Tax season is right around the corner – so in this video I’m going to share with you 3 things you should keep in mind before filing.
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Video Transcription
Hey MoneyLion, my name’s Austin Hankwitz and I talk about personal finance and investing online. I’ve compiled a list of a few things that you should keep in mind. It’s important to remember that this video is just for informational purposes. You should speak to a tax professional if you have questions about or need help with your taxes.
Let’s break down three things: filing your taxes for free, reporting crypto or stock investments, and changes to charitable deductions. By understanding these things, hopefully we can save some money together.
And just so we’re all on the same page, let’s quickly walk through basic information on how taxes actually work – because a lot of people don’t understand. There are a lot of deductions and other but the basics are that in the US we have a progressive tax system – which means taxation progressively increases as your income increases. There are 7 federal tax brackets, ranging from 10% to 37%.
To put some numbers around this – let’s assume you’re not married and made $45,000 in 2021. The first $9,950 you made was taxed as 10%, totaling about $1,000. After you made that first $9,950, every dollar you made beyond that was then taxed at 12% – until you hit about the $40 thousand dollar mark. This is about another $3,700 in taxes – bringing your total now close to $5,000.
That last $5 thousand you made above $40 grand was taxed at 22% – which is $1,100 in taxes. Right? A progressive tax system – taxation increasing as your income increases.
Great! You now have some background on how taxes work so let’s talk about filing them for free. If you make less than $72,000 per year, the IRS will help you file your taxes – for free, you just have to answer some personal questions. Google “IRS free file” – it’ll take you to an IRS.gov URL with more information. If you make more than $72,000 you can still fill out and file the forms yourself. Boom! You just saved yourself about a hundred bucks.
The second thing to know is there are requirements about reporting any stock and crypto transactions. For most apps and platforms – they’ll either give you something called a Form 1099-B or a complete history of your transactions, which you may need to complete your taxes. If you have questions about this form, you should speak to a tax professional.
Heck, maybe you lost money in 2021 – you might be able to deduct that.
Speaking of deductions, our final highlight here are the changes to charitable deductions in 2021. Ordinarily, people who choose to take the “standard deduction” on their taxes cannot claim a deduction for their charitable contributions. But, there was a temporary law passed in 2021 which allows you to deduct up to $300 in charitable contributions on top of the standard deduction. So if you donated to a qualifying charity, this is something that you may want to look into.
Video Summary
The tax season is coming once again, and it’s just as complicated as ever. Taxpayers shift through paperwork and look for ways to save. We’ll share some tax-saving tips and provide an overview of how the tax system works.
Taxes explained
The U.S. tax system operates under a progressive structure. The more money you earn, the more you’ll pay in taxes. The U.S. tax system features seven brackets ranging from 10% to 37% in taxes. You’ll pay a different tax amount depending on if you’re single or married.
We’ll use the example of an unmarried 45-year-old to calculate taxes. Based on the 2021 tax brackets, the first $9,950 gets taxed at 10%. The next $30,575 gets taxed at 12%.
At this point, the IRS has taxed $40,525 of the single filer’s earnings. The remaining $5,000 gets taxed in the following bracket, with a 22% tax rate. As you move up the tax brackets, you’ll pay more money to the government.
Tax brackets can change at any time as dictated by the IRS. The IRS expanded 2022 federal income tax brackets for taxes due in April 2023, helping taxpayers save money for the 2023 tax season.
3 tips to save money on taxes
Knowing the structure provides some clarity on your total tax payment. A tax professional can help you verify how much you’ll owe the IRS.
Filing your taxes isn’t only about how much you pay. Taxpayers can utilize various strategies to save money during tax season. We’ll share three of our favorite tips to save money and get prepared for the tax season.
Tip #1: file your taxes for free
The IRS lets taxpayers who made less than $72,000 file their taxes for free. You can Google “IRS free file” for more information. The IRS will ask you some personal questions and then assist with the filing fee.
Taxpayers who earned more than $72,000 can still file their taxes for free. You can fill out the form yourself and save yourself the $100 filing fee.
Tip #2: reporting stocks and crypto transactions
Most stock and crypto platforms will provide you with Form 1099-B or they’ll give you a list of your transactions, which you can then submit to the IRS. You should briefly review your transactions to ensure they match up. The 1099-B form will provide information on dividends and capital gains.
If you report a net loss through your investments, you can use it as a deductible. At the end of the year, some investors sell laggards to show a net loss. Then, they repurchase the same assets over 30 days later to avoid triggering the wash sale rule.
If you can demonstrate a loss, you’ll save money. You’ll pay some taxes on this year’s capital gains, but you can consider selling underperforming stocks in November or December to save on next year’s taxes.
Tip #3: use charitable deductions
The IRS recently made a new rule that helps you use charitable deductions. The original structure prevented taxpayers from putting charitable deductions on top of the standard deduction.
The IRS changed this rule and currently allows taxpayers to deduct $300 on top of their standard deduction. If you donated to a qualifying charity last year, you can save on this year’s taxes.
Any taxpayers who donated more than $300 should itemize their deductions. Itemizing your deductions takes extra work but it often saves you more money than the standard deduction.
Save money when filing your taxes
We all have to pay taxes on our income. Taxes fund various state and federal programs designed to enhance the country. Taxpayers can avoid overpaying and keep more money in their pockets. You can reach out to a tax professional to discover all of the ways you can save money when filing taxes
