What you need to know before filing your taxes this year

Apart from accountants  and finance aficionados, taxes are not a to-do many people look forward to — but filing is an annual necessity and Tax Day 2023 is Tuesday, April 18th.

By knowing what you need beforehand, you can knock this off your to-do list in an afternoon (or faster). 

A tax bracket is a range of incomes subject to a certain tax rate, which is determined by your filing status and taxable income for the year. The Internal Revenue Service (IRS) makes adjustments every year, so it’s possible your tax bracket will change between this tax year (which is based on your 2022 income) and the 2023 tax year (which will be filed in 2024).  We’re going to cover the tax brackets for 2022 and the changes coming in 2023. Your specific situation may not be straightforward, but a tax professional can help you determine your tax bracket.

Here’s a look at how the federal tax brackets stack up this tax filing season, based on 2022 income and filing status:

The United States uses a progressive tax system, which means each portion of your income is taxed at a different rate. Tax brackets determine the rate at which each portion is taxed based on your filing status. 

While this system effectively results in people with higher incomes paying more in taxes, all taxpayers pay the same rate for the same level of taxable income. For example, whether you made $10,000 or $100,000 of taxable income in 2022, the first $10,000 will be taxed at 10% (if you’re a single filer). 

Let’s consider another example. Say you are a single filer and you made $60,000 of taxable income in 2022. The first $10,275 will be taxed at the 10% rate, then the amount between $10,275 and $41,775 is taxed at 12%, and the remaining $18,225 is taxed at the 22% rate, as it falls in that bracket. The total tax bill is $8,817, which is about 14.7% of your taxable income. 

So, in the example above, the total taxable income of $60,000 lands in the 22% tax bracket — but you don’t actually pay 22% of your total income in taxes. The amount paid, in this case 14.7%, is called your effective tax rate. 

Your marginal tax rate is the tax rate paid on the last dollar of your taxable income. It’s basically the tax rate of the highest tax bracket you’re in. Based on the $60,000 taxable income example provided in the previous section, that person’s marginal tax rate is 22%. 

Because of the progressive tax system, your marginal tax rate will likely be greater than your effective tax rate. 

Being in a lower tax bracket means owing less money in taxes. When prepping your tax return, it pays to know the difference between tax deductions and credits, and which you’re eligible to claim. Working with a tax professional is the best way to find out what credits and deductions you qualify for.

Tax credits directly lower your tax bill. For example, if you owe $1,000 in taxes and qualify for a $1,000 credit, the credit can zero out your tax liability. Some, like the Child Tax Credit , are refundable, meaning if the credit amount exceeds what you owe in taxes, you receive the difference in your refund (conversely, if your income is higher, you may need to repay some or all of the money you received).

If it’s your first time filing income taxes ,  keep the following in mind:

Failing to file or not paying taxes owed can trigger a tax penalty or in extreme cases, the IRS could place liens against your property or file charges, so make sure to prioritize filing on time.

The IRS offers an online tool you can use to determine if filing a federal tax return is necessary for you.

Speaking of filing status, you can choose from: Single, head of household, married filing separately, married filing jointly or qualifying widow/widower with a dependent child. If you’re not sure, a tax professional can help you determine the proper filing status for you.

Be sure to gather all necessary tax forms and maintain documentation of any income, government benefits (such as unemployment benefits), receipts on major purchases, business expenses, distributions and any gains or losses from your investments.

Money made from dividends or investment profits is subject to tax. But tax implications vary depending on how long you’ve owned the asset before selling. A tax profession can help you explore certain strategies, like tax-loss harvesting, that can help you lower your investment tax bill.

You can collect your paperwork (W-2s, receipts for deductible expenses, etc.) and take it to a tax professional, who can get your tax return in order and file for you, in exchange for a fee.

Or, if you feel comfortable doing taxes on your own, you can prepare both your federal and state tax returns using an online tax filing program or by hand using paper and pencil. If you qualify, the IRS Free File program lets you file taxes for free.

While the DIY option is cheaper than hiring a tax pro, it may be more time consuming if you’re not well-versed in filing taxes.

Once completed, you’ll see whether you owe a tax bill or you’re due a refund. If you’re getting a refund, direct deposit is the fastest way to get the money. The IRS aims to send refunds within 21 days of a tax return being approved.

If you owe taxes, pay those by the tax filing deadline to avoid penalties and interest. If you owe a large sum of money to the IRS, you can set up an Installment Agreement, which doesn’t prevent penalties and interest from accruing but it can give you time to pay the IRS what you owe without fear of a lien or other consequences.

If you owe taxes, pay those by the tax filing deadline to avoid penalties and interest. If you owe a large sum of money to the IRS, you can set up an Installment Agreement, which doesn’t prevent penalties and interest from accruing but it can give you time to pay the IRS what you owe without fear of a lien or other consequences.

Getting your tax return together shouldn’t be a hassle. Whether you file on your own or work with a tax professional, staying organized throughout the year is a great way to ensure that the season doesn’t sneak up on you. Happy filing!