It's time to file your tax return, and many of us are facing smaller refunds, shrunken tax credits and deductions — right as inflation and higher debt loads are biting into our budgets.SourceMoneyGuru-https://www.mgkx.com/4155.html
The IRS starts accepting tax returns for 2022 earnings on Jan. 23, and it will issue tax refunds in the weeks and months that follow.SourceMoneyGuru-https://www.mgkx.com/4155.html
And some of us could be in for a surprise.SourceMoneyGuru-https://www.mgkx.com/4155.html
"People should absolutely expect smaller tax refunds this year. And frankly, some people might even owe the government money," financial expert Lynnette Khalfani-Cox told NPR.SourceMoneyGuru-https://www.mgkx.com/4155.html
"There's really four main reasons why," she said. "The first is: no more stimulus checks. The second is that what was called the enhanced child credit — that's gone."SourceMoneyGuru-https://www.mgkx.com/4155.html
A special pandemic-era tax break for charitable deductions was also nixed, Khalfani-Cox said. And even after a volatile year on the stock market, some people might face taxes on investment gains, especially if they own mutual funds that had to sell off stocks.SourceMoneyGuru-https://www.mgkx.com/4155.html
To answer some of the most frequent questions about this tax season, we asked Khalfani-Cox, the financial expert also known as the Money Coach, for guidance and advice.SourceMoneyGuru-https://www.mgkx.com/4155.html
File online, or face the dreaded backlog
"In 2023, you absolutely need to file your federal tax return electronically," Khalfani-Cox said.SourceMoneyGuru-https://www.mgkx.com/4155.html
The IRS says people who file electronically should expect to get their refund within around 21 days if they choose direct deposit and their return has no issues. "So that's fabulous," Khalfani-Cox said.SourceMoneyGuru-https://www.mgkx.com/4155.html
The other option is less fab: People who submit returns on paper are more likely to join the agency's large backlog.SourceMoneyGuru-https://www.mgkx.com/4155.html
"The IRS told us all in late 2022 that they have something like 9 million unprocessed tax returns," Khalfani-Cox said. "And it turns out that 7 million of them were paper returns."SourceMoneyGuru-https://www.mgkx.com/4155.html
The stimulus giveth ... and now it's gone
Because of the government response to the COVID-19 pandemic, many Americans got a $1,400 stimulus check in 2021, the third of such payments.SourceMoneyGuru-https://www.mgkx.com/4155.html
"But a whole bunch of taxpayers actually received what's called a recovery rebate credit," Khalfani-Cox said. "And they got $1,400 per person on their 2021 taxes," plumping their tax refund or lowering their bill.SourceMoneyGuru-https://www.mgkx.com/4155.html
"But now that's gone" for people dealing with 2022 taxes, Khalfani-Cox said.SourceMoneyGuru-https://www.mgkx.com/4155.html
How did the child tax credit change?
For this tax season, many families with two children under 6 years old won't be able to count on an extra $3,200 worth of tax credits that helped them last year. That's because while pandemic legislation provided $7,200 in combined tax credits for two kids under 6 in the last tax season, that same family is now looking at $4,000 in credits.SourceMoneyGuru-https://www.mgkx.com/4155.html
"In 2021, parents were getting what folks call the enhanced child tax credit," Khalfani-Cox said. "It was either $3,000 for children under 18 or $3,600 for kids under 6 years old."SourceMoneyGuru-https://www.mgkx.com/4155.html
The child tax credit and related pandemic policies had a large impact — the U.S. Census Bureau said the measures sent child poverty rates down "46% in 2021, from 9.7% in 2020 to 5.2% in 2021," to the lowest child poverty rate on record, based on the Supplemental Poverty Measure, which was introduced just over a decade ago.SourceMoneyGuru-https://www.mgkx.com/4155.html
"In 2022, now that child tax credit is going back down," Khalfani-Cox said. "It's reverting back to the $2,000 level."SourceMoneyGuru-https://www.mgkx.com/4155.html
A special charitable deduction break also lapsed
In general, taxpayers can only deduct donations to charity from their taxes if they itemize deductions, rather than take a standard deduction. A special temporary tax break changed that for returns covering 2021.SourceMoneyGuru-https://www.mgkx.com/4155.html
"It was a $300 deduction for people who don't itemize and a $600 deduction for married couples," Khalfani-Cox said. "But Congress didn't extend this deduction in 2022."SourceMoneyGuru-https://www.mgkx.com/4155.html
Investment gains can add a painful bit of irony
"On the investment gains front, 2022 was a wild year, obviously, on Wall Street and the Dow was down, the Nasdaq was down," Khalfani-Cox said. "So people might be thinking, 'Why am I having a bigger tax bill to pay because of investment gains? I didn't have any investment gains.' "
But the markets' volatility forced many mutual funds to sell more holdings than they normally would, including profitable ones. They then distributed those gains. And if investors hold the fund directly, rather than in a tax-sheltered account like a Roth IRA, they'll have to pay taxes on their gain.
"So yeah, your investment portfolio might have actually declined, but your tax bill nonetheless got bigger," Khalfani-Cox said.
Anyone in that position, she added, should try to offset their capital gains. It would help if they sold any losing stocks, to balance out the winners.
"Under tax law, you can use tax losses like those to offset up to $3,000 worth of ordinary income," she said.
Do I need to worry about Venmo, PayPal and Cash App?
Millions of Americans could be excused for freaking out a bit when the government announced it would start requiring Venmo and other peer-to-peer payment apps to report income for goods and services worth $600 or more annually — a sharp drop from the previous threshold of $20,000.
Things eased a bit last month, when the IRS postponed the plan. But as financial experts note, taxpayers are still obligated to report their full income on their tax returns, whether they've received a 1099-K form or not.
"You know, we're in a gig economy," Khalfani-Cox said. "We've got a ton of people who are freelancers and 1099 workers, contractors, consultants, people who do side hustles, etc."
It's understandable for those workers to feel relief about the delay, she said, but they should use this year to get used to the idea that the rules are changing.
What can regular people do to help themselves?
The general deadline to file your 2022 tax returns is Tuesday, April 18. That's because Washington, D.C.'s Emancipation Day holiday falls on April 17. If you know you won't make the deadline, do yourself a favor and ask for more time.
"I can't stress this enough to people, but if you need an extension, just go ahead and file that form 4868 with the IRS," Khalfani-Cox said. "That will give you an extra six months and then you'll have until Monday, Oct. 16, to actually submit your taxes."
Reciting the litany of problems that can stack up without an extension, Khalfani-Cox notes that failure-to-file and failure-to-pay penalties can accrue each month, with interest added on to any unpaid tax amounts. Anyone filing an extension, the IRS says, "should estimate and pay any owed taxes by your regular deadline to help avoid possible penalties."
"It kind of is always shocking to me that so many people don't do this when they know they're going to wait until the very last minute," Khalfani-Cox said. "But, you know, you really don't want to play around with Uncle Sam on this one."
If you find yourself in over your head, help is available — and much of it is free.
"If you go to IRS.gov, if you made less than $73,000 in 2022, you can use IRS Free File ... it basically does your taxes for you at no cost," Khalfani-Cox said.
And even if you're 25 instead of 65, the American Association of Retired Persons can give advice, she added, saying the AARP "has trained experts who will help people to prepare and to do their taxes or to answer tax questions."
Another option is to look for local community-based organizations.
"If you just even do a Google search in your area, about 'free nonprofit credit counselors, free nonprofit tax counseling agencies near me,' you're likely to find agencies that can provide you with some assistance and support."
What should we expect in 2023?
"So 2023, unfortunately, is already shaping up to be quite a financial 1-2-3 punch for the average American family," Khalfani-Cox said. "Not only do we still have high inflation, but we've still got a crazy stock market and a lot of volatility, rising interest rates — all of which are contributing to layoffs."
Add in the potential for smaller tax refunds, and "it kind of feels like this is just way too much," she added. "You know, I don't even know if it's a 1-2-3 whammy or like a 1-2-3-4-5."
The challenges make it crucial to pay close attention to our finances and how we spend and save money in 2023, Khalfani-Cox said.
She also notes that the IRS has already announced a change to its standard deduction for 2023 — raising it to $13,850 for individual filers (a $900 increase) and $27,700 for couples filing jointly (a $1,800 increase).
While many of us focus on finances during tax time, Khalfani-Cox urges us to plan ahead.
"You may do some forecasting using tax software or using a paid professional or even a free tax help source to be able to say, what is my tax situation likely to look like in 2023?" she said.
How’s the IRS doing this year?
Overall, the IRS is in a better position now than one year ago — but customer service and lingering effects of a backlog are "the elephant in the room." That's according to National Taxpayer Advocate Erin Collins, who heads the official IRS watchdog agency.
Here's what that elephant looks like:
- Millions of people who filed paper tax returns or saw their e-filed returns suspended for review had to wait eight-and-a-half months or longer for refunds;
- In 2022, less than 13% of callers to the IRS reached someone who could help them (11% did so in 2021);
- Callers' average time on hold rose — from 23 minutes in 2021 to 29 minutes last year;
- Identity fraud remains a huge issue. On average, the IRS said in mid-December, "it is taking about 360 days to resolve identify theft cases" and issue a refund.
"The good news is that since the close of the 2022 filing season, the IRS has made considerable progress in reducing the volume of unprocessed returns and correspondence," Collins said last month, in her annual report to Congress.
"We have begun to see light at the end of the tunnel. I am just not sure how much further we need to travel before we see sunlight," she added.
Source - www.npr.org