This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
The 2023 tax filing deadline is coming soon — are you ready? Learn some basic rules and language of the IRS to avoid problems with your tax return. [[{“value”:”
Image source: Getty Images
Tax season causes a lot of Americans to get familiar with complex vocabulary and concepts that they might only use once per year. As a result, there are a lot of misunderstandings about filing taxes. People often use the wrong terminology.
It’s no surprise that people get confused about taxes. After all, the IRS tax code is complicated. But as a taxpayer, it’s important to understand the basic rules and vocabulary of tax season. Knowing the language of the IRS will help you file your taxes on time and avoid tax problems or penalties.
Let’s look at a few of the biggest misconceptions about filing taxes and how to avoid them.
1. Tax refund vs. tax return
I often hear people confuse these two terms: tax return and tax refund. Your tax return is the official document that you file with the IRS at tax time. The money you get back from the IRS is called a “refund,” not a “return.”
It’s understandable that your “refund” might feel like a “return” — after all, the IRS is “returning” money to you. But your tax refund (if you get one) is a different thing. Almost everyone has to file a tax return, but not everyone will get a refund. And sometimes, getting a tax refund is not the best move for your personal finances, since it means you paid extra money to the IRS during the last year.
2. You can get an extension on filing your taxes
April 15 is not always the final deadline to file your taxes. If you need extra time to finish your tax return, you can get an extension until Oct.15. But you have to pay any tax due by April 15 or else you will owe interest and penalties.
3. You can still save money on last year’s taxes
Right up until your tax filing deadline (April 15), you can still put money into tax-deductible accounts that will reduce your taxable income for last year’s taxes. This is called making prior-year contributions. You can use extra cash to make this strategic tax planning move with traditional IRAs, health savings accounts (HSAs), and college savings 529 plans.
4. The difference between HSA and HRA
People with job-based health insurance might have a type of healthcare account called a health reimbursement account (HRA). An HRA is owned by your employer and allows your employer to put money into it for you to use for healthcare costs — but the HRA money does not appear on your tax return. You can’t get a tax break for your HRA.
An HSA is available to people who have a high deductible health plan (HDHP). The health savings account is a tax-deductible account that lets you save for healthcare tax-free, kind of like a tax-deductible traditional IRA. If you qualify for an HSA, for 2023, you can put up to $3,850 (for self-coverage) or $7,300 for family coverage into your HSA for the 2023 tax year.
5. You (probably) won’t get tax write-offs for your charitable donations
Unless you’re a high earner with many thousands of dollars of gifts to charity, you probably can’t get a tax deduction for your charitable contributions. To get a tax break for charitable gifts, you must take itemized deductions — and most taxpayers don’t qualify to do this. In fact, about 87% of taxpayers use the standard deduction.
6. Your marginal tax bracket is not your amount of income tax
If you’re in the 22% tax bracket, that doesn’t mean the federal government takes 22% of all your income. You only owe 22% on the amount above a certain level.
For example, for 2023 taxes, according to the IRS tax brackets, a single filer with $60,000 of taxable income is in the 22% tax bracket. Here’s how much tax this person would owe:
22% of income from $41,775 to $60,000 = $4,009.50, plus…12% of income from $10,275 to $41,175 = $3,708, plus…10% of income from $0 to $10,275 = $1,027.50
So this person’s total federal income tax would be: $8,745. That’s about 14.6% of this person’s taxable income, not 22%.
7. Tax credits vs. tax deductions
Tax credits and tax deductions are not the same thing. Tax deductions reduce your taxable income, but tax credits actually reduce the amount of tax that you owe. A common tax credit is the Child Tax Credit, which pays $2,000 per year per child under the age of 17. For example, if you owe $10,000 of federal income tax based on your income, but you have two children, your tax bill gets reduced by $4,000.
Tax deductions are different, but can also be valuable. If you put money into tax-deductible accounts like a traditional IRA or HSA, this reduces your taxable income and lowers your taxes based on your tax bracket. For example, if you’re in the 22% tax bracket, and you put $6,500 into a tax-deductible traditional IRA for 2023, this IRA contribution will give you a tax savings of about $1,430.
Bottom line: You don’t have to be an accountant to learn some basic lingo about filing taxes. Avoiding these misunderstandings can help you avoid unpleasant surprises on your tax return. Knowing which deductions you can expect to get and how much money you might owe (or get back in a tax refund) can help you have a happier tax season.
Alert: highest cash back card we’ve seen now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. This card features a 0% intro APR for 15 months, a cash back rate of up to 5%, and all somehow for no annual fee!
Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
“}]] Read More
