Getting prepared for filing in the 2023 tax season, here are tips to navigate if you have changed jobs, lost money in the stock market or moved to a different state to avoid any tax filing issues with the IRS this year. A recent article published by Bloomberg explains that this years filing will be different if you have made any major life-changing events.
The article columnist explains that as people are getting prepared for their yearly tax season filing, individuals that made major life changes may find that this year’s filing will be more complex or trickier. One of the corporate buzz phrases of 2022 was the “Great Resignation” where people quit jobs, switched employers, and moved to different states out of expensive cities for more affordable regions such as the south “Sun Belt” destinations. The stock market was volatile with several interest rate hikes trying to tame inflation, leaving investors to grapple with possible capital gains losses as the IRS holiday AKA tax filing deadline on April 18th, approaches.
Elliot Pepper, a financial planner and director of tax at Northbrook Financial in Baltimore told Bloomberg that “over the past two years, we’ve had either a combination of extended due dates, stimulus payments, and other tax credits that obscured a traditional tax return.” he went on to say that this years tax filing year is going to be different.
The article covered some of the pros and cons of these situations.
(image credit: bloomberg)
Changed or Switched Jobs
Depending on what type of job position and compensation you receive, (salary, bonuses, commission etc) If you changed jobs during the tax year, you may have received multiple W-2 forms from your employers. Be sure to include all of your income on your tax return and double-check that the information on each W-2 form matches your records.
Whether you quit your job or were laid off, your new employment status will likely mean extra work this tax season. But you could also be in for a higher refund.
Upside: Withholding surprises
Some professionals who switched jobs sometimes benefit around tax time: unexpectedly large refunds. The Bloomberg article points out the reason is those old and new employers often don’t communicate about how much they are withholding in taxes for Social Security and Medicare. New employers often withhold too much, which ultimately needs to be repaid to the staff member.
Downside: Interest-free loans
Big refunds are nice, but they also come with an opportunity cost. Large refunds are effectively interest-free loans you’ve given to the IRS. The financial planner MR Pepper suggests that a better “strategy is to get your withholding amounts right when you switch jobs and put any spare cash into a high-yield savings account.”
Investment Income Stock Losses
Last year, the S&P 500 Index posted its worst annual performance since 2008. Tough as it may have been on portfolios, losses presented a unique tax benefit for investors.
Upside: Tax-loss harvesting
Lost money in the stock market: If you sold stocks or other investments at a loss during the year, you may be able to use those losses to offset gains and reduce your tax liability. This is known as tax-loss harvesting, and it’s a strategy that can be used to minimize taxes. However, keep in mind that there are limits to how much you can deduct each year, so it’s important to talk to a tax professional to understand your options.
The Bloomberg article stated that experienced investors who sold poor-performing stocks before the end of 2022 can use those losses to offset capital gains from the sale of better-performing assets. As per IRS rules, these latter assets can include stocks and bonds, but also a home or business.
There is a limit: Investors can only deduct up to $3,000 against their taxable income each year. But losses beyond $3,000 can be carried forward every year until death to offset gains in future years.
Downside: You may be too late
Mr. Pepper of Northbrook Financial had some tough news for a financial-planning client who came to him recently excited about tax-loss harvesting. The client hadn’t done it before the end of 2022, so he was too late for the current filing year. As a general rule of thumb if you have portfolio investments it is recommended that you check in on your tax-loss harvesting opportunities twice a year. Any more than that, you run the risk of skewing an investor’s asset allocation. And some robo-adviser companies such as Betterment or Wealthfront will do it automatically, taking out both the guesswork and the potential to forget.
Started a Side Hustle or Business
Whether started a side hustle because you needed extra money during the pandemic due the rising cost of everything or just decided to finally start a passion project. They have become quite popular, They can also be more lucrative than expected. But as financial advisers point out, side hustles can get tricky from a tax perspective very quickly.
Upside: Retirement savings
A successful small business provides a great way to save for retirement.
The IRS allows entrepreneurs to set up Simplified Employee Pension (SEP) plans for themselves and their staff. Such plans do not have startup or operating costs like retirement plans at larger companies.
Employees using SEPs are allowed to contribute up to 25% of their pay or $66,000 in 2023, whichever figure is smaller. This means that someone already contributing the maximum amount to their retirement accounts at their main job also has the opportunity to contribute even more to a tax-favored retirement account through their side hustle.
Downside: 1099 reporting issues
Most side hustlers know what a 1099 form is, which they receive from clients who paid them $600 or more a year in nonemployee compensation.
Taxes aren’t deducted from payments on 1099 forms. This means sidle hustlers need to keep track of how much they bring in, and how much they will eventually owe in taxes.
Mr Pepper told Bloomberg that tells clients that to be on the safe side he recommends
taking 30% of revenue from a side hustle and putting it in a high-yield savings account. That way, when it comes time to pay taxes, there will be more than enough in the bank to prevent cash-flow issues. Last month I wrote an article about the IRS decision to delay implementing Form 1099-K $600 3rd party payment reporting threshold until 2023.
Moved to a Different State
Recent data from the US Postal Service shows that Americans have been on the move to cheaper zip codes. But some issues may await for those that just focused on relocation logistics rather than their potential tax consequences or tax obligations for doing so.
Upside: New investment options
During the pandemic many people chose to move out of expensive urban cities to lower-cost states, to reduce their tax burdens. But moving states can also present a new investment landscape. As an example, Alvina Lo, chief wealth strategist at Wilmington Trust told Bloomberg that some of her clients that moved from New York to lower-tax states have long invested in triple-tax exempt municipal bonds. (which are exempt from federal, state and NYC tax on their interest, if purchased by residents.)
But if you move to a state such as Florida, this can change as other types of investments with higher yields may become more attractive in lower-tax states.
Downside: New tax obligations
On the flip side of that coin, not moved to everyone to a lower-tax jurisdiction, and those who move to destinations with higher taxes should remember that obligations can creep up in unexpected places.
Mrs. Lo, said got a tax surprise when she made to the move to NYC from Massachusetts. She was used to being taxed at the federal and state levels, but not at the city level, as happens in New York. She ended up with a bigger bill than she expected because of city obligations when it came to tax time.
Conclusion
To help navigate, save, prepare, and file an accurate and complete tax return for 2023 tax consider working with a tax professional who can identify your unique needs. If you are a small business and have any questions feel free to reach out for a free consultation, time is of the essence.
