5 Levels of Being a Savvy Taxpayer: Which One Are You?

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How well do you understand your tax return? See how you stack up in tax knowledge — and get fresh ideas for how to save money on taxes. [[{“value”:”

Most people don’t love filing taxes, but it’s a necessary part of life. As you go through your career, just as you will ideally experience growth in your income and wealth, you will also likely get savvier about taxes.

No matter how you file your tax return, it’s important to know your rights and responsibilities as a taxpayer. Getting a better understanding of how taxes work can help you save money during tax season and free up more cash in your budget throughout the year.

Let’s look at a few unofficial “levels” of taxpayer savvy and see where you stand on the journey to being a better-informed taxpayer.

Level 1: Do I actually need to file taxes?

Most U.S. citizens and permanent residents working in the U.S. must file a tax return. But it depends on how much money you make. For example, if you’re single and your gross income is $12,950 or higher, you’ll need to file a tax return.

If you aren’t sure if you need to file taxes, check out the IRS website for more details.

Fun fact for Level 1 taxpayers: If you’re a student, you might not be required to file a tax return, but could still get a tax refund — for example, based on money that was withheld from your paychecks at a part-time job.

Level 2: Young adult with no children and simple taxes

You are a young adult, single, with no children. You’re working at your first “real job” out of high school or college, you receive a W-2 form from one employer, and you don’t own a home. At this stage of life, your tax situation might be the simplest it will ever be again.

As a Level 2 taxpayer, you probably don’t know the difference between the standard deduction and itemized deductions. Maybe you’re not putting money into tax-advantaged retirement accounts like a traditional IRA. Your tax return is kind of a mystery to you; you just fill out the tax software, and if you get a big refund from the IRS, you think that’s great. Free money!

Fun fact for Level 2 taxpayers: If your adjusted gross income (AGI) is $79,000 or less, you can file taxes for free with the IRS Free File program and free tax-filing software.

Level 3: Mid-career adult who’s happy to pay for tax software

As a Level 3 taxpayer, you’re making a lot more money than you did at your first job. You own a home and have started a family, and your taxes have gotten more complicated. At this level, it’s worth paying for the best tax software.

You’re putting cash into a traditional IRA or other retirement accounts like a 401(k). You’re paying home mortgage interest and local property taxes on your home, and asking yourself questions like, “Can I get a tax deduction for my home mortgage interest?” and “Does the $10,000 SALT deduction cap affect me?”

At this level, you understand what your tax return looks like, what tax bracket you’re in, and how to make a few strategic tax planning moves. You might want to proactively maximize your tax savings by putting more money into a traditional IRA or health savings account (HSA). See if you have enough itemized deductions to be bigger than the standard deduction.

Fun fact for Level 3 taxpayers: Writing a few extra checks to charity by the end of the year can be a good way to reduce your taxable income with itemized deductions.

Level 4: High earner/entrepreneur with lots of deductions

At this level, your income has grown, and so has the complexity of your taxes. You might be in a higher tax bracket than ever before. You decide to hire a professional tax advisor, not just use tax software. (Hiring professional tax help is especially important for small business owners.)

You have a high enough income to max out your 401(k) and other tax-advantaged retirement accounts — while being mindful of income limits. You might be able to itemize deductions with just a few smart tax planning moves. Plan ahead to get a ballpark estimate of how much tax you will owe in a typical year. Instead of celebrating a big tax refund, try to get a smaller refund — so you can have more cash to invest throughout the year.

Fun fact for Level 4 taxpayers: You can make prior-year contributions to a health savings account (HSA) or traditional IRA right up until your April 15 filing deadline.

Level 5: High-net-worth household

You’ve reached a high level of wealth and income. You’re in one of the highest tax brackets, and it’s important for you to be strategic about tax planning. You itemize deductions and make big donations to charity to help reduce your taxable income.

You try to only pay long-term capital gains tax, not short-term. You do tax-loss harvesting (selling losing stocks in your taxable brokerage account). You look for advanced tax strategies, and you need professional tax help to handle your money in the most tax-efficient way possible.

Fun fact for Level 5 taxpayers: If your income is too high to use a Roth IRA, you can use a tax strategy called a backdoor Roth IRA to get access to valuable tax benefits.

Bottom line

Young people who are in the early stages of their careers might have simple tax returns and can file for free. Middle-aged people with children, mortgages, and tax deductions might need to do a deeper dive into IRS tax rules. And self-employed people who own small businesses might need professional tax help from an accountant or tax attorney.

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