Challenge

Day 14: Tax Transcripts (30 Day Financial Wellness Challenge)

Understand your status with the IRS.

The article may contain affiliate links from one or more partners. Learn how we make money to continue our financial wellness mission.

Day 14: Tax Transcripts (30 Day Financial Wellness Challenge)Welcome to Day 14 of the 30-Day Financial Wellness Challenge.

Each day will comprise of financial exercises, some short and others a bit longer, to help you become financially fit. The goal is to tackle different aspects of personal finances one day at a time.

After the 30 days, you’ll have a stronger understanding of your financial health and an action plan to improve your financial wellbeing. Review Day 13: Your Paycheck and Paystub Review

On day 14, we’ll cover taxes by introducing you to the IRS Tax Transcripts. You’ll also learn:

  • the difference between gross income and Adjusted Gross Income,
  • how to request your Tax Transcripts,
  • and why it matters and how it’s used.

Maybe this is the first time you’ve heard about Tax Transcripts or wondering if it even matters since you keep perfect tax records. Well, a Tax Transcript is helpful and insightful. You can see your tax status with the IRS, view any pending actions, and review your previous filing information. These documents are also accepted by many organizations and lenders as an alternative to tax filing documents. Additionally, Tax Transcripts can provide insights leading to a strategy to lower your tax burden.

Your Adjusted Gross Income

But before we dive deeper into Tax Transcripts, I want you to understand the distinction between Gross Income and Adjusted Gross Income (AGI). This is important. Your gross income refers to all your pre-tax income for the year, while your AGI is often lower and refers to your income after allowed tax deductions.

Your gross income can commonly be defined as all of the income you received in a year before any tax deductions and other qualified expenses have been taken into account. On the other hand, your AGI will almost always be lower than your gross income. That’s because the IRS provides opportunities to adjust your income that can reduce your overall tax burden.

Not only does your AGI influence your specific tax bracket placement, but it can also significantly impact your classification for state income tax obligations. It is also important to remember that your specific AGI status may qualify or disqualify you for various other deductions and exemptions. With that in mind, it is strongly recommended that you spend all of the time you need to properly evaluate your AGI.

With a Tax Transcript, you can see the differences between your reported gross income and AGI and the elements that reduced your taxable income amount (i.e. contribution to a tax-advantaged retirement account).

Introducing the IRS Tax Transcripts

If you don’t have access to your tax returns, you can request your IRS Tax Transcripts. The information found in your tax transcripts will show your taxable income and Adjusted Gross Income.

From the IRS: “A transcript summarizes return information and includes Adjusted Gross Income (AGI). They are available for the most current tax year after the IRS has processed the return. People can also get them for the past three years.” It may take up to 30 days to get your tax transcripts. ith the IRS Tax Transcripts, you can only go back three years but it’s still useful information. Requesting your tax transcripts are free.

When do you need Tax Transcripts

You might need these when applying for certain types of financing as a mortgage. If you’re seeking a student loan Income-Driven Repayment Plan, the loan servicer may request tax returns or transcripts. These documents are also helpful if facing legal issues where proving your income is necessary.

How are Tax Transcripts Useful

Tax transcript can help you with the following:

  • Access your income history*
  • Understand your status with the IRS
  • Verify tax return information for lenders, loan servicers or legal issues
  • Resolve tax notices, discrepancies, and other issues

*On Day 10, you requested your SSA Benefit Statement that shows the income used to calculate your future benefits. With the IRS Tax Transcript, you’ll get more details about the income used for benefit calculations and tax burden.

What do Tax Transcripts reveal?

Accessing my tax transcripts helped me understand the relationship between income and taxes. This led to creating a strategy that focused on reducing taxes to keep more of my earnings in my pocket. In future challenges, we’ll discuss tax-advantaged accounts, paycheck deductions, and employer retirement benefits.

Now, let’s get to today’s challenge.

Day 14 Assignment

Access your IRS Tax Transcripts

  1. Visit the IRS.gov website, Get Transcript.
  2. Provide your details.
  3. Choose IRS Return Transcripts (learn about transcript types).
  4. View your transcript online, print, or save in a secure safe place.

Tax Transcript Review

Date Tax Transcript Requested: 

____________

YearGross IncomeAdjusted Gross IncomeComments

Tax Transcript Review Tips

  1. Verify the information is correct. Keep in mind a Tax Return Transcripts will not show changes you made after you initially filed. You’ll need to request a different transcript type.
  2. Review the difference between your reported Gross Income and your AGI. What does it reveal? Were there deductions and credits you qualified for? Did you increase your pre-tax retirement contributions?
  3. Think deeply and start asking questions about the gap. This will help you in formulating a plan to minimize your taxes by researching various credits, deductions, and adjustments that can lower your tax burden.

Congrats, you’ve just completed Day 14 of the challenge.

Additional Reading

Financial tools

Following tools are helpful and recommended:

  • Review the top tax preparation software in the phroogal marketplace. Find the best solution for you to prepare your taxes and maximize your refund.
  • Personal Capital is a free personal finance app with a 360-degree view of your money. With Personal Capital, you can see all your accounts in one place with planning and analysis tools.

Next Daily Challenge: Day 15 – Evaluate Your Financial Past

Frequent Asked Questions

How can tax transcripts help me with financial planning?

Use tax transcripts to help you frame financial discussions through a tax lense. Most often we only think of the taxes we pay, not the strategy to reduce our tax burden. Reviewing your tax transcripts (or returns) can lead to asking the right questions for your situation. For instance, can contributing more to a pre-tax retirement account reduce your taxes today and help you save for tomorrow. Could you keep more of your paycheck by using deductions and credits? Keep this in mind when reviewing your transcripts.

Are tax transcripts helpful to achieve financial wellbeing?

Reviewing my tax transcripts helped me see my income differently. I began to pay closer attention to differences between gross income and Adjusted Gross Income. I could see how my finances (from a tax perspective) has changed as I qualified for different deductions or credits. It also helped me connect how federal benefits, government laws, and tax guidelines impacted my earnings. It made me want to figure out better ways to structure my income and use a tax strategy that lessened my tax burdens.

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once: The Roadmap to Financial Wellness and a Purposeful Life.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.