April 15, 2023 is swiftly approaching. Feeling overly anxious and a bit overwhelmed about this date? Well, no need as this year’s individual tax filing deadline is April 18, 2023! Ha! Did you think I was going to say something like "...no need
to fear as Congress has issued a new bill eliminating the individual income tax for good?" Nope! Just letting you know you have 3 glorious extra days to beat the clock this year!
Wouldn't that be the ultimate Utopia, a place where there's not only a Walgreens on every corner, but a place where there are no pesky taxes imposed on income, property, sales, etc. Close your eyes for a moment and imagine it. Take a deep breath and listen to the waves as they crash upon the shore in "Notaxtopia". Mmm. Now open your eyes and let’s get back to reality!
The reality is Tax Day, April 18, 2023, COMETH, and we all (yes even me, lol!) have to make sure two MAJOR tasks are marked "complete" on our to-do list by this date:
1. 2022 Individual income tax Return filed (check!)
2. 2022 Individual income taxes paid (check!)
If you're cutting it close getting #1 checked off your list, you can avoid the failure to file penalty by at the least filing an extension to file which will buy you an additional six (6) months to get this done but the extension won’t prevent the failure to pay penalty. Many taxpayers don't realize that the slap on the wrist passed down in the form of tax penalties varies. Of the many, the first two on the list are the "Failure to File" and "Failure to Pay" penalties. Filing an extension (and submitting your return within the six (6) month grace period the extension provides) will help you avoid the failure
to file penalty, but the failure to pay penalty can't be avoided if you haven't paid all that you owe by Apr 18, 2023.
Guess which penalty is greater??? If you guessed “Failure to File” come on down!! Yes, the failure to file penalty is 5% per month up to 25% of the tax owed. The Failure to pay penalty is 0.5% per month up to 25% of the tax owed. Yes! The failure to file penalty is 10X greater than the failure to pay!! Thus, even if you'll owe for 2022 but aren't able to pay right away, file anyway! Thus, avoiding the larger penalty! The failure to file penalty is much greater because the IRS wants to at the least know how much revenue they can "expect" from you, even if you're not able to fork it over just yet. Also
know this, the IRS isn't as scary as most people think if you c-o-m-m-u-n-i-c-a-t-e. Trust me, I speak with the IRS so often on my client’s behalf that we're now on a first name basis, LOL!! JK. All jokes aside, I’ve worked with numerous clients under an unthinkable amount of stress due to their tax situation and I know this can be a sore subject for many. But just remember, if you're in a position where you're going to owe and can't pay, file anyway and setup a payment plan. This at least helps avoid more significant penalties, shows a good faith effort on your part, and removes unnecessary stress
around your tax situation.
Also, here’s a heads up, this tax season I’m seeing a significant number of clients that owe for 2022. This is being driven in part by several tax credits returning to their 2019 amounts, coupled with lower W4 withholdings. Thus, I can’t stress this point enough, if you haven’t filed, file as soon as possible so that you’re not blindsided if you end up owing, and you can proactively put a plan in place to pay or setup a payment plan by the deadline. Now enough of the textbook talk, I could nerd out on this subject all day! Let's talk about the additional items you should be checking off your to do list throughout the year to help manage and/or reduce your tax liability. Most of you reading this are likely employees, or W-2 earners, and unfortunately the juicy tax savings measures available to independent contractors and business owners aren't available to W-2 earners. Thus, maximizing itemized deductions is where most W-2 earners should focus.
Note: For those who aren’t aware, the Internal Revenue Code (IRC) grants each taxpayer (a.k.a. YOU) the option to use a Standard or Itemized deduction to arrive at your "taxable income". Your taxable income determines your tax liability. If your Itemized deductions are greater than your Standard deduction, take the itemized deduction. Remember its math, not magic!
Itemized deductions include amounts you paid for state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, disaster losses, charitable contributions, and medical/dental expenses that exceed 7.5% AGI.1 For your itemized deductions to make sense, in terms of Federal income taxes, they must exceed your
standard deduction, and your standard deduction depends upon your filing status. See 2022 Standard Deduction amounts below:
Single/Married File Sep.: $12,950
Married Filing Joint/Qualifying Widow(er): $25,900
Head of Household: $19,400
(Note: States vary and in certain situations itemizations may not be enough to exceed the Federal Standard Deduction, but the deductions may be beneficial for State tax savings)
In my experience, the itemizations that generally provide the biggest bang for your buck are mortgage interest, real estate taxes, and charitable contributions if you're big on philanthropy. If you're a high-income earner, state and local income taxes may weigh in heavily as well. For the 2022 tax year what's done is done, and the only tax savings option that may still be in play before the filing deadline (including the extension) is an IRA contribution to take advantage of the Savers Credit. But for 2023 I strongly encourage you to be your own CFO (which is a finance talk I’ve led in the past for Fit Pros, aptly titled "Be Your Own CFO" 4) and start putting some tax planning measures in place. Mortgage interest, state/local income taxes, and real estate taxes are a given, but if those three together aren't enough to cross the standard deduction hurdle consider increasing your charitable donations, paying property tax a year in advance, tracking your sales tax paid especially on big ticket purchases, keeping track of out-of-pocket medical expenses, purchasing an electric vehicle (EV)3, or making energy efficient home upgrades. Another thought is to consider making that “side-hustle” you’ve been dreaming of creating a reality as that 5-9 outside of your 9-5 could not only bring in extra cash flow, but it may also prove to be beneficial in helping to reduce your tax liability!
Save Wisely!
References:
1. “Topic No. 501 Should I Itemize?” https://www.irs.gov/taxtopics/tc501
2. “IRS provides tax inflation adjustments for tax year 2022” https://www.irs.gov/newsroom/irs-provides-tax-
3. “Credits for New Clean Vehicles Purchased in 2023 or After” https://www.irs.gov/credits-deductions/credits-for-
4. See the financial health session offering “How to Improve Financial Wellness” https://www.fitpros.com/finance
5. “IRS Fact Sheet: F.A.Q.s About Energy Efficient Home Improvements and Residential Clean Energy Property
Written By FitPros Financial Speaker, Simone Smith https://kwfinancialsvcs.com/ Read more about KW Financial Services HERE
Contact us today to schedule one or more financial sessions with Simone Smith!
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