5 Things to Know Before Doing Your Taxes
No one likes preparing for tax season, but we do get excited about lowering our taxes or the possibility of a refund every year. To make this year as painless as possible, here are five things you should know before you file your taxes.
What to Know Before Doing Your Taxes
Changes to our economy, inflation rates, and administrations often make for changes to how we’re taxed on an annual basis. That said, the major things to know before you file your taxes include how tax brackets may have shifted (which can save or cost you money depending on how they move), any changes to standard deductions that can make your life easier, additional tax credits or deductions you may be eligible for, and any major deadlines to be aware of. All of these combined can help you be the most prepared to save the most money in taxes, leaving you with more income to save and invest to reach your goals.
Let’s dive into each of them a bit deeper so you feel prepared come tax time.
1. Tax brackets have shifted to adjust for inflation
Inflation was rough for everyone this past year. Luckily, the tax brackets that determine how much we all pay in taxes have been adjusted to keep up the pace. This means that you may be able to pay less in taxes on certain portions of your income (but not your total income) because the United States uses what's called a progressive tax system. This means that your income is taxed at different levels within the same year as your taxable income increases.
For example, all single filers in 2022 will be taxed 10% on the first $10,275 of their taxable income. Then, they'll all be taxed 12% (in 2022) on each additional dollar up to $41,775, and so forth. This is very different from being taxed 12% on all of the $41,725 as whole.
Be sure to check out the current tax brackets in the table below so you can make sure you’re taking full advantage of any potential deductions or credits available to you. Standard deductions are also higher for 2022 than in previous years, meaning less of your income will be considered taxable (more on this in the next tip).
| Taxable income (single) | Taxes owed | Taxable income (married + filing jointly) | Taxes owed |
|---|---|---|---|
| $0 to $10,275 | 10% | $0 to $20,550 | 10% |
| $10,276 to $41,775 | $1,027.50 + 12% of amount over $10,275 | $20,551 to $83,550 | $2,055 + 12% of amount over $20,550 |
| $41,776 to $89,075 | $4,807.50 + 22% of amount over $41,775 | $83,551 to $178,150 | $9,615 + 22% of amount over $83,550 |
| $89,076 to $170,050 | $15,213.50 + 24% of amount over $89,075 | $178,151 to $340,100 | $30,427 + 24% of amount over $178,150 |
| $170,051 to $215,950 | $34,647.50 + 32% of amount over $170,050 | $340,101 to $431,900 | $69,295 + 32% of amount over $340,100 |
| $215,951 to $539,900 | $49,335.50 + 35% of amount over $215,950 | $431,901 to $647,850/td> | $98,671 + 35% of amount over $431,900 |
| $539,901 or more | $162,718 + 37% of amount over $539,900 | $647,851 or more | $174,253.50 + 37% of amount over $647,850 |
2. The standard deduction also increased for 2022
The standard deduction amount also increased this year from 2021 to 2022, meaning more of your income may be exempt from taxation (exempt simply means it won't be taxed). The standard deduction can make it a lot easier to file your takes, as opposed to itemized deductions that would involve a lot more paperwork and math. That said, itemized deductions can provide larger tax savings if you're willing to put in the additional work. That's why I recommend software like TurboTax which has always done a great job guiding me through the process.
Whether or not that's the right decision for you will depend on the number and value of deductions you might take. Take a look at the standard deductions below to gauge whether it the itemized deduction may be worth the extra effort.
| Filing status | 2021 Tax Year | 2022 Tax Year |
|---|---|---|
| Individual / single | $12,550 | $12,950 |
| Married + filing jointly | $25,100 | $25,900 |
| Married + filing separate | $12,550 | $12,950 |
| Head of household | $18,800 | $19,400 |
3. You can still max out your Traditional or Roth IRA for 2022
If you haven't already filed for the 2022 tax year, don't forget about individual retirement accounts! Investing in an individual retirement account (IRA) like a traditional IRA or a Roth IRA can mean major savings come tax time. If you contribute to a traditional IRA, you may receive a deduction on your taxes for the current year. A Roth IRA is slightly different, as contributions are taxed up front—but no taxes need to be paid when distributions are taken after you've retired. That said, regardless of which account you choose, you'll benefit from tax-deferred growth which can help you build wealth faster over time. That's why you want to strive to make the full $6,000 contribution for 2022 before moving on to the $6,500 contribution for the 2023 tax year.
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Keep in mind that if you've already filed your taxes for 2022, you won't be able to contribute to a Traditional IRA for the 2022 tax year (but could still contribute to a Roth IRA). If making a 2022 contribution, you'll also want to specify the year with your financial provider as they are likely to assume the current tax year (2023) unless you tell them otherwise.
In either case, you'll want to set aside some time now to go over your options and take advantage of all the possible tax breaks available before it's too late. You can also read all about how I maxed out my Roth IRA twice in the same year (across two tax years) here.
4. The Child Tax Credit is lower this year
The Child Tax Credit was temporarily increased in 2021, decreasing back to $2,000 this year for the money makers with kiddos out there. This means for every child you support under the age of 17, you'll be able to take off $2,000 from your tax bill.
Not familiar with tax credits? No problem.
Tax credits are different from deductions and work to reduce your tax liability, rather than your tora taxable income. This means that for every dollar of a credit you use, you get one dollar off of what you owe in taxes at the end of the year (rather than reducing how much of your income is taxed to begin with). There are also several other ways that parents can save money on their taxes. For instance, those with children age 17 or older, or other dependents, that may not qualify for the Child Tax Credit can claim an additional $500 per dependent or relative using the Family Tax Credit.
All this said, while the Child Tax Credit may not be as big as it was in 2021, parents should definitely keep an eye out for all available credits when doing their taxes!
5. You can get an extension past the April 15th deadline
April 15th can be a stressful day for some money makers as it’s the deadline to file your taxes. That said, if you need some more time to get your documents and taxes together, don't worry! You can file for an extension through October 15th, but be sure to do it before the April 15th deadline. While filing an extension may seem like a hassle, but it's worth it if it means that you have more time to make sure everything gets done right.
Making small tweaks to the way you manage your money can have a huge impact on how much tax you pay and how quickly your wealth grows. For example, now that we know that the standard deduction has increased for next year, it's worth looking at whether or not itemizing deductions makes sense for you. Additionally, taking advantage of investment accounts like an IRA can help you grow your wealth quicker and minimize the taxes you pay in retirement.
Want to make sure you're doing everything possible to lower your taxes and build wealth faster? Check out my Money Moves Accelerator course here.
