The IRS has released a plan for the nearly $80 billion in funding enacted through the Inflation Reduction Act. The plan includes improvements to customer service, technology, and enforcement. In this article we will explore how the funding plan will affect taxpayers.
Boost Technology
The plan aims to help the IRS develop new technologies to make the tax filing process easier for taxpayers, such as tools to help identify errors before filing returns. These improvements could make it easier for taxpayers to comply with tax laws and reduce the likelihood of mistakes in filing their returns. Additionally, the IRS seeks to phase out its paper backlog within five years by moving to a fully digital correspondence process.
Focus on Customer Service
The IRS intends to hire more than 7,000 service representatives and 1,500 auditors with the aim of reducing wait times and being more accessible to taxpayers, leading to a more efficient and responsive system. Within the next five years, taxpayers should be able to file documents and respond to notices online as well as download their account information.
Lean In to Enforcement Efforts
The agency wants to crack down on tax evasion, and plans to utilize a portion of the funding to do so. This could mean an increase in audits. Taxpayers who may have cut corners in the past could face stricter penalties for non-compliance. However, increased enforcement could also lead to more compliance with tax laws, if there is a clearer standard of behavior and more deterrents for those who attempt to cheat the system.
Close the Tax Gap
The IRS plans to reduce the budget deficit by closing the tax gap, initially focusing on tax returns for large corporations, complex partnerships, and wealthy families. The boost in staffing will help to address these more complicated audits. The agency has been quick to point out that households making less than $400,000 will not be affected by an increase in audit rates.
Saving for retirement should be a critical component of any financial plan, but it can be challenging if you’re also working toward debt repayment. The good news is that it’s possible to do both at the same time. The key is to be consistent and disciplined, and in time you’ll see the benefits of your efforts. Read on for strategies you can use to save for retirement while tackling debt.
Prioritize High-Interest Debt
High-interest debt, such as credit card debt, can quickly accumulate interest and make paying it off even more challenging. By addressing this debt first, you can reduce the amount of interest you’ll pay over time. The amount of money you’ll rescue from credit card interest can be applied to remaining debt payments. Once your highest interest debt is paid off, move onto the debt with the next highest interest rate. This is known as the avalanche method of paying off debt.
Build an Emergency Fund
Establishing an emergency fund will help you cover unexpected expenses without having to rely on credit cards and thereby adding to your debt. Aim to save at least three months’ worth of living expenses in your emergency fund before you start allocating more funds toward retirement savings.
Increase Your Cash Flow
Increasing your monthly cash flow will provide you with more cushion in your budget to save for your emergency fund, meet your debt repayment plan, and save for retirement. In order to increase your cash reserves, think about requesting a raise, making a career change, or taking on a side hustle.
Consider a Balanced Approach
A balanced approach involves allotting a portion of your income toward paying off debt and a portion toward saving for retirement. You’ll need to decide what percentage of your income should go toward each goal, but this approach can help make progress toward both debt repayment and retirement savings without neglecting one for the other.
Cut Expenses and Establish a Budget
If you’re struggling with debt and saving for retirement, it’s probably time to take a closer examination at your income and expenses. Where is your money going each month? What can you do to build better financial habits? Look for areas where you can cut back, such as dining out, shopping, and entertainment. Even small slashes in costs can have an impact on your finances. When you begin to pay attention to where your money is actually going, you can make informed decisions that will help you redirect more funds toward your savings goals.
Automate Savings
Automating savings is an ideal way to ensure that you’re on track to meet your retirement goals. If your employer offers a retirement plan that allows you to contribute a percentage of your paycheck toward retirement savings, be sure you’re taking advantage of it. You can also set up automatic transfers from your checking account to a retirement savings account like an IRA. Automating savings is a set-it-and-forget-it approach that provides consistent progress in saving for retirement.
The IRS wants American taxpayers to be prepared for a potentially smaller tax refund in 2023. There are a few contributing factors that prompted the warning from the IRS in a recent statement, and we go over those below.
Economic Impact Payments
In a recent statement, the IRS cited the lack of Economic Impact Payments in 2022 as the main factor in lower tax refunds for next year. In 2020 and 2021, many taxpayers received additional refunds due to Economic Impact Payments (also known as stimulus payments), which were issued in response the financial impact Americans experienced during the COVID-19 pandemic. The final stimulus payment was distributed in March 2021. With no stimulus payment issued in 2022, taxpayers won’t see the additional money in their refunds.
Charitable Contribution Deductions
Additionally, in 2020 and 2021, taxpayers who take the standard deduction could claim a tax deduction of up to $300 for cash donations to charity. This pandemic-era exception hasn’t been extended for 2022. In order to write off gifts to charity, taxpayers must once again itemize. Almost 90% of taxpayers use the standard deduction, which means most Americans won’t be able to deduct charitable contributions.
An Additional Hurdle for Side Hustles and Small Gigs
The American Rescue Plan enacted a new rule that will affect those who rely on side hustles using third-party payment services like PayPal or Venmo – or sell on sites like eBay, Etsy, and Facebook Marketplace. Taxpayers who used these platforms to sell more than $600 worth of goods or services will be receiving a 1099-K form from whichever platform they used. Prior to the American Rescue Plan, the threshold that would trigger the need for a 1099-K form was either 200 transactions or $20,000. With this new requirement, many Americans will be filing taxes on their side hustles for the first time in 2023, which could also contribute to a lower tax refund for some filers. Note that money received from friends or family via a third-party app as a gift or reimbursement for personal expenses is not taxable.
NOTE: On Dec. 23, 2022, the IRS announced that calendar year 2022 will be treated as a transition year for the reduced reporting threshold of $600. For calendar year 2022, third-party settlement organizations who issue Forms 1099-K are only required to report transactions where gross payments exceed $20,000 and there are more than 200 transactions.
Approaching retirement planning when you’re late in the game can be a daunting task, but with the right strategies, you can get on track to build a nest egg that will provide some support by the time you reach retirement. Read on for proven catch-up options for late starters.
Identify How Much Savings You’ll Need
You might tell yourself that you won’t need much in retirement, but you might be surprised to learn that even a life of simplicity could require $1 million in the bank once you step away from the workforce. Given that most financial experts agree on an annual withdrawal of 3% to 4% of your retirement portfolio, that’s $30,000-$40,000 per year with a $1 million portfolio. This scenario excludes Social Security income as well as pensions, rental properties, or other sources of income.
Thinking through how much money you’ll need to live comfortably with the lifestyle you plan to lead in retirement will help you determine how aggressively you’ll need to save.
Pay Down Debt
While it’s important to pay down debt, you don’t want to surrender retirement goals to do so. You’ll need to come up with a plan to pay off credit card debt, car loans, and other high-interest or non-mortgage debt while also saving for retirement.
As for your mortgage, how you handle this debt as you approach retirement depends on where you are in your repayment journey. If you’re closer to the early stages of your mortgage and most of your monthly payment is assigned to interest, it might make sense to pay down some of the principle. However, if you are closer to the later stages of your mortgage and your payments are generally assigned to the principal, you might think about investing that money for retirement rather than putting any additional funds toward mortgage payments.
Invest Your Age
You might think that in order to make up for lost time, you should take on more investment risk. But with more risk comes the potential for more loss to your principal. Your risk should correlate with your age. While investors in their 20s and 30s can afford more risk because they have more time to recover any losses, investors in their 50s or older don’t have that luxury. As you near retirement you might consider one of the following blueprints for asset distribution, depending on your personal level of risk aversion:
High (but acceptable) risk: Invest in stock funds a percentage of 120 minus your age. Put the rest into bond funds.
Moderate risk: Invest in stock funds a percentage of 110 minus your age. Put the rest into bond funds.
Conservative risk: Invest in bond funds a percentage equivalent to your age. Put the rest in stock funds.
Fund a Roth IRA
If you are able to max out your 401(k), consider opening a Roth IRA and fully funding that as well. Roth IRAs are an opportune way to save and grow investments. Contributions to a Roth IRA grow tax-free, and qualified withdrawals are tax-free. The yearly contribution limit for both traditional and Roth IRAs is $6,000 for 2022. The catch-up contribution for those 50 years and older is $1,000.
Be Sure You Have Sufficient Insurance
Fact: Unforeseen hardship is the cause of most personal bankruptcies. You have a greater chance of avoiding bankruptcy when you have adequate health, disability, home and car insurance in place. Further, if you have dependents, think about term life insurance. Note that, in general, term life insurance is recommended over whole life insurance. Be sure to look for insurance agents who have a fiduciary duty to you, meaning the agent must legally and ethically act in your best interest.
Put Your Retirement Saving Plan First
It’s typically agreed that draining retirement funds to send children to college is a bad financial move. Aside from the fact that your 401(k) may not permit you to take out a loan on your retirement account balance, consider that your children have their entire working lives ahead of them, and they can begin saving for retirement much earlier than you did. At this stage in the game, protecting your own financial retirement security will help to ensure that the burden doesn’t fall to your children in the future.
With record high inflation and rising interest rates, an economic recession has been the subject of many conversations lately. Now with two consecutive quarters of a drop in GDP (gross domestic product)—the benchmark many economists use to gauge a recession—the possibility of a serious economic downturn isn’t just fodder for conversation anymore. It’s time to get serious about protecting your finances for a recession. Here’s how you can make sure you’re prepared.
Build Up Your Emergency Fund
It’s widely recommended to have enough savings to cover three to six months of living expenses. The specific amount will depend on your circumstances. For instance, in today’s uncertain economy, you might feel it worthwhile to aim for more than six months. It might seem daunting, but don’t undervalue the effectiveness of small contributions on a regular basis. You can also think about automating your savings contributions for a set-it-and-forget-it approach. Whichever way you go about it, consistent contributions to an emergency fund help to build positive saving habits that will carry into the future.
Pay Down Credit Card Debt
Focus on paying down any high-interest debt. Not only will this help you be more prepared should you get laid off during a recession, but credit card APRs are rising in response to the Federal Reserve’s rate hikes. Knocking out debt could free up critical breathing room in your budget that you could use to boost your emergency fund.
Identify Ways to Reduce Expenses
Start looking at all the ways you spend money, and identify ways you can scale back on discretionary spending (services or items that aren’t necessities—vacations, dining out, cable, spa treatments, etc.). Typically, the guidance is to spend no more than 30 percent of your net income on discretionary purchases. Think about creating a monthly budget in order to stick to this guideline and ensure you’re not overspending.
Stay Invested
It’s tempting when the market is as volatile as it’s been recently to think about cutting back on 401(k) contributions or selling stock investments. Keep in mind, however, that you’re investing for the long term. Stocks rise and fall all the time, and history has proven that bull markets (rising market conditions) last longer than bear markets (falling market conditions).
Rebalance Your Portfolio
While you want to stay invested for the duration of a recession, you might consider rebalancing your investments. Depending on your age, risk tolerance, and investment goals, it may make sense to shift more investments into growth funds, which could potentially experience greater gains when the market rebounds. Be sure to keep in mind that money needed in the short term should not be allocated to these funds as they are high risk.
