Tax season is here again, but this time, you might be in for some unexpected changes. As in, you might have a smaller tax refund — or you might owe the federal gov money. That could be because the IRS is getting back to pre-pandemic procedures, or you might have taken on freelance work in the past year. No matter what the reason is, it's important to be prepared. That's why we talked to Ana Karina Klein, CPA and founder of AKK Tax and Accounting, about what we should expect from this tax season.
Why do I owe taxes this year?
There’s no single reason why. A number of factors could affect your tax bill, like your dependents, your salary, and your assets. You could owe taxes because…
You didn’t have enough money deducted from your paycheck
“If you are a W-2 earner and don’t have any other side businesses, you might have not withheld enough for taxes from your paychecks to pay the taxes that you owe,” Klein shared. Remember when you first started your 9-to-5, and your employer asked you to complete a W-4 form? The numbers you put down on that sheet determine how much is withheld from your paycheck to cover taxes. If you made an error or information on your W-4 has changed, you may have underpaid. And now, the IRS wants you to pay up.
You got a raise
So you finally asked your boss for that raise you deserve. Or maybe your new job came with a big salary boost. Either way, an income increase could come with a new tax bill. That’s because your new pay can land you in a higher tax bracket.
If you earned at least $400 from a freelance job or side hustle in 2022, get ready to pay taxes on your income. Chances are your paycheck isn’t withholding enough to cover taxes. Which means, you’re going to need to keep a close eye on what you make and what you owe. Unsure of those numbers? You aren’t alone: One study found that 70% of Gen Z doesn’t keep a record of this type of income.
Any freelancer making $400 or more has to file self-employment taxes using Form 1040 from the IRS site. If you make more than $600, you’ll also need to get Form 1099-NEC from the company you worked for and file it. The profit listed (minus deductions) will determine your total taxable income.
If you expect to owe over $1,000 in taxes: You’ll need to pay taxes each quarter. And the IRS makes it pretty simple: You can pay online, using the app, by phone, or by mail using a 1040. If you’re drawing a blank on estimating your taxes, Form 1040-ES is a good way to come up with a figure.
You relied on on certain pandemic-level deductions
Things have changed. For example, the Child Tax Credit that gave many families a financial boost has returned to $2,000 max. And the Earned Income Tax Credit limits have gone through some big changes, too: Last tax season, the credit max started at $1,502 — even with no kids. This year, the max for zero kids has dropped to $560. And for parents, the credit now maxes out at $6,395 if you have three or more kids.
You started investing
Klein says you’ll need to account for taxes on your capital gains (aka profits) if you’ve been investing. And the more you earn, the more you’ll have to pay. If you’ve brought in between $44,625 and $492,300, expect to shell out at least 15% of those profits to cover taxes. If you’ve held your investment for at least a year, grab a Schedule D to report what you earned.
When do I need to pay my taxes?
“Taxes are due by April 15 of each year,” Klein said. If Tax Day falls on a weekend or holiday, the deadline changes to the next business day. If you pay your taxes quarterly (hi, freelancers), your deadline is the 15th of the month following each quarter.
If you can’t make your tax deadline, you can always file for an extension — though you still have to pay taxes by the due date. The ‘extension’ only applies to the paperwork. Alternatively, you can set up a tax payment plan with the IRS. A short-term payment plan will give you an extra 180 days to pay your taxes, while a long-term payment plan comes with the option to make monthly installment payments.
While extra time can be convenient, Klein says it’s a better idea to stick with the original deadline. Because you’ll still accrue interest — and end up paying more in the long run.
Any tips for how I can lower my tax bill in the future?
Spoiler: You don’t need to aim for lower pay. Here are some easy ways to shave down your next tax bill:
If you work full time: Check your W-4 info once a year to see if you need to set aside a larger amount from your paycheck. Remember, paying more upfront means a smaller bill during tax season (and maybe even a refund).
If you’re doing freelance work: Set money aside from each paycheck to cover your estimated taxes. Ideally, around 30% of your income should be enough for taxes.
Klein says another tried-and-true way to lower your tax bill is to sit down with a pro. “The best way to reduce your tax liability is to hire a tax planner to help you before the end of the year to minimize your tax liability.”
Tax season isn’t most people’s favorite time of year — and 2023 is bringing even more unexpected surprises than normal. The key to making it through April is to know what to expect. And don’t be afraid to call up a tax pro if things look complicated.
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