file a return, you may want to file one anyway to get a refund owed to you.

If federal income tax was withheld from your paychecks or you want to claim a refundable tax credit, then there’s a good chance you may be entitled to a refund, especially if you fall below certain income thresholds set by the Internal Revenue Service. 

For returns filed in 2022, about $345 billion was issued in refunds, with the average refund at $3,175. And who wants to leave $3,175 on the table? If you don’t file a tax return when you’re owed a refund, then you won’t get the refund.

Before you decide to file, you should at least consider some of the basic criteria for filing a tax return.

Minimum income levels

The minimum income required to file a 2022 federal tax return depends on your filing status and age as of the end of 2022. If you fall below the threshold, you generally don’t need to file a return.

Here are the minimum incomes needed to file taxes:

Single filing status

• $12,950 if under age 65
• $14,700 if 65 or older

Married filing jointly

• $25,900 if both spouses under 65
• $27,300 if one spouse under 65 and one 65 or older
• $28,700 if both spouses 65 or older

Married filing separately

• $12,950 for all ages

Head of household

• $19,400 if under age 65
• $21,150 if 65 or older

Qualifying widow(er) with dependent child

• $25,900 if under 65
• $27,300 if 65 or older

Not a U.S. citizen

Income and tax filing status are two big factors in knowing if you’re required to file a tax return. For people who live in the U.S. and earn money but aren’t a citizen, they may also need to file a return by using form 1040NR, the U.S. nonresident alien income tax return form.

People who are not U.S. citizens are called nonresident aliens by the IRS. They need an individual taxpayer identification number, ITIN, Social Security number, or SSN. Some countries have income tax treaties with the United States where residents of foreign countries are taxed at a reduced rate or exempt from U.S. taxes on certain types of income in the U.S.

Earned income tax credit

Just like you need to file a return to get a refund of withheld income taxes, you must also file taxes to get a refund of the earned income tax credit, or EITC. You may be eligible for this refund even if you don’t owe taxes.

Depending on your income and how many children you have, lower-income workers may get an EITC of $510 to $6,318. Even if you don’t have children, you may still be eligible for this refundable credit. The IRS has a free online tool to see if you qualify.

Basically, the income requirements to qualify for EITC are:

• Earned income under $59,187
• Investment income below $10,300

You’re self-employed

If your income is less than your standard deduction, then you generally don’t need to file a tax return. However, certain types of income require filing a return for other reasons, such as self-employed income.

Self-employed people must generally file an annual return and pay estimated tax quarterly if their net earnings were $400 or more. If they earned less than $400, they must still file an income tax return if they meet other filing requirements that are in a 113-page document the IRS provides.

Self-employed workers must figure their net profit or loss from their business by subtracting business expenses from business income.

If expenses are less than income, the difference is net profit and can be taxed. If expenses are more than income, then the difference is a net loss and can usually be deducted from gross income.

When Social Security benefits are taxed

Social Security benefits aren’t taxable income, and a tax return doesn’t usually have to be filed by people who receive these benefits. However, there are exceptions. Among them:

• Some benefits are taxable income if you’re married but file a separate tax return from your spouse who you lived with during the year.
• Tax-exempt income such as tax-exempt interest is received.

When a dependent may need to file a tax return

A child or adult who is claimed as a dependent on someone’s tax return must file a return when their earned income is more than their standard deduction.

In 2022, the standard deduction for single dependents who are under age 65 and not blind is the greater of:

• $1,150
• Or more than $400 in the person’s earned income, up to the deduction for an unclaimed single taxpayer of $12,950

Free online tool for help

If you’re unsure if you should file a tax return, the IRS has a free online tool to decide if your filing status and income require if you need to file.

The form takes about 12 minutes to complete and require you knowing:

• Your filing status
• Federal income tax withheld
• Basic information to help you determine your gross income

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The post Do you need to file a tax return? appeared first on Credit Sesame.

Famously, the U.S. Treasury Department developed tax evasion charges against Al Capone after the federal government could not build a criminal case against him for murder and other crimes. 

Capone was convicted of tax evasion in 1931. He served seven and a half years of an 11-year sentence, and paid court fines and $215,000 plus interest due on back taxes before being released from federal prison on Alcatraz Island in San Francisco.

This is unlikely to happen to most people who cannot pay their taxes in 2023. Few people are charged with tax evasion and the IRS offers multiple warnings and chances for payment. Still, the memory of Capone is an intimidating reminder.

Unable to pay your taxes

What if you are not trying to evade your taxes but can’t afford to pay them? Is that a crime? Yes, though it’s likely a civil case that will result in a notice that you must pay back your unpaid taxes, plus interest and penalties. Prison is unlikely, though legally you could be sent to prison for one year for every year you don’t file.

Not paying taxes you owe is a crime

Failing to file your taxes is against the law. Intentionally lying on a return or trying to deceive the IRS is tax fraud and you could be charged and convicted of tax evasion. The maximum penalty is imprisonment of up to five years and up to $100,000 in fines.

If you do not pay your taxes, you could also be charged with a crime, though the IRS first tries many methods to get the money that you owe from you.

What if you file a tax return this year and owe taxes but cannot afford to pay them? What can you do?

Don’t ignore IRS notifications

Firstly, do not ignore IRS communications. The IRS wants the money you owe, and ignoring its letters and not paying could lead to a court case against you. 

It could place a lien on your property or assets, and eventually your property could be seized to pay your bill. Your wages could be garnished, or it may withdraw money from your bank accounts. An unpaid tax bill could also be deducted from any future tax refunds you’re owed.

Before the IRS takes legal action, it gives you several chances to pay. It first sends you a letter, giving you time to pay or to challenge the notice. The letter arrives via standard mail, never as a phone call or e-mail.

There’s a 10-year statute of limitations on the IRS to collect a liability from the date of assessment. After 10 years the IRS can no longer try and collect taxes you owe. However, there’s no statute of limitations on tax fraud, so if you intentionally try to defraud the IRS, you could still be charged with a crime at any date in the future.

Payment plans available if you cannot pay your taxes

The IRS has options if you can’t pay your taxes all at once. You may qualify for a self-service, online payment plan so you can pay off what you owe over time. 

You get immediate notification of whether your payment plan has been approved without having to call or write the IRS. This option is quicker than asking for a payment plan when you file your tax returns electronically, even if the new tax hasn’t been assessed yet.

Payment plans include:

• Short-term plan of 120 days or less when the amount owed is less than $100,000 in combined tax, penalties and interest.
• Long-term plan of 120 days or longer, paid monthly when less than $50,000 is owed.

The option when owing $50,000 or less requires making an installment agreement request with Form 9465. The form asks about your income and expenses, such as how often you’re paid and what your take home pay is. Car payments, health insurance premiums and court-ordered payments are also taken into account. You can get up to six years to pay the plan off.

No setup fee is charged for the short-term plan, but the long-term payment plan through automatic transfers from a checking account requires a fee of $31 for applying online, or $107 when applying by phone, mail or in-person. Fees can be waived for low-income applicants. Payments made outside of direct deposit require paying fees of $130 online or $225 if filing by other methods.

If you miss a payment on the installment agreement, you owe the whole payment as a lump sum, and penalties and interest are also due immediately.

Extensions for filing late

Federal income taxes are due April 18, 2023. You can file a tax extension until Oct. 16 to file your federal return, but it only gives you more time to file a return, not pay taxes. If you owe money and want to avoid late fees and interest, then you need to estimate how much you owe and pay it by April 18. 

IRS Form 4868 is used to ask for an extension to file, either electronically through your tax-filing service, or by physical mail. The extension is automatic as long as you ask for it by Tax Day. You don’t need to provide a reason for the extension request.

How much are the late fees and interest?

The penalties for not paying your taxes can add up to 25% of the taxed owed after the due date. The IRS list its failure-to-pay penalties as:

• 0.5% of the tax owed after the due date, for each month or part of a month the tax remains unpaid, up to 25%.
• 10 days after the IRS issues a final notice to levy or seize property, the 0.5% penalty increases to 1% per month.
• 0.25% for each month or part of a month for an installment agreement.

Those are penalties for not paying your taxes. The IRS has another list of penalties for not filing a tax return at all, either after the due date or an extended due date, unless a reasonable cause is accepted for filing late. The failure-to-file penalties are:

• 5% per month, up to 25% of unpaid taxes.
• Combined penalty for not filing or paying is 5%, up to 25% total.
• Failure-to-file penalty maxes out at five months, though the failure-to-pay penalty continues until the tax is paid, up to 25%.
• Maximum penalty for failure to file and pay is 47.5% of the tax.
• If return was  more than 60 days late, minimum failure-to-file penalty is $450 or 100% of the tax required to be shown on the return, whichever is smaller.

The fees listed above are basically late fees for not paying your taxes. The IRS also charges interest on the unpaid balance. At the start of 2023, it charges 7% for underpayments, meaning taxes owed but not fully paid. 

Other consequences if you cannot pay our taxes

If you don’t pay taxes, the IRS may summon you to a local post office to confirm your information with tax documentation and to file a tax return in person.

If you owe $59,000 or more, you cannot get a passport or renew one through the United States.

The IRS may transfer your account to private collections, and a collection agency may start asking you for payment. 

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The post What if you cannot pay your taxes for 2022? appeared first on Credit Sesame.