Why Start Now?
Many people don’t start thinking about tax prep until after the current tax year has already drawn to a close, but this isn’t always the best idea. You’ll likely find that things go much more smoothly when you get started on tax planning at the beginning of each year. This means that now is the perfect time to begin tax planning for 2023 tax season.
Not sure how to get started? We’ve put together a list of three simple ways you can start preparing for the 2023 tax season right now. Keep reading to find out some helpful tips and tricks that will make filing your taxes easier.
Organize Your Records
Do you often find yourself stressing about missing records or struggling to hunt down important tax documents at the last minute? Instead of rifling through piles of papers on the evening of April 18, wouldn’t you rather have everything you need already in one place? Setting up a strong organizational system early on will save you the stress of digging through crowded filing folders the night before taxes are due.
Everyone has a different way of doing things, so there isn’t any one magical style of organization that will be right for everyone. Finding something that works for you may take a bit of experimentation. Feel free to try different things and tweak your method over time as you learn more about what does and does not serve your needs.
It’s a good idea to keep a few key documents on hand (either physically or digitally) so that they’ll be readily available when it’s time to file taxes this 2023 tax season. Here are a few examples of such documents:
- W-2: Your employer is responsible for reporting wage and salary info for all their employees using Form W-2. You’ll receive an updated copy each year to use for tax filing purposes. This will be mailed to you, so make sure your employer has your current mailing address.
- 1099: Forms 1099 are used to report different types of income that typically aren’t paid by employers. For example, you may receive a 1099 from a bank, pension fund or retirement plan.
- 1099-K/1099-MISC: Those who participate in the gig economy or work as contractors can expect to receive Forms 1099-K and/or 1099-MISC. If you receive payments via third-party payment platforms (such as Cash App or PayPal) which total $600 or more, the payment platform will issue you a 1099-K.
- 1099-INT: If you are paid interest in 2023, you’ll likely be sent a 1099-INT Form. While you may not have to pay income taxes on all your interest payments, you should still retain the 1099-INT for your records.
- Digital Asset Transaction Records: Because digital assets are treated as property by the IRS, you’ll need to keep records of all your digital asset transactions for the year. These records should document any sales, purchases or transfers of cryptocurrency, NFTs, stablecoins or any other digital assets.
Adjust Your Withholdings
By completing a new W-4 Form and submitting it to your employer, you can adjust the amount of taxes withheld from each paycheck you earn. The beginning of the year is a good time to review your records and determine if your withholdings are currently too high or too low. You’ll also need to make updates if you’ve recently gotten married, had a child or experience another major life event.
When to Increase Withholdings: If you owed taxes in 2022, you may want to increase your withholdings. This will help you budget more accurately throughout the year. Plus, it can prevent a surprise tax bill, which no one wants.
When to Decrease Withholdings: While receiving a large tax refund can certainly be a pleasant surprise, it often isn’t ideal for your finances. Essentially, a tax refund represents the IRS returning a no-interest loan you made to them. Decreasing your withholdings will make sure you don’t overpay (or at least that you overpay less) on taxes and help keep more money in your pocket.
Review Upcoming Tax Changes
Tax policy changes every year, but the changes coming in 2023 are a bit more dramatic than what we’ve seen in the past. As the IRS transitions out of pandemic-era financial policies, certain time-sensitive tax incentives are set to be reduced or even come to an end entirely. Here are a few changes you’ll want to be mindful of:
- Child Tax Credit - The Child Tax Credit is currently set to remain at its pre-pandemic baseline in 2023. This means that those who received $3,600 per dependent in 2021 can expect to get $2,000 in 2022 and 2023.
- Earned Income Tax Credit - The Earned Income Tax Credit expansion of 2021 will no longer be in effect in 2023. Some taxpayers who were eligible for the credit under the expansion will no longer receive it and should plan their taxes accordingly.
- Child and Dependent Care Tax Credit - The Child and Dependent Care Tax Credit reverts to its pre-pandemic baseline in 2022, with credits returning to $2,000 per child and 17-year-olds again being excluded. Those who claimed the credit in 2021 may either be ineligible in 2023 or be eligible for lesser amounts.
- Employee Retention Tax Credit - For most, the Employee Retention Tax Credit sunset on March 12, 2020. While it can still be claimed retroactively through 2025, employers will not be eligible to earn the credit in 2023.
- Bonus Depreciation - The Tax Cuts and Jobs Act of 2018 temporarily increased first-year bonus depreciation to 100%, which remained in place through 2022. Beginning in 2023, this deduction will be gradually reduced until it is phased out entirely in 2027. The rate of bonus depreciation for the 2023 tax year is set at 80%.
- Third-Party Payment Platforms - Freelancers, contractors and the self-employed may need to file their taxes differently in 2023 than they have before. This is because the American Rescue Plan Act reduces the reporting threshold associated with Form 1099-K. In the past, gig economy workers have not been required to report payments under $20,000 aggregate, but this will change in 2023. Those who receive a total of $600 or more in payments made on third-party platforms such as PayPal or Venmo will be sent 1099-Ks by said platforms.
Make the 2023 Tax Season Stress-Free
The earlier you get started, the better prepared you’ll be when it comes time to file 2023 taxes. By proactively setting up an effective organizational system, making sure your withholdings are where they should be and reviewing upcoming tax policy changes, you can help set yourself up for a stress-free tax season.