The Boston Tea Party occurred just over 250 years ago in December 1773 when the loosely organized Sons of Liberty organization took to Griffin's Wharf to dump 342 chests of British East India Company tea into the Boston harbor.
In the eyes of U.S. historians, this event remains a paramount example of the lengths we will go to pay less in taxes. This maxim remains the same today as it was during the Revolutionary War, and in fact, the tax code even encourages it.
But how exactly do I optimize my tax situation to make sure I owe less this year? First, you'll need to get familiar with the basics of taxes.
Tax 101 Lesson 1 — Getting Familiar With US Tax Basics
More American taxpayers are preparing and filing their returns all on their own than ever before, and while this might sound empowering, it can also be dangerous for the ill-equipped.
If you're planning on filing your own taxes this year, here are a few things you should know.
What counts as taxable?
Let’s cut to the chase — most monetary events are taxable, but there are of course some distinctions to be made.
There are two broad categories of taxes levied on income — earned income, and unearned income. Earned income is any money you make in exchange for your labor and time, like your job. Unearned income eludes to profits you reap from other sources, such as capital gains, annuities, retirement account distributions, social security, unemployment, gambling winnings, and more.
Income taxes are paid on the money you make. Whether it's federal, state, or local tax, and whether it's from an employer, as an entrepreneur, freelancer, landlord, or a variety of other circumstances. As you might've guessed, the rate your income is taxed at depends on how much you made. For the 2023 tax year, federal income tax rates top out at 37%.
Capital gains taxes are paid on any profits you make from the sale of an asset. An asset could mean a house, stock, crypto, baseball cards, or even a car (although they rarely appreciate). Capital gains have their own unique tax brackets. For example, short-term capital gains (selling an asset you owned for less than a year), are taxed in the same bracket as your ordinary income, whereas long-term capital gains have favorable tax rates ranging from 0% to 20%.
Basics of Tax Documentation
Filing taxes requires a lot of paperwork, even if that 'paper' is stored on your computer. Most filers will need, at minimum, basic identification documents, and income statements (W-2, 1099s, etc.).
You'll also need a plethora of different documents for other kinds of income and tax-relevant events. For example, interest from a high-yield savings account will need to be reported on form 1099-INT, dividends on form 1099-OID or 1099-DIV, income from the sale of stocks on form 1099-B, and… the list goes on.
For the self-employed, freelancers, and small business owners, another set of forms awaits you too. 1099-MISC, 1099-NECs, expense records, etc. Self-employed individuals also miss out on the benefit of their employer paying half of their FICA taxes, often resulting in a higher tax burden and the need to make estimated self-employment tax payments quarterly — yes, you'll need a record of those too.
Ultimately, the more complex your tax situation, the more documentation you will need. Luckily, we've already prepared a comprehensive list for almost any tax situation.
Understanding Deductions and Tax Credits for Beginners
Tax deductions come in two flavors — the standard deduction, and itemized deductions.
The standard deduction is a set amount that all filers can reduce their taxable income by. For 2023, that amount is $13,850 for single filers, $20,800 for heads of households, and $27,700 for those married filing jointly. Next year, those deductions increase to $14,600, $21,900, and $29,200.
Itemized deductions, on the other hand, are exactly what they sound like. Instead of taking the lump-sum standard deduction, filers can choose to itemize certain eligible deductions based on their tax situation and expenses.
It's estimated that about 90% of filers choose to take the standard deduction. This is because you can't take both the standard deduction and itemized deductions and unless your itemizations exceed the SD, it's simply not worth it. To figure out if your candidates for itemization exceed the standard deduction, you'll just need to identify all possible deductions and do some math.
Deductions also aren't to be confused with tax credits, which they can coexist with. Filers can take tax credits for certain eligible events or expenses, and these credits reduce their taxes owed in direct proportion to their value. I.e., a $1,000 credit is good for a $1,000 reduction in taxes owed. In many cases, this can help facilitate a refund.
Understand Pre and After-tax distinction for income
Knowing the difference between pre-tax and after-tax can be one of the most powerful tools in your tax planning belt.
These are terms most often associated with certain kinds of retirement plans and employee benefits, and optimizing your selection of them based on your situation is key.
Pre-tax simply means that the money comes out before it is reported as income. Pre-tax contributions, for example, effectively reduce your taxable income by being “subtracted” from your income, or in other words, they were never counted as income. The caveat of pre-tax accounts is that you'll have to pay taxes on them when you do finally take distributions, making them best-suited for those who are in a higher tax bracket now and expect to be in a lower one later.
Pre-tax examples: Common work retirement plans like 401(k)s, 403(b)s, or 457 are all pre-tax, as well as the traditional IRA, which can be opened independently. For 2023, the contribution limit on a 401(k), for example, is $22,500. If an employee makes $100,000 and maxes out their 401(k), their taxable income has been reduced by $22,500.
After-tax accounts are the exact opposite of this. They're a work now, play later approach to taking the tax burden on now and avoiding it later. Contributions made to after-tax accounts are counted as income, but you get the benefit of not owing taxes on the proceeds at the time of withdrawal.
After-tax examples: Brokerage accounts, Roth 401(k)s, and Roth IRAs are all after-tax accounts — and they come with lower contribution limits. So, if someone under age 50 contributes the maximum amount of $6,500 to their Roth IRA, it will have no effect on reducing their taxable income now, but allow them to enjoy tax-free growth and gains over time.
Tax 101 Lesson 2 — Planning Ahead for Taxes as a Beginner
Once you feel like you've got a solid, comprehensive grasp on the world of taxes, it's time to apply knowledge to your own situation. Start getting ahead of the tax deadline on April 15th by planning ahead and making moves to optimize your taxes, and reduce the amount you owe.
Look at your financial plan, portfolio, earned and unearned income, and overall situation from a tax perspective. Instead of just viewing income as green and expenses as red, view them through the lens of the tax code and the many ways it invites you to reduce your taxable income.
Identify the deductions and credits you qualify for. You’d be surprised at just how many filers miss out on tax savings simply by not knowing about the deductions or credits they qualify to take.
Of note — make sure to make the moves that qualify you for those deductions and credits on time. For example, itemizing your deductions isn’t worth it unless your itemizable expenses exceed the standard deduction, so if you find that you’re nearing that amount by year’s end, it may be time to accelerate those costs to get over the hump.
Don't forget to make use of your use-it-or-lose-it FSA contributions, sell some losers in your portfolio if you plan to deduct capital losses, make a charitable contribution by year’s end if you’re planning to, and make last-minute contributions to retirement accounts that come with a Dec 31st deadline — 401(k), 403(b) accounts.
Make proactive decisions throughout the year. As you become more aware of the impact taxes have on your finances, make sure to use that knowledge to make prudent money moves in 2024 that lend themselves to tax advantages.
Tax 101 Lesson 3 — File your taxes with Origin to take the burden out of tax season.
The IRS estimates taxpayers spend an average of $250 on tax preparation services each year — yikes. Now that you've mastered the basics, you can avoid the hefty bill by finding an affordable and straightforward way to file your taxes, relieving the stress that comes with the season.
Enter the solution: an all-in-one financial platform. Picture managing your money, budgeting, investing, and filing your taxes seamlessly in one place. That's what Origin brings to its members.
Origin is introducing simplified digital tax filing for the 2023 season. What's even better? It's included at no additional cost to your subscription. Origin Tax is powered by Column Tax to not just cover the basics, but to handle all tax complexities or unique scenarios. Whether you've dabbled in crypto or you're navigating the intricacies of filing jointly with a partner for the first time, Origin lets you file your taxes without extra charges or hidden fees.
Worried about accuracy and getting the maximum refund? Fear not. Returns filed on Origin are backed by a 100% accuracy and maximum refund guarantee, providing peace of mind as you get your taxes done.
Have questions or unsure if Origin Tax is right for you? We’re happy to chat! Reach out anytime.
Maximum Refund Guarantee. Column Tax will reimburse you for up to $250 if you are able to pay less federal or state income tax or receive a larger federal or state income tax return by using another tax return preparation provider. To be eligible for such reimbursement, the difference must be solely due to calculations, not due to entering any additional information or taking any different tax positions. To be eligible for such a reimbursement, you must file your federal (and if applicable state) income tax returns using the other tax preparation provider and must submit a copy of such return within sixty (60) days of filing via letter to 228 Park Ave S, PMB 22299, New York, New York, 10003, US or via email to firstname.lastname@example.org. You must also provide proof of payment for the other tax preparation provider and Column Tax will reimburse you for that amount (up to $250). Column Tax reserves the right to request additional information to support your claim that the other tax preparation provider calculated a lower tax liability or larger refund amount and that any such difference was not the result of different information.
Accuracy Guarantee. Column Tax will reimburse you for up to $10,000 of IRS or state interest and/or penalty that is imposed as the result of a computational error on a form prepared using Column Tax. If you believe that such an error occurred and you wish to seek reimbursement, you must submit a request for reimbursement via letter to 228 Park Ave S, PMB 22299, New York, New York, 10003, US or via email to email@example.com. Such a request for reimbursement must be submitted within thirty (30) days of the payment of interest and/or penalty and you must include (i) any correspondence assessing such interest and/or penalty, and (ii) proof that you paid the assessed interest and/or penalty. This Section 7.2 (Accuracy Guarantee) applies only to computational errors made by Column Tax; it DOES NOT apply to any errors that are the result of, among other things, any incomplete, inaccurate, or inconsistent information provided by you, any uncertain position you decide to take, your choice not to claim a deduction or credit, conflicting tax laws or guidance, or any changes to federal or state tax laws after January 1, 2023.