Count your children: A tax to-do list for 2023
Planning a dry January or more time in the gym as a new year dawns? Save time and money by adding these tax resolutions to your list.
- By laura saunders,
- The Wall Street Journal
- – 12/30/2022
A new year brings New Year’s Resolutions. With inflation still taking a toll and markets in turmoil, making smart tax moves–and avoiding dumb ones–brings real benefits in uncertain times.
So here’s a clutch of tax resolutions for this year’s filing season and beyond. And here’s hoping that 2023 brings you health and wealth–and better odds of getting the IRS on the phone.
I WILL e-file my tax return, if possible.
Some people need to file paper tax returns because they have an unusual form or a prior identity theft, but most can e-file.
Filers who submit paper returns risk an array of problems, such as key-punch errors on name or taxpayer ID numbers, or even a form getting dropped on the floor. When pandemic tasks like stimulus payments diverted IRS resources from return processing, a large chunk of the backlog was paper returns.
For example, when the IRS reported having nine million unprocessed individual returns last August, seven million of them were on paper. As of mid-December, the seven-million figure had shrunk to one million. But paper-return processing delays are still causing headaches both for taxpayers and the IRS.
I WILL check my W-2 wage forms and Form 1099 income reports when I get them.
If there are mistakes, get a corrected form before filing the return. An IRS spokesman notes that agency rules require companies sending out forms to include a phone number the recipients can call if they have questions.
Doing this check-up can head off IRS snafus. If an income item shown on a filer’s return is different from what’s reported to the agency by a payor, the IRS computers will likely pick up the discrepancy and automatically send a letter–and sometimes a bill.
Such errors are often hard to correct, says Jeffrey Porter, a CPA in Huntington, W. Va., given the difficulty of communicating with the IRS. He adds that for smaller businesses, this issue often arises with entity changes, such as when a sole proprietor becomes an S Corp. but vendors continue to send 1099 forms using the old taxpayer ID.
I WON’T blow off the IRS’s April deadline.
This year’s tax due date is April 18. Taxpayers who miss the deadline typically get clobbered with failure-to-file and failure-to-pay penalties that quickly mount to 5% or more of the tax due per month, plus interest.
All taxpayers can have a six-month extension to finish their paperwork simply by filing IRS Form 4868. The agency also has options for filers who can’t afford to pay their taxes, which are due in April.
The bottom line: Ignoring the April deadline will greatly compound your tax woes.
I WILL minimize my tax refunds.
The average refund has been about $3,000 in recent years, in part because many filers use refunds as forced savings.
But this means the taxpayer is making an interest-free loan to Uncle Sam, and that costs more now that interest rates have risen. If there are IRS processing delays–as during the pandemic–the filer may have to wait a long time for a sorely needed sum.
Yes, the IRS will pay interest, but only after 45 days or more. Plus, it’s taxable.
I WILL save my receipts when making home improvements.
Capital investments in a home can raise its cost basis, which is the starting point for measuring taxable gains when a home is sold. A home’s basis typically consists of its purchase price plus some selling expenses and the cost of improvements such as additions or landscaping.
Having a higher cost basis will lower the amount of tax owed on a home sale, if there is any. Although the law exempts $500,000 of gain for home sellers who file jointly and $250,000 for single filers, this amount isn’t indexed for inflation. So more sellers are likely to owe capital-gains tax than in the past, especially in high-cost areas.
Note that home repairs like a paint job don’t count as capital investments. However, some items that may seem like repairs–such as a new roof–do count as investments. For more on this distinction, see IRS Publication 523.
I WON’T buy or sell an exotic investment without talking to a tax adviser first.
Got cryptocurrency, a master limited partnership, or an investment trust that seems like a mutual fund but actually isn’t? If so, be sure to check with a tax specialist before jumping in or out.
For example, putting an income-generating partnership into a Roth IRA might seem like a smart way to reap tax-free income. But it’s not, says Dan Herron, a CPA in San Luis Obispo, Calif.
That’s because the tax code can penalize people who put one tax-favored investment such as a partnership into another, such as a Roth IRA. Correcting this mistake can be expensive in both taxes and preparer time.
Good tax advice could also prevent the common mistake of making a bad investment recommended by a relative or friend. “If Uncle Joe has a sure-thing private deal for you, talk to an adviser about tax implications. It might head off problems with the IRS and save your relationship too,” says Mr. Herron.
I WON’T make my tax preparer want to strangle me.
The tax code is frustrating enough, so don’t cause your preparer unnecessary trouble.
“Trouble” includes answering some questions the preparer asks but not others, or dashing in on April 10 with a shoebox full of unsorted and incomplete records. Also don’t text long documents to the preparer with just one page in each text, as one of Mr. Porter’s clients did.
Do count your children: Mr. Herron says that last year he had to file two amended returns for a married couple with a blended family who kept revising which children qualified as dependents.
“We started with three and ended with one,” he says. “It drove me nuts.”
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