Tax season is here and it’s time to start thinking about your 2022 tax return. Working on your taxes might seem intimidating, but it doesn’t have to be. Here are eight ways you can get ready for Tax Day, whether you’re working with an accountant or using tax preparation software like TurboTax.
1. Mark your calendar
Highlight April 18, 2023 on your calendar before you do anything else. This is the date by which you must either file your tax return or Form 4868 to get a tax extension. It’s also the deadline to contribute to an Individual Retirement Account (IRA) for 2022 if you haven’t already maxed yours out. Tax Day is often April 15, but these deadlines are slightly later this year because of the Emancipation Day holiday in Washington, D.C. and the Patriots’ Day holiday in Maine and Massachusetts. Victims of the severe storms in California within certain counties have until May 15, 2023 to file their tax returns and make tax payments. You don’t need to wait until the deadline to submit your tax return—you can do so as soon as you have all the necessary documents.
2. Gather your tax documents
Starting in January, you should receive tax paperwork from your employer and your banks. The documents you’ll need to file your taxes will vary depending on your situation.
Here are some of the forms you might need:
- W-2 from your employer
- Schedule K-1 for income received from an estate, trust, partnership, or S-corporation
- 1095-A for health insurance through the Health Insurance Marketplace
- 5498 for contributions made to IRAs
- 1098 for mortgage interest
- 1098-E for student loan interest
You may also need various kinds of 1099s, including:
- 1099-NEC (formerly 1099-MISC) for income from contract work over $600
- 1099-DIV for earnings from stocks and mutual funds
- 1099-INT for interest from bank accounts, CDs, and other accounts
- 1099-B for income from selling stocks, bonds, or mutual funds
- 1099-R for distributions from retirement accounts or pensions
Other employer provided forms might include:
- 3921 for exercise of incentive stock options
- 3922 for acquisitions or purchases through an Employee Stock Purchase Plan (ESPP)
Wealthfront clients can download their tax documents—1099-R for IRA withdrawals and consolidated 1099s for taxable accounts—directly from their dashboard by clicking on the menu item labeled Documents. These forms will become available starting in late January or February, but you may receive additional correction documents going into March.
3. Review your year
Was 2022 a big year for you? If so, those life events may come with some tax breaks.
If you got married: It’s time to decide if you’ll file your taxes separately or jointly. For most people, it makes sense to file your taxes jointly. This article can show you exactly how to decide. For example, if you or your spouse has an income-based student loan, filing separately could keep your payments from dramatically increasing.
If you purchased a home: You may be able to deduct your mortgage interest on mortgages up to $750,000 and property taxes—part of your SALT burden; limited to $10,000 a year.
If you had a baby: For any child in your family younger than 17, you may be eligible for a $2,000 tax credit, $1,500 of which may be refundable. If you are married and file jointly, this credit starts phasing out if your income is above $400,000. You may also be eligible for tax credits for child care. Remember to fill out a new W-4 with your employer, as you’ll now have an additional withholding allowance.
If you bought a car: If you bought a car in 2022, the purchase could impact your taxes. If you itemize your deductions—more on that below—you can deduct the sales tax you paid on the purchase regardless of whether you bought it new or used. You may also qualify for a nonrefundable tax credit of $2,500 to $7,500 if you bought a plug-in hybrid or electric vehicle. To claim this credit, fill out Form 8936 and file it with your tax return. Keep in mind that this benefit phases out after a manufacturer sells more than 200,000 qualified vehicles, and both Tesla and General Motors passed this threshold in 2022.
If you installed solar panels: If you purchased and installed solar panels on your home during 2022, you could be eligible for a federal tax credit. You can claim the federal solar tax credit using Form 5695; the credit is 30% of qualified solar electricity systems including the panels and installation. The solar system has to be placed in service during 2022 for the credit to apply for the 2022 tax year.
4. Decide if you’ll itemize your deductions
When it comes to tax deductions, you have two options:
- Claim the standard deduction. This allows you to deduct $12,950 for single filers or $25,900 for joint filers from your taxable income this year.
- Itemize your deductions instead.
To decide if you want to itemize, add up your various deductible expenses such as:
- Medical bills
- Charitable contributions
- State and local taxes
- Property taxes
- Investment interest expenses
- Mortgage interest payments
If the total reaches more than $12,950 for single filers or $25,900 for joint filers, you’ll want to itemize and file a Schedule A (Form 1040). If you choose not to itemize, you’ll file a return claiming the standard deduction and Schedule A won’t be included. If your spouse itemizes, then you’ll need to do so as well.
Regardless of whether you take the standard deduction or itemize, you can take what are called above-the-line deductions which will further reduce your taxable income.
Above-the-line deductions include:
- Student loan interest payments
- Unreimbursed moving expenses for a job
- Health savings account (HSA) contributions
- 401(k) contributions
- SEP-IRA contributions
5. Contribute to your IRA
Individual Retirement Accounts (or IRAs) are a great type of account to consider as you save for retirement. IRAs offer a tax-advantaged way to save for retirement and, in many ways, offer additional flexibility compared to a 401(k). If you’re planning to contribute to an IRA for the 2022 tax year, April 18, 2023 is the deadline to do so, with the exception of victims of the severe storms in California within certain counties who have until May 15, 2023. The annual combined contribution limit for traditional or Roth IRAs is $6,000—$7,000 if you are 50 or older. If you’re opening and funding a new IRA at Wealthfront, we recommend doing so by April 12 to ensure the account is funded by the April 18 deadline.
If you’re interested in funding an IRA but you’re not sure which kind to use, check out Wealthfront’s IRA Account Selection Tool to learn more about your IRA eligibility. Wealthfront offers traditional IRAs, Roth IRAs, and SEP IRAs, as well as easy Roth conversions. You can transfer funds directly from your Cash Account to your Wealthfront IRA.
6. Use your harvested losses
Financial markets were volatile for much of 2022. If you were a Wealthfront client using our Classic or Socially Responsible portfolio, you likely received enough benefit from our Tax-Loss Harvesting service to cover our annual 0.25% advisory fee several times over.
Tax-loss harvesting involves selling investments that have declined in value, generating a loss you can use to lower your taxes. If you have an investing account at Wealthfront, we automatically harvest your losses for you. If you use TurboTax, you can automatically import your tax-loss harvesting information.
7. Consider working with a tax professional
If this sounds complicated, especially if you sold employee stock options this past year, it’s a good time to ask yourself if you should hire an accountant. Typically, this is a good move if your taxes are complex —say, you own a business, you’re subject to the Alternative Minimum Tax (AMT), or you receive K-1s. For more information, check out our blog post about who should consider hiring an accountant.
If you plan to file your own tax return, there are a number of tax preparation programs to choose from including TurboTax, Credit Karma Tax, TaxAct, and TaxSlayer. If you’re a Wealthfront client who uses TurboTax, you’ll get up to $20 off the cost of filing, and can use TurboTax Live to either consult with a CPA or hire one to file your taxes for you.
8. Determine how you’ll pay
Depending on your tax withholdings and the estimated taxes you’ve paid on any income not subject to withholding, you could either receive a refund from the IRS or owe money on your 2022 taxes.
If you think you might owe money, now is a good time to plan for how you’ll pay. You can use your account and routing numbers to pay your tax bill up to the ACH limit of $50,000 directly from your Wealthfront Cash Account if you have checking features activated.
Tax season doesn’t have to be taxing
Tax time rolls around every year, and many people dread it. But if you’re prepared with your paperwork and have a plan, there’s nothing to fear. We hope these eight steps will help set you up for a less stressful tax season.
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Wealthfront Advisers and its affiliates do not provide legal or tax advice and do not assume any liability for the tax consequences of any client transaction. Clients should consult with their personal tax advisors regarding the tax consequences of investing with Wealthfront Advisers and engaging in these tax strategies, based on their particular circumstances. Clients and their personal tax advisors are responsible for how the transactions conducted in an account are reported to the IRS or any other taxing authority on the investor’s personal tax returns. Wealthfront Advisers assumes no responsibility for the tax consequences to any investor of any transaction.
Visit http://turbotax.intuit.com/lp/yoy/guarantees.jsp for TurboTax product guarantees and other important information. Limited time offer for TurboTax 2022. Discount applies to TurboTax federal products only. $0 Federal + $0 State + $0 To File offer is available for simple tax returns only with TurboTax FreeEdition. A simple tax return is Form 1040 only (without any additional schedules). Situations covered include: W-2 income; Limited interest and dividend income reported on a 1099-INT or 1099-DIV; Claiming the standard deduction; Earned Income Tax Credit (EIC); Child tax credits. Actual prices are determined at the time of print or e-file and are subject to change without notice. Terms, conditions, features, availability, pricing, fees, service and support options subject to change without notice. Intuit, TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries.
The effectiveness of the tax-loss harvesting strategy to reduce the tax liability of the client will depend on the client’s entire tax and investment profile, including purchases and dispositions in a client’s (or client’s spouse’s) accounts outside of Wealthfront Advisers and type of investments (e.g., taxable or nontaxable) or holding period (e.g., short- term or long-term).
Wealthfront Advisers’ investment strategies, including portfolio rebalancing and tax loss harvesting, can lead to high levels of trading. High levels of trading could result in (a) bid-ask spread expense; (b) trade executions that may occur at prices beyond the bid ask spread (if quantity demanded exceeds quantity available at the bid or ask); (c) trading that may adversely move prices, such that subsequent transactions occur at worse prices; (d) trading that may disqualify some dividends from qualified dividend treatment; (e) unfulfilled orders or portfolio drift, in the event that markets are disorderly or trading halts altogether; and (f) unforeseen trading errors. The performance of the new securities purchased through the tax-loss harvesting service may be better or worse than the performance of the securities that are sold for tax-loss harvesting purposes.
Tax loss harvesting may generate a higher number of trades due to attempts to capture losses. There is a chance that trading attributed to tax loss harvesting may create capital gains and wash sales and could be subject to higher transaction costs and market impacts. In addition, tax loss harvesting strategies may produce losses, which may not be offset by sufficient gains in the account and may be limited to a $3,000 deduction against income. The utilization of losses harvested through the strategy will depend upon the recognition of capital gains in the same or a future tax period, and in addition may be subject to limitations under applicable tax laws, e.g., if there are insufficient realized gains in the tax period, the use of harvested losses may be limited to a $3,000 deduction against income and distributions. Losses harvested through the strategy that are not utilized in the tax period when recognized (e.g., because of insufficient capital gains and/or significant capital loss carryforwards), generally may be carried forward to offset future capital gains, if any.
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About the author(s)
Scott Peterson is a Partner in Moss Adams Private Client Practice. He has practiced public accounting since 2009. He focuses on the tax aspects of estate planning, including gift planning and trust taxation, to help his clients achieve their financial goals and manage their tax liabilities efficiently. He can be reached at (408) 558-3274 or firstname.lastname@example.org. Assurance, tax, and consulting offered through Moss Adams LLP. ISO/IEC 27001 services offered by Cadence Assurance LLC, a Moss Adams company. Wealth management offered through Moss Adams Wealth Advisors LLC. View all posts by Scott Peterson, CPA