by frugalprofessor
The 2023 version of FreeTaxUSA is now live: https://www.freetaxusa.com/
Usual disclaimer: the website’s name makes it sounds like a horrible scam. But it is my favorite tax filing site, found through my favorite resource on the planet for all things personal finance: the Bogleheads forum.
How do I use FreeTaxUSA?
- In November, I take 30 minutes to extrapolate my YTD income to arrive at projected W2s + 1099s, and thus my projected tax refund/shortfall:
- I’m salaried with no uncertain bonuses coming, so I can estimate to the penny my 2023 income. Combined with my YTD + future withholdings (fed + Soc Sec + Medicare), I can perfectly estimate my official 2023 W2 in mid-November.
- I created a template if you want to see the gist of what I do. It’s not terribly sophisticated, but it works flawlessly every year given my predictable income stream: W2-Estimator
- For interest income (e.g. 1099-INT), I estimate it as YTD interest (through Oct) * 12/10.
- I use Personal Capital to easily observe my YTD interest through a simple transaction query.
- Be sure to include bank bonuses here. They are easy to forget.
- For dividends (e.g. 1099-D), I can estimate this as YTD dividends (through Oct) * 4/3, since I’ve already received three of the four quarterly VTSAX dividends from Vanguard (Mar, Jun, Sep). Historically, 95% of these dividends are qualified (with 5% non-qualified). That is going to certainly get me close enough.
- I use Personal Capital to easily observe my YTD dividends through a simple transaction query.
- For cap gains (e.g. 1099-B), generate a YTD report from your brokerage and try to extrapolate what that will look like at the end of the year.
- At Vanguard, this is accessible through the Show=>Realized Cap Gains/Losses drop-down menu within a brokerage account.
- Include any deductions you need to. In my case, I claimed the EV tax credit for a $7,500 reduction in my federal tax liability. I, like most people, simply take the standard deduction (thanks to the $10k SALT cap) so I don’t worry about any of the itemized stuff (e.g. mortgage interest, prop tax, state income tax, etc).
- I’m salaried with no uncertain bonuses coming, so I can estimate to the penny my 2023 income. Combined with my YTD + future withholdings (fed + Soc Sec + Medicare), I can perfectly estimate my official 2023 W2 in mid-November.
- In February once our official W2s and 1099s are received, I update my estimates at FreeTaxUSA and file my federal taxes for free. Filing state is fairly cheap ($15), but I prefer to file on my state’s free eFile website.
If you estimate your W2 and 1099s today and find that you owe money, you can simply adjust your W4 withholdings by putting your projected federal tax deficit into cell 4(c) below. Just be sure to turn this back to $0 after the desired “extra” withholding occurs. If you want to split your shortfall across two paychecks, then put $/N into 4(c). 
On the other hand, if you project to have a refund, that’s a bit more difficult of a problem to solve because the W4 doesn’t have an explicit “withhold $X less/paycheck” feature. You can sort of get there with 4(b), but it is not at all clear what you’d put in there to reduce your withholdings by $3k, particularly over the 1-2 remaining paychecks in 2023. This is a bummer
The median federal tax refund is ~$3k because there is inherent conservatism built into the W4 withholdings. It drives me crazy, but I guess you can’t blame the government for erring on the side of over-withholding (to reduce non-payment risk). But it is certainly not in the our best interest to give the federal government an interest-free loan every year by overwithholding. Particularly when interest rates are greater than zero.
I have a weird hobby of trying to get my refund/payment to as close to zero as possible each year. Last year I was off by ~$50. Hopefully I can get it to single digits this time. It’s pretty easy to do so with about 30 minutes of planning. Perhaps you will join me in this weird endeavor.
I used to accomplish the above tax estimation using math and tax tables (e.g. https://frugalprofessor.com/2022-tax-calculator/), but I’ve found that using FreeTaxUSA ahead of time with projected W2s/1099s is much easier (and more accurate) than trying to use my to decipher the ever-evolving mess of the US tax code. For those wanting to geek out to that level of detail, please see MDM’s excellent case-study spreadsheet which is far more sophisticated than my dinky little spreadsheet ever was.
