Consider these five tips to avoid unnecessary headaches this 2023 tax season.
The 2023 tax season is officially here, which means most taxpayers will be filing their tax return within the next month. If you tend to stress about squaring up with Uncle Sam, there are steps you can take to help ensure the process goes as smoothly as possible this year.
For a smooth 2023 tax season, consider the following tips:
#1: Get Ahead of Last-Minute Filers
It’s tempting to wait until the last minute to file your tax return. After all, the deadline isn’t until mid-April.
However, most of the documents you’ll need to file your return this 2023 tax season start arriving in January, with investment-related 1099s typically available in February. That means you don’t have to wait until April to file your return in most cases.
Plus, the sooner you start preparing this year’s tax return, the more time you’ll have to address issues or questions that come up along the way.
If you’re expecting a refund, filing before the taxpayers who wait till the last minute may help you get your money faster. And if you owe the IRS money, completing your return early gives you time to prepare if you need to raise cash or move money between accounts.
Lastly, many people don’t realize that filing your taxes early can help you avoid fraud.
If someone steals your identity and submits a false return in your name to claim a refund, you’ll run into issues when you submit your real return. At that point, the onus is on you to prove to the IRS that the first return was fraudulent.
If you’re concerned about a potential breach, filing your taxes early in the 2023 tax season gives potential scammers less time to file ahead of you.
#2: File Important Documents in a Safe Place
Depending on the nature of your employment and your investment activity last year, you may have several tax documents arriving in your mailbox this 2023 tax season. As they arrive, file them together for safe keeping.
In addition, consider scanning a copy of each document so you also have an electronic version. This makes it easier to archive your tax return once it’s complete. You’ll also have backup copies of your tax documents in case you lose or damage them.
If you’re self-employed, start gathering receipts and review last year’s credit card and bank statements as soon as possible to tally up your business-related expenses. You can deduct these expenses on your tax return, plus you’ll have a detailed record of them in case the IRS audits you.
If you itemize, you can also start to compile a file of deductible expenses at the beginning of the 2023 tax season. Examples may include state and local income taxes, medical expenses, and/or charitable donations.
Just be sure to record the exact amounts you paid rather than estimate your expenses. Round numbers can be a red flag with the IRS, potentially triggering an audit.
#3: Know What’s Changing This 2023 Tax Season
Keep in mind there may be changes to the tax code each year due to new and expiring legislation. Being aware of these changes is especially important if you do your own taxes so you can take advantage of new tax incentives and avoid costly missteps.
For the 2023 tax season, key changes include:
- Refunds may shrink this year for some taxpayers. Many taxpayers will likely receive a smaller refund this year as several Covid-19-related tax credits, including an expanded child tax credit and enhanced child and dependent care tax credit, expire this year.
- You may not get a tax break for your charitable donations. Last year (tax year 2021), taxpayers could take a special charitable deduction of up to $300 for individuals and $600 for joint filers—even if you took the standard deduction. For the 2022 tax year, taxpayers who take the standard deduction won’t get a tax break for their charitable donations.
- Electric vehicle (EV) and other energy tax incentives are changing. If you purchased a new EV in 2022, the Inflation Reduction Act stipulates that the final assembly of the vehicle must take place in North America to qualify for a tax credit. However, if you entered into a binding contract to buy a new EV before August 16, 2022, and took delivery before January 1, 2023, this rule doesn’t apply. Additional rules and incentive programs will go into effect for the 2023 tax year.
- The IRS delayed 1099 gig-economy reporting changes until 2023. The IRS delayed a new law requiring e-commerce platforms such as eBay, Etsy and Airbnb to report information on users with more than $600 in revenue until 2023. For 2022, the old rules apply. Platforms must only report user information to the IRS if they had more than 200 transactions and $20,000 of revenue in 2022.
#4: Streamline the Tax Preparation Process
If you prefer to do your own taxes, there are ways to streamline the process and make it easier on yourself this 2023 tax season.
First, consider using tax preparation software to prepare and file your tax return. Many of these programs automatically pull in last year’s return, which can be a helpful starting point. They’ll also review your return—either for free or for an additional fee—to identify potential audit risks.
In addition, it’s typically a good idea to file electronically and sign up for direct deposit—especially if you expect a refund. Filing electronically can help you avoid errors and speed up the IRS’s processing time. Meanwhile, you’re likely to get your refund faster if you sign up for direct deposit.
#5: Consult an Expert This 2023 Tax Season
Your tax situation often gets more complicated as your income and net worth increase. If you aren’t comfortable doing your own taxes or simply don’t have the time or energy, the value of hiring an expert may far exceed the cost.
For example, a tax professional may be able to identify lesser-known tax savings opportunities that significantly reduce your tax bill. He or she will also make sure your tax return is complete so you can avoid delays and potential penalties.
But don’t wait until the last minute to enlist the help of a tax professional. Experts tend to book up in advance, so procrastinating may cost you.
While the IRS claims to have made progress in reducing backlogs, many experts are predicting more frustration and delays for taxpayers this year. Following the above tips can help ensure the 2023 tax season goes as smoothly as possible—despite unavoidable headwinds.
In addition, a trusted financial advisor like Oak Capital Advisors can help you stay on top of important tax deadlines and proactively plan for the future. Oak Capital Advisors specializes in the tax and financial planning needs of small business owners and entrepreneurs. To begin your financial planning journey, please request your complimentary Financial Independence Roadmap™.
This article is for educational purposes only and is not intended to be specific tax, legal, or investment advice.