Updates to the tax code you should really know about

FeaturedMoney

Written by:

 

Why Make Changes?

The US experienced some of the highest inflation rates in decades in 2022. To account for this inflation, the Internal Revenue Service announced a few major changes to the tax code that will take effect in the 2023 tax year.

Taking full advantage of these tax code updates could help individuals lower their taxable income and ultimately pay less in taxes come April 2024.

Deductions & Contributions

To start, the IRS increased the amount that you’re able to deduct from your tax bill for the 2023 tax year. This year, single taxpayers will be able to deduct up to $13,850 from their bill, which is $900 more than they could last year. And married couples will be able to deduct up to $27,700 from their taxes — $1,800 more than last year.

______________________

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you're ready to be matched with local advisors that can help you achieve your financial goals get started now.

______________________

 

 

 

By deducting acceptable expenses from your tax bill, you can lower your taxable income, ultimately paying less in taxes. Acceptable expenses include interest on student loan or mortgage payments, charitable donations, and even moving expenses.

On top of that, the IRS increased the amount that taxpayers can contribute to their tax-deferred retirement plans this year by 9.8%. Americans can now contribute up to $22,500 into 401(k), 403(b), and most 457 retirement plans — a $2,000 increase from last year’s limit. For IRAs, individuals can now contribute up to $6,500, which is a $500 increase from last year.

Bigger Paychecks

The IRS also updated the 2023 tax brackets, as well as the withholding tables, which dictate how much employers should withhold from paychecks to pay federal taxes.

With bracket thresholds increasing by around 7% from last year, the income of many employees will be taxed at a lower rate this year. With employers potentially withholding a different amount in federal taxes, this means that, depending on the nature of your employment, your take-home pay may get a boost in 2023.

These updates represent the IRS’s part in curbing the high inflation persistent in our current economy. And by taking full advantage, it may just minimize the effects of inflation on a tax burden.

Learn More:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

More from MediaFeed:

Guide to taxes and cryptocurrency

 

With some investors seeing substantial profits in cryptocurrency, governments understandably want to take in cryptocurrency taxes.

 

But since cryptocurrency trading is a relatively new type of investment, investors are still struggling to learn how to report different cryptocurrency transactions on their taxes. Bitcoin has only been around since 2009, and it wasn’t until 2014 that the Internal Revenue Service (IRS) first acknowledged its existence.

 

What every cryptocurrency investor should know: The IRS treats crypto as property, so in general, a cryptocurrency tax is similar to a tax involving a property transaction.

 

Related: Understanding the different types of cryptocurrency

 

Jirapong Manustrong / istockphoto

 

The IRS declared cryptocurrency to be a form of property in April 2014. Broadly speaking, this makes the asset class subject to capital gains taxes.

 

And yet one confusing aspect of the IRS communications surrounding cryptocurrency taxes is their use of the term “virtual currency.” Despite classifying crypto as a form of property, the agency still refers to the asset class as a currency.

 

The official IRS website states the following: “The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.”

 

There is a full IRS statement on the subject called “Notice 2014-21.” This document answers many of the most frequently asked questions surrounding taxes and cryptocurrency.

 

franckreporter

 

Here’s a quick rundown of four situations in which a taxpayer will need to report their cryptocurrency transactions, as covered in Notice 2014-21.

 

 

Helloquence

 

Taxpayers, including independent contractors, who receive payment for goods or services in the form of cryptocurrency are required to factor this payment into their income.

 

Doing so requires including the fair market value of the cryptocurrency on the date that the crypto was received. All cryptocurrency transactions must be reported in U.S. dollars. To determine fair market value, taxpayers must determine the value of the coin as measured in U.S. dollars at the time of receipt.

 

IRS Publication 525  can be referenced for issues regarding taxable income.

 

istockphoto

 

Individuals who pursue cryptocurrency mining as their business have to pay taxes on the cryptocurrency they earn as a result.

 

In this case, the crypto earned becomes subject to the self-employment tax. IRS Publication 334  has more information on self-employment taxes and Publication 535  has more information on business taxes.

 

ipopba / istockphoto

 

Hard forks that involve the creation of a new coin generate additional income for the recipient, and are treated as such. Bitcoin holders who received Bitcoin Cash (BCH) on August 1st, 2017, for example, might owe taxes on the BCH they received.

 

“Airdrops,” which are random distributions of new coins for marketing purposes, are also treated as additional income.

 

Marc Bruxelle / istockphoto

 

When someone pays for goods or services using crypto, the IRS considers the transaction “subject to information reporting to the same extent as any other payment made in property.”

 

Notably, this only applies to a payment of $600 or more in a taxable year. This provision was added to spare users the almost impossible task of calculating capital gains for many small purchases made using crypto.

 

Ivan-balvan / istockphoto

 

In recent years, the IRS has become more targeted in their efforts to get taxpayers to report gains and losses in their crypto portfolios.

 

In 2019, the agency sent letters to 10,000 taxpayers notifying them that they may owe back taxes, penalties, and interest on cryptocurrency transactions.

 

In 2020, for the first time, all taxpayers were required to answer a question regarding cryptocurrency taxes on their 2019 tax returns.

 

The question simply asks if a taxpayer has engaged in taxable transactions involving cryptocurrency, including receiving, selling, sending, exchanging or otherwise acquiring any financial interest in any virtual currency. (Buying cryptocurrency does not constitute a taxable event.)

 

The IRS later elaborated on what it means to have a “financial interest” in virtual currency:

  • Receiving crypto from a fork or airdrop
  • Selling crypto
  • Exchanging crypto for goods or services
  • Exchanging crypto for other property, including other cryptocurrencies.

The IRS appears newly determined to find and prosecute crypto users who haven’t reported crypto taxes. Taxpayers who falsify their answer to the cryptocurrency question on their tax returns could face penalties and perhaps even criminal investigations later on.

 

istockphoto

 

For investors who only buy cryptocurrency and never sell ( these investors are sometimes called “HODLers”), their taxes might be easy. With no selling activity, there are no realized gains, and so there may be no capital gains taxes to pay.

 

For those who have realized gains, however, there could be taxes due.

One common method for determining fair market value for anything subject to capital gains tax is the “first-in, first-out” (FIFO) method. With FIFO, the first sale made must be compared to the first purchase made to determine profits or losses.

 

For those who have realized gains, there could be taxes due.

 

For example, if 20 items were purchased for $10 and 10 more items were purchased next for $15, FIFO would assign the cost of the first item resold of $10. After 20 items were sold, the new cost of the item would become $15.

 

Whenever an investor sells coins, calculating the profit or loss can be accomplished by looking at the first buy order for that coin. The second sell order would then look at the second buy order. The third sell order would look at the third buy order, and so on.

 

Things can get tricky when trying to calculate many different transactions over time for many different coins and amounts of coins.

 

Luckily, exchanges and other third-parties have developed software to help investors cope with these challenges. In addition, many cryptocurrency exchanges keep logs of user transactions. This data is typically available for download as a .csv file.

 

FIFO isn’t the only method for calculating capital gains tax, but it’s one of the more commonly-used and straightforward ones.

 

RobertAx / istockphoto

 

When an investor profits from crypto transactions, they can be subject to taxes. Those transactions include buying low and selling high, exchanging one crypto for another, or benefiting from a hard fork.

 

Of course, capital losses can also be reported and could reduce an investor’s overall tax burden in some cases.

 

Since the IRS first declared cryptocurrency taxable in 2014, a number of software programs and services have arisen to help investors with the complicated task of reporting cryptocurrency transactions on their taxes. There is also a growing number of tax lawyers and accountants who specialize in this area.

 

For investors trying to make sense of their individual cryptocurrency tax responsibilities, it may be helpful to consult with a certified tax professional to determine the best course of action for their individual situation.

 

Learn more:

This article
originally appeared on 
SoFi.com and was
syndicated by
MediaFeed.org.

 

SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA  SIPC  . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA  the SEC  , and the CFPB  . PDF File, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
For additional disclosures related to the SoFi Invest platforms described above, please visit www.sofi.com/legal.

 

dulezidar / istockphoto

 

Featured Image Credit: franckreporter.

AlertMe