Feb
14
2024

Tax Credits vs Tax Deductions: What’s the Difference?

By | Family Finances, money, Terminology | Comments Off on Tax Credits vs Tax Deductions: What’s the Difference?

Tax credits and tax deductions work differently, with deductions lowering your taxable income and credits actually reducing the taxes you owe.

To be a little more specific, deductions can decrease the amount of income you have to pay taxes on, which can lower your final bill. Tax credits are a dollar-for-dollar reduction in what you owe — and might even get you a bigger tax refund.

It’s possible you may be able to claim both deductions and credits. Read on to understand more about how both options work.

What Are Tax Credits?

Tax credits represent a dollar-for-dollar reduction in your overall tax burden. They directly lower the tax amount you owe to Uncle Sam.

For example, if you owe $1,500 in taxes but qualify for a $500 tax credit, your total tax bill will decrease by $500, meaning you’ll only have to pay $1,000.

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How Do Tax Credits Work?

When filing your taxes, you can use IRS resources, tax software, or a certified accountant to research tax credits for which you may be eligible. If it’s your first time filing taxes, these resources can be especially helpful.

Even if you don’t owe anything in taxes, it’s worth looking into tax credits. Why? Because some tax credits are refundable, meaning the government might owe you money:

•   Refundable tax credits allow your tax liability to go below zero. For example, if you owe $100 in taxes but receive a $500 refundable tax credit, the government will actually owe you $400.

•   Nonrefundable tax credits do not work that way, unfortunately. If you qualify for a nonrefundable tax credit, the best it can do is eliminate your tax liability (meaning you owe nothing). But even if the credit is large enough to wipe out what you owe and there’s still money left over, you don’t get to pocket that extra money.

Tax credits are not for everyone. Each credit has specific requirements to qualify.

And if you’re wondering what happens if you miss the tax deadline, tax credits would still apply for the year that you’re filing your taxes.

Common Tax Credits

Your tax software or accountant should know the full list of tax credits to look out for, and the IRS website features the whole list. (You can also learn important information from an online tax help center.)

Before diving into your taxes, however, it’s a good idea to note some of the most common tax credits for which you may qualify:

•   Earned Income Tax Credit: Commonly called by its initials (EITC), this refundable tax credit is for low- to moderate-income workers. The amount you might qualify for and your eligibility can vary depending on whether you have dependents and/or have a disability.

•   American Opportunity Tax Credit: This education tax credit is partially refundable. Students (or parents claiming a student as a dependent) can claim this tax credit for the first four years of higher education. It’s $2,500 per eligible student, but once your tax bill hits zero, you can earn 40% of whatever remains (up to $1,000) as a tax refund.

•   Child Tax Credit: Even if a child isn’t enrolled in higher education, parents have access to a handy tax credit. The Child Tax Credit is a refundable tax credit for parents (with dependent children) who meet income requirements.

•   Child and Dependent Care Credit: Parents have access to yet another potential tax credit, this time for those who pay for babysitters or daycare. The credit amount depends on such factors as your income, child care costs, and number of children requiring care.

You can use tools on the IRS website to discover if you qualify for these and other tax credits.

What Are Tax Deductions?

Tax deductions are another way to reduce your tax burden, but they work differently. While a tax credit discounts your final tax bill after all the calculations, a tax deduction reduces the amount of income eligible for taxes.

The more deductions you have, the less money you have to pay taxes on. This can result in a lower overall tax bill, but it cannot result in a tax refund.

Recommended: What Triggers an IRS Audit?

How Do Tax Deductions Work?

Let’s look at an example to understand how tax deductions reduce what you owe:

If you made $100,000 in a given year, you would owe 24% in federal taxes based on your marginal tax bracket. But if you have $10,000 in tax deductions, you would lower your taxable income to $90,000, which puts you at both a lower base to calculate taxes ($90K vs. $100K), and you would be in the 22% tax bracket, which this year is capped at $95,375 for single filers.

As you can see, when calculating how much a tax deduction will save you, it’s important to know which tax bracket you’re in — your tax bracket represents the percentage at which your income could be taxed. In general, the more money you make, the higher the tax rate.

Common Tax Deductions

Nearly every tax filer is eligible for the standard deduction. Without inputting any information accounting for business expenses, medical costs, charitable contributions, student loan interest payments, and other eligible deductions, you can simply subtract the standard deduction amount from your taxable income.

For the 2023 tax year (which will be filed in April of 2024), the standard deduction is:

•   $13,850 for single taxpayers (and married, filing separately)

•   $27,700 for married taxpayers filing jointly

•   $20,800 for heads of household.

Many people choose to take the standard deduction, but if you qualify for various deductions that would amount to more than the standard deduction, it’s worth itemizing your deductions.

Working with a personal accountant or tax preparation software may be your best bet for determining which deductions you qualify for. Here are some of the most common types of deductions:

•   State and local taxes

•   Business expenses (if you are self-employed)

•   Mortgage interest

•   Property taxes

•   Qualifying medical expenses

•   Charitable contributions

•   Student loan interest.

You can explore even more tax deductions on the IRS website.

If you run your own business, it’s wise to look into common tax deductions for freelancers.

Pros and Cons of Tax Credits

Tax credits are largely a good thing, as they reduce your overall tax burden. But they also have some drawbacks. Here’s a closer look at the pros and cons:

Pros

First, consider these upsides of tax credits:

•   Reduces your tax bill

•   May result in a refund

•   Often designed for moderate- to low-income families.

Cons

Next, the potential downsides of tax credits:

•   Strict eligibility requirements

•   Can delay your refund when you claim them.

Recommended: How to File for a Tax Extension

Pros and Cons of Tax Deductions

Similarly, tax deductions serve a useful purpose in filing taxes, but they also have their own set of pros and cons.

Pros

Here are the potential advantages of tax deductions:

•   Reduces your tax bill

•   The standard deduction is easy to claim

•   Useful for self-employed individuals with business expenses.

Cons

Also be aware of the possible downsides:

•   Lots of paperwork (itemized deductions)

•   Weighing the standard vs. itemized deduction can be complicated

•   Won’t generate a refund.

Tax Credits vs Deductions: What’s the Difference?

Let’s break down the differences between tax credits and tax deductions in chart form:

Tax Credits Tax Deductions
Dollar-for-dollar reduction in your total tax bill Reduction in how much income you have to pay taxes on
Can result in a tax refund Can only reduce taxable income; cannot result in tax refund
Must claim specific credits for which you qualify Can take the standard deduction or itemize your deductions
Only available to filers who meet specific criteria Available to most filers as standard deduction

While nearly everyone can qualify for the standard deduction, tax credits can actually be the more effective way to lower your tax bill. But the best part? You can utilize both tax strategies when you file.

Tips for Using Tax Credits and Deductions

Preparing to file your taxes? Here are some tips for using tax credits and deductions:

•   Research eligibility requirements online: The IRS website has useful tools to help determine if you qualify for specific tax credits and deductions.

•   Gather all your paperwork: Taxes require a lot of forms, documents, and receipts. When claiming credits and deductions, it’s important to have the paperwork (whether printed or digital) to prove your eligibility.

•   Consider using tax software or an accountant: Taxes can be overwhelming. If your situation is complex (maybe you are confused by, say, your payroll deductions), you may benefit from tax software (TurboTax, H&R Block, and TaxSlayer are popular brands) or a tax professional.

The Takeaway

Tax credits and tax deductions can both lower your overall tax burden. Tax credits reduce what you owe dollar-for-dollar, while tax deductions reduce the amount of income you owe taxes on. If you’re eligible, you can take advantage of both tax strategies when you file.

While you are getting your taxes organized, don’t overlook the value of a banking partner that makes it easy to manage your finances.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

Between a tax deduction and tax credit, which lowers your bill more?

A tax credit lowers your tax bill dollar-for-dollar and may even result in a refund. A tax deduction only reduces the amount of money you owe taxes on. For example, a $1,000 tax credit takes $1,000 off your tax bill. A $1,000 tax deduction reduces your taxable income by $1,000; the actual reduction in tax depends on your tax bracket.

Do more people utilize tax credits or tax deductions?

Most tax filers can claim the standard deduction, but not everyone qualifies for tax credits. So it is more likely that you’ll use a tax deduction on your tax return than a tax credit. That said, it is possible to use both credits and deductions to lower your tax bill.

Can I claim both deductions and tax credits?

Yes, you can claim both tax deductions and tax credits on your tax return, as long as you qualify for the deductions and credits you claim.

Photo credit: iStock/Jinli Guo

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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14
2024
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IRA Tax Deduction Rules

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on IRA Tax Deduction Rules

Broadly speaking, individual retirement accounts, or IRAs, offer some sort of tax benefit — either during the year that contributions are made or when distributions take place after retiring. But not all retirement accounts are taxed the same.

With a traditional IRA, it’s possible for certain individuals to both invest for their future and reduce their present tax liability. For tax year 2023, the maximum IRA deduction is $6,500 for individuals younger than 50, and $7,500 for those 50 and older. For tax year 2024, the maximum IRA deduction is $7,000 for people younger than 50, and $8,000 for those 50 and older.

To maximize deductions in a given year, the first step is understanding how IRA tax deductions work. A good place to start is learning the differences between common retirement accounts — and their taxation. And since each financial situation is different, an individual may also want to speak with a tax professional about their specific situation.

Read on to learn more about IRA tax deductions, including how both traditional and Roth IRA accounts are taxed in the U.S.

What Is a Tax Deduction?

First, here’s a quick refresher on tax deductions for income taxes — the tax owed/paid on a person’s paycheck, bonuses, tips, and any other wages earned through work. “Taxable income” also includes interest earned on bank accounts and some types of investments.

Tax deductions are subtracted from a person’s total taxable income. After deductions, taxes are paid on the amount of taxable income that remains. Eligible deductions can allow qualifying individuals to reduce their overall tax liability to the Internal Revenue Service (IRS).

For example, Person X earns $70,000 per year. They qualify for a total of $10,000 in income tax deductions. When calculating their income tax liability, the allowable deductions would be subtracted from their income — leaving $60,000 in taxable income. Person X then would need to pay income taxes on the remaining $60,000 — not the $70,000 in income that they originally earned.

For the 2023 tax year, 22% is the highest federal income tax rate for a person earning $70,000. By deducting $10,000 from their taxable income, they are able to lower their federal total tax bill by $2,200, which is 22% of the $10,000 deduction. (There may be additional state income tax deductions.)

A tax deduction is not the same as a tax credit. Tax credits provide a dollar-for-dollar reduction on a person’s actual tax bill — not their taxable income. For example, a $3,000 tax credit would eliminate $3,000 in taxes owed.

💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Putting the IRA Tax Deduction to Use

Traditional IRA tax deductions are quite simple. If a qualifying individual under age 50 contributes the maximum allowed to a traditional IRA in a year — $6,500 for the 2023 tax year and $7,000 for the 2023 tax year — they can deduct the full amount of their contribution from their taxable income.

That said, you are not eligible to claim your IRA deduction if you are:

•   Single and covered by a workplace retirement account and your modified adjusted gross income (MAGI) is more than $83,000 for tax year 2023 ($87,000 or more for tax year 2024)

•   Married filing jointly and covered by a work 401(k) plan and your MAGI is more than $136,000 for tax year 2023 ( more than $143,000 for tax year 2024)

•   Married, only your spouse is covered by a work 401(k) plan, and your MAGI is more than $228,000 for tax year 2023 ($240,000 or more for tax year 2024).

It’s worth noting that you may claim a partial deduction, depending on your income if you are:

•   Single and covered by a workplace retirement account and your adjusted gross income is more than $73,000 and less than $83,000 for tax year 2023 (more than $77,000 and less than $87,000 for tax year 2024)

•   Married filing jointly and covered by a work 401(k) plan and your MAGI is more than $116,000 and less than $136,000 for tax year 2023 (more than $123,000 and less than $143,000 for tax year 2024)

•   Married, only your spouse is covered by a work 401(k) plan, and your MAGI is more than $218,000 and less than $228,000 for tax year 2023 (more than $230,000 and less than $240,000 for tax year 2024).

401(k), 403(b), and other non-Roth workplace retirement plans work in a similar way (contributions to Roth IRAs are not tax deductible). For the 2023 tax year, the contribution maximum for a 401(k) is $22,500 with an additional $7,500 catchup contribution for employees 50 and older. For tax year 2024, the contribution maximum is $23,000 with an additional $7,500 catchup contribution for employees 50 and older. A person under 50 who contributes the full amount in 2023 could then deduct $22,500 from their taxable income ($23,000 in 2024), potentially lowering their tax bracket.

One common source of confusion: The tax deduction for an IRA will reduce the amount a person owes in federal and state income taxes, but will not circumvent payroll taxes, which fund Social Security and Medicare. Also known as Federal Insurance Contributions Act (FICA) taxes, these are assessed on a person’s gross income. Both the employer and the employee pay FICA taxes at a rate of 7.65% each.

Understanding Tax-Deferred Accounts

Traditional IRA, 401(k), and other non-Roth retirement accounts are deemed “tax-deferred.” Money that enters into one of these accounts is deducted from an eligible person’s total income tax bill. In this way, qualifying individuals do not pay income taxes on that invested income until later.

Because these taxes are simply deferred until a later time, the money in the account is usually taxed when it’s withdrawn.

Here’s an example of this: Having reached retirement age, a person chooses to withdraw $30,000 per year from a traditional IRA plan. As far as the IRS is concerned, this withdrawal is taxable income. The traditional IRA money will be taxed as the income.

So, what’s the point of deferring taxes? Generally speaking, people may be in a higher marginal tax bracket as a working person than they are as a retired person. Therefore, the idea is to defer taxes until a time when an individual may pay proportionally less in taxes.

Tax Brackets and IRA Deductions

Income tax brackets can work in a stair-step fashion. Each bracket reveals what a person owes at that level of income. Still, when a person is “in” a certain tax bracket, they do not pay that tax rate on their entire income.

For instance, in 2023, single filers pay a 12% federal income tax rate for the income earned between $11,001 and $44,725. Then, the tax rate “steps up,” and they pay a 22% tax on the income earned that falls in the range of $44,726 and $95,375. Even if a person is a high-earner and “in” the 37% tax bracket, they still pay the lower rates on their lower levels of income.

Why is this worth noting? Because tax deductions reduce a person’s taxable income at their highest marginal rate (their highest “stair-step”). Using 2023 tax rates, a person with $70,000 in taxable income would be taxed like this:

•   10% up to $11,000 ($59,000 remaining)

•   12% up to $44,725 ($14,275 remaining)

•   22% on the remaining $14,275

However, if that same person contributes the maximum to their tax-deferred retirement account, they would be taxed 22% on the top amount minus what’s deductible. In other words, they wouldn’t be taxed 22% on the full $14,275.

401(k) Withdrawals and Taxation

Now, let’s compare that with the taxation on a $30,000 withdrawal from a 401(k). Assuming 2023 income tax rates, a $12,000 withdrawal would be taxed at a 10% rate up to $11,000 and then a 12% rate for the remaining $19,000.

Taxes are assessed at a person’s “effective,” or average, tax rate. This is another reason that some folks prefer to defer their taxes until later, when they can pay a hypothetically lower effective tax rate on their withdrawals, rather than taxes at their highest marginal rate.

But, here’s why it’s not so simple: All of the above assumes that income tax rates remain the same over time. And, income tax rates (and eligible deductions) can change with federal legislation.

Still, plenty of earners opt to reduce their tax bill at their highest rate in the current year — and a tax deduction via an eligible retirement contribution can do just that.

For individual tax questions, it’s a good idea to consult a tax professional with questions about specific scenarios.

What About Roth IRAs and Taxes?

Simply put, there are no tax deductions for Roth retirement accounts. Both Roth IRA and Roth 401(k) account contributions are not tax-deductible.

The trade-off is that Roth money is not taxed when it is withdrawn in retirement, as is the case with tax-deferred accounts like a 401(k) and traditional IRA. In fact, this is the primary difference between Roth and non-Roth retirement accounts. With Roth accounts, taxes are already paid on money that is contributed, whereas income taxes on a non-Roth 401k are deferred until later.

So, then, what are some advantages of a Roth retirement account? All retirement accounts provide an additional type of tax benefit as compared to a non-retirement investment account: There are no taxes on interest or capital gains, which is money earned via the sale of an investment.

CFP® Brian Walsh explains, “With a Roth IRA, you’re going to pay taxes on your money and then you’re going to put after-tax money into the Roth IRA. That money is going to grow without paying any taxes. But when you take it out—ideally that money grew quite a bit—you’re not going to pay any taxes on the withdrawal.”

Someone might choose a Roth over a tax-deferred retirement account because they prefer to pay the income taxes up front, instead of in retirement. For example, imagine a person who earned $30,000 this year. They pay a relatively low income tax rate, so they simply may prefer to pay the income taxes now. That way, the taxes are potentially less of a burden come retirement age.

Not everyone qualifies for a Roth IRA. There are limits to how much a person can earn. For a single filer, the ability to contribute to a Roth IRA for tax year 2023 begins to phase out when a person earns more than $138,00 ($146,000 for tax year 2024), and is completely phased out at an income level of $153,000 in 2023 ($161,000 for tax year 2024). For a person that is married and filing jointly, the phase-out begins at $218,000 in 2023 ($230,000 for tax year 2024), ending at $228,000 in 2023 ($240,000 for 2024).

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Deduction and Contribution Limits

The maximum amount a person is able to deduct from their taxes by contributing to a retirement account may correspond to an account’s contribution limits.

Here are the maximum contributions for the 2023 tax year:

•   Traditional IRA Limits: $6,500 ($7,500 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan

•   401(k): $22,500 (additional $7,500 if age 50 or older)

•   403(b): $22,500 (additional $7,500 if age 50 or older)

•   457(b): $22,500 (additional $7,500 if age 50 or older)

•   Thrift Savings Plan (TSP): $22,500 (additional $7,500 if age 50 or older)

•   Simple IRA or 401(K): $15,500 (additional $3,500 if age 50 or older)

•   SEP IRA: The lower of 25% of an employee’s income, or $66,000

•   Solo 401(k): Either $22,500 or up to 100% of total earned income as employee, additional opportunity to contribute as the employer

Here are the maximum contributions for the 2024 tax year:

•   Traditional IRA: $7,000 ($8,000 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan

•   401(k): $23,000 (additional $7,500 if age 50 or older)

•   403(b): $23,000 (additional $7,500 if age 50 or older)

•   457(b): $23,000 (additional $7,500 if age 50 or older)

•   Thrift Savings Plan (TSP): $23,000 (additional $7,500 if age 50 or older)

•   SEP IRA: The lower of 25% of an employee’s income, or $69,000

•   Simple IRA or 401(K): $16,000 (additional $3,500 if age 50 or older)

The above lists are only meant as a guide and do not take into account all factors that could impact contribution or deduction limits — such as catch-up contributions. Anyone with questions about what accounts they qualify for should consult a tax professional.

Investing for Retirement

Different types of retirement accounts come with distinct tax benefits and, for eligible investors, IRA tax deductions. Opening a retirement account and contributing to certain tax-deferred accounts may affect how much a person owes in income taxes in a given year. Roth accounts may provide tax-free withdrawals later on.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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The Facts About Getting Audited: Woman writing in notebook

What Happens When You Get Audited?

By | Family Finances, Life & Career, money | Comments Off on What Happens When You Get Audited?

What is it about the words “tax audit” that so many people find so anxiety-provoking? The idea that the Internal Revenue Service (IRS) could be poring over your tax return can be downright nerve-racking, not to mention the possibility of mistakes found and penalties incurred.

But take a deep, calming breath: Over the last decade, the IRS audit rate has been declining. In 2022 (the most recent data available), the odds of an audit were 3.8 out of every 1,000 returns filed (0.38%), a slight decline from tax year 2021, when the odds of audit were 4.1 out of every 1,000 returns filed (0.41%).

But even so, you likely want to do your best to avoid going through that process. This is an informative, high-level overview of IRS audit triggers, and it should not be considered tax advice. It’s always worth consulting a tax professional for any questions or concerns because taxes are complicated and highly personal.

Read on to learn:

•   What is an audit?

•   What are reasons why someone may get audited?

•   What should you do if you get audited by the IRS?

What Is a Tax Audit?

A tax audit is a process by which the IRS reviews an individual’s or organization’s accounts as well as their financial details to make sure that the information submitted has been reported correctly and in keeping with the prevailing tax laws.

The IRS usually sends a letter when it reaches out to ask for more information, and the letter should let you know specifically what the agency is looking for.

You shouldn’t ever receive a text, email, or phone call from the IRS asking for personal or financial information. If you do, the IRS website offers several steps for checking out and reporting any suspicious contact .

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Reasons Why Someone May Get Audited by the IRS

Here’s a closer look at some of the typical IRS audit triggers. Knowing them can help you understand and possibly avoid the process as you work your way through tax season.

•   You’re a high earner. In 2022, the odds that a millionaire was audited by the IRS was 1.1 percent — higher than the average audit rate. If you are a high earner, it may be worthwhile to work with an experienced CPA to ensure you file precisely. You may also want to investigate ways to lower taxable income for high earners.

•   You claimed the Earned Income Tax Credit. The Earned Income Tax Credit, or EITC, is a provision that helps lower- and moderate-income workers and their families receive a tax credit. This can reduce the taxes owed or possibly increase a refund. However, research indicates that those who claim the credit are audited at a higher rate than average, perhaps because the IRS wants to be sure the credit is being used appropriately.

•   You failed to report all your income. When you are issued a W-2 form or 1099 form showing your earnings, the IRS receives a copy too. If your return doesn’t reflect the same figures that they have when they perform a cross-check, you could wind up being audited.

•   You didn’t report all of your stock trades. When you sell stock shares, the funds you receive are taxable unless the investments happen to be a retirement account that is tax-deferred. Both you and the IRS will be sent a particular kind of 1099, a Form 1099-B, reflecting activity, and you will have to report your capital gains and losses when you do your tax return. The tax rate will depend on how long you have held the investment, but it’s important that these transactions be reported and paid up when you file your return.

•   You claim large charitable contributions. If you claim tax deductions for charitable donations of cash or items, it’s important to keep records and receipts. For a donation of cash or goods worth more than $250, the IRS requires you to get a written letter of acknowledgment from the charity by the date you file your taxes. If you’ll deduct at least $500 in donated items, you need to fill out Form 8283. For any items worth more than $5,000, you must attach an appraisal of the item to the form. Large and unsubstantiated contributions can be problematic.

Recommended: Tax-Deductible or Not? Your Guide to End-of-Year Donations

•   You claim a home office. If you are self-employed, you may deduct a percent of your rent, phone bills, and other work-related costs on Schedule C of your return. Another option is to deduct $5 per square foot of space used for business, up to $1,500. However, the IRS has over the years been successful in minimizing this home office deduction on returns, especially since the home office must be for the exclusive purpose of work; it can’t double as, say, a guest room. This means it can be an audit risk to take this on your return.

•   You claim that your car is only used for business. This is another audit red flag. If you are self-employed and depreciate a car on Form 4562 and claim that it’s used for business 100% of the time, you may well be stretching the boundaries of believability. Because it’s unusual that a vehicle wouldn’t also be used for personal transportation, you may trigger an audit with this 100% figure. It can be important that tax deductions for freelancers aren’t too large versus income.

•   You accept cash transactions. If you work in the kind of business where you often get paid in cash, especially large amounts, your return may receive extra scrutiny. The IRS requires individuals and businesses to report cash transactions over the sum of $10,000. Banks must also report potentially suspicious transactions involving cash (for instance, if someone deposits $9,500 in cash one day and $700 the next, thereby skirting the $10,000 reporting threshold).

•   Your business regularly shows losses. Of course, not all businesses are always profitable. But if you’ve started an enterprise and it keeps showing losses, year after year, it might be what triggers an IRS audit. It could look as if you have established this endeavor simply as a way to benefit from some tax deductions. The same can hold true if your business is barely break-even.

Recommended: Tax Loss Carryforward

•   You claim lots of travel and entertainment deductions. What else can trigger a tax audit? Here’s another one for self-employed workers: If you claim a lot of restaurant dinners, travel, and shows as business expenses, you may raise eyebrows at the IRS. This is especially true if the meals and hotels seem more lavish than your business might otherwise qualify for. Save all your receipts and documentation, and know that a high level of these expenses being claimed on Schedule C may get some attention and even an audit.

•   You make errors on your tax return. As you prepare for tax season, you may feel overwhelmed or be in a rush. Or perhaps you’re just not the most detail-oriented person on the planet. But if you make math mistakes on your return or, say, round up numbers to the nearest $10 or $100 because you can’t be bothered with change, heads-up: You may put yourself in line for an audit. Precision and specificity do count.

Quick Money Tip: Direct deposit is the fastest way to get an IRS tax refund. More than 9 out of 10 refunds are issued in less than 21 days using this free service, plus you can track the payment and even split the funds into different bank accounts.

A Few Facts About Tax Audits

Here are a few points to be aware of on the topic of IRS tax audits. They may clarify some concerns that are on your mind.

A Compliance Contact Isn’t Always an Audit

A compliance check is a review done by the IRS to ensure that a taxpayer is adhering to the requirements for recordkeeping and information reporting. It does not relate directly to whether or not a person owes taxes.

There Are Different Types of Audits

Just as there are different kinds of taxes, so too are there different kinds of audits. If you are being audited by the IRS, there are a couple of ways this may happen. Mail audits are fairly common; in these, you mail in documents in response to specific inquiries. Office and field audits are more serious, and the IRS asks for proof of credits and deductions, and may look at your financial records more carefully to see if your tax return is correct. The IRS may be looking for tax evasion on these kinds of audits. The third kind of audit is what’s known as a CP2000 notice. Technically, this isn’t an audit but an underreporter inquiry, and is likely about a discrepancy between your return and the tax documents that were filed with them for the tax year in question.

Some Groups Face Higher Audit Rates than Others

While audit rates have dropped for all income levels, those with incomes below $25,000 and above $500,000 are audited at higher rates than the average.

Good Record Keeping May Offer Protection

If you are audited, it can be very helpful if your records are in good order. That way you can explain the amounts you reported and easily answer questions the IRS may have. This can serve as a good incentive for you to keep your records diligently going forward.

Ignoring the IRS Could Be Costly

What happens when you get audited can of course vary. But one possibility if you are audited is that you may be liable for back taxes not paid and penalties. These penalties typically accrue over time, so the longer you go without paying them, the higher they can be. That’s why it’s a good reason to respond promptly if you do get audited.

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What to Do if You Get Audited

What if you are one of those few people who is told that your returns are being reviewed? This is what to expect and what to do if you get audited by the IRS:

•   Typically, you will get a letter from the IRS in the mail that will identify an issue (such as your reporting less income than their records show you earned) and requesting a response.

•   It’s wise to gather your documents so you can make your case. It can be smart to send your reply as a clear, concise statement of what your documentation shows and share those records to help prove your point.

•   One important thing to do when you get audited is to reply in a timely manner and make sure your reply gets where it’s going. It can be a wise move to use additional mail services to ensure you have proof of delivery.

•   If you worked with a CPA or an enrolled agent on your return, they can likely advise you. If you used tax-return software, they may also offer help.

•   Your response to the mail inquiry may be enough to resolve the situation. Or the IRS may have additional questions for or requirements of documentation for you. If things escalate to a face-to-face meeting, you may want to have a tax professional work with you and accompany you for guidance and support.

•   Whether it’s a correspondence exam or an in-person audit, you’ll get a printed list of specific records the IRS wants to see. If your audit is being managed by mail, you may be able to send the documents electronically or by mail. (Be sure to get a receipt for delivery.) Note the IRS will generally accept copies and they caution against mailing original documents in. If it isn’t possible to send the documents, you can request an in-person meeting.

•   If you need more time to respond to a correspondence exam, you can fax or email a request for an extension using the contact information in your IRS letter. Or, if you’re being asked to comply with an in-person exam, you can contact the auditor assigned to your case to request an extension.

•   Also worth noting: If the IRS finds discrepancies in your return, it may review returns from up to the last six years to better assess what the situation is.

The Takeaway

No one can guarantee a return won’t be audited by the IRS — even if you aren’t doing any of the things most experts say might put you at higher risk. But if you’re honest about your income and your deductions, keep organized and complete records, take care to enter all information accurately, and double-check your work, you may be able to avoid major problems should you get audited.

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FAQ

Are audits always negative?

While IRS audits make most people sweaty-palmed, they can be as simple as answering some questions by mail. They are not necessarily as scary as you may think.

How do I know that I am being audited?

If you are being audited, you will be notified, most likely by mail, by the IRS.

What happens after an audit is conducted?

After an audit is conducted, you will be told the outcome. You may be told you owe taxes and penalties or not. If you are assessed additional taxes and fees, you can complete paperwork and pay them if you agree with the findings. If you don’t, you can contact the auditor to discuss and request a review of the findings. If necessary, the matter can be escalated to Alternative Dispute Resolution (ADR) or you can file an appeal with the IRS Appeals Office.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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The Fastest Ways to Get Your Tax Refund

By | Budgeting & Goals, Family Finances, money, Money & Life | Comments Off on The Fastest Ways to Get Your Tax Refund

Learning that you are eligible for a tax refund can be a welcome surprise. Or maybe it’s something you’ve been hoping (or even waiting for) for months.

If you have any pressing expenses — maybe you’re behind on a few bills or have been putting off going to the dentist because of the cost — you may be wondering how you might be able to get that money into your hands ASAP.

Fortunately, there are a few simple things any taxpayer can do to help ensure that their refund comes quickly.

This includes e-filing with the IRS (rather than physically mailing in your return) and setting up direct deposit, so there’s no waiting for that refund check to come through the mail.

Read on to learn more about getting your tax refund sooner, including:

•   How to plan your tax return filing

•   How to file electronically

•   How to set up direct deposit

•   How to track your refund

Quickest Ways to Get Your Tax Refund

Here are some key steps you may want to take as tax season gets underway, starting well before Tax Day in April. They’ll help ensure that you get your refund ASAP.

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1. Start Planning Your Tax Return Filing in January

In general, the fastest way to get your tax refund is to file your taxes early, and you certainly don’t want to miss that tax-filing deadline.

This means that, starting in January, you may want to begin collecting all the necessary information for filling out your tax forms, such as your W-2 and any 1099s. You’ll also likely need to decide whether you are going to file on your own (perhaps using tax software) or hire a tax preparation service or accountant to help.

2. Get Your Return in ASAP

The further into tax season that you file, the more likely the IRS is to be inundated with returns. That can slow processing times, which can delay your refund.

If you followed Step 1, above, then you’ll have your documentation organized. All of the forms you need should be issued by January 31.

If you prefer working with a professional tax preparer, it’s wise to book them in advance, since they’ll likely be very busy with other clients. If you plan to use tax software, buy it early and learn how to use it. You’ll be ready to be one of the first filers out of the starting gate.

3. File Your Tax Return Electronically

One of the fastest ways to get your refund can be to choose electronic filing instead of sending your return by mail.

That way, your refund can begin moving through the system immediately, rather than having to wind its way through snail mail and hands-on processing.

A paper tax return can take about six to eight weeks to process, but with electronic filing, or e-filing, taxpayers can typically expect to receive their refund within 21 days. Your tax preparer will usually offer ways for you to file electronically.

Taxpayers can also use tax preparation software such as TurboTax, TaxSlayer, TaxAct, or H&R Block. You can use these programs to file your taxes yourself, or you might go to a professional who knows how to use this type of software. Either way, electronic filing is probably an option.

4. Get Help Filing Your Return Quickly

But what if you don’t have funds for tax help and are feeling overwhelmed by the process and therefore don’t file right away? Fortunately, help is available. The Internal Revenue Service (IRS) offers a few options for
e-filing which can help you get this task completed.

If taxpayers make an adjusted gross income (AGI) of $79,000 or less per year, then they can use IRS Free
File to turn in their tax forms.

For taxpayers whose AGI is greater than $79,000, they can use the IRS’s Free File Fillable Forms service, which lets you simply input your data onto your tax forms so you can e-file (if you choose this option, you’ll need to know how to prepare your own tax return).

The IRS Volunteer Income Tax Assistance (VITA) and the Tax Counseling for the Elderly (TCE) programs also provide help and e-file for taxpayers who qualify.

Most states also offer free e-filing options for state returns.

The IRS has a helpful tool on their website where taxpayers can find an authorized IRS e-file Provider
Locator . All taxpayers have to do is input their zip code and choose what kind of provider they need.

5. Set Up Direct Deposit

How else to get your refund fast? The speediest way to get your tax refund is to have it electronically deposited into your financial account. This is known as direct deposit, and the service is free. It’s also possible to break up your refund and have it deposited into one, two, or even three accounts.

You can set up direct deposit simply by selecting it as your refund method through your tax software and then inputting your account number and routing number (which you can find on your personal checks or through your financial institution).

Or, you can tell your tax preparer that you want direct deposit.

It’s also possible to select direct deposit if you’re filing by paper and sending your return through the mail (you may want to double check to make sure you didn’t make any errors inputting your financial account information). But remember, paper returns tend to move through processing more slowly.

💡 Quick Tip: As opposed to a physical check that can take time to clear, you don’t have to wait days to access a direct deposit. Usually, you can use the money the day it is sent. What’s more, you don’t have to remember to go to the bank or use your app to deposit your check.

6. Open a Bank Account If You Don’t Have One

If you just read the step above and thought you can’t use direct deposit because you don’t have a bank account, this could be the moment to set one up. Perhaps you haven’t gotten around to opening a checking or savings account. Now is a great moment to open one. Many online banks can guide you through the application and opening process online, from your home, in a minimal amount of time. This can be an excellent move as you prepare for tax season.

If you were previously turned down for a bank account, you might want to look into what are known as second chance accounts. Offered by some banks and credit unions, these may not have all the features of conventional accounts, but they can give you a good landing pad for your tax refund via direct deposit.

Recommended: What Are the Different Types of Taxes?

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No account or overdraft fees. No minimum balance.

Up to 4.20% APY on savings balances.

Up to 2-day-early paycheck.

Up to $2M of additional
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When Can I Expect My Tax Refund?

As long as taxpayers have e-filed by the deadline and chosen direct deposit, then the refund should hit their account within three weeks. According to the IRS, nine out of 10 refunds arrive in less than 21 days. However, if you file a paper return, the timing will more likely be six to eight weeks.

And, remember, if you file later in the tax season, you might face processing delays. That’s because the volume of returns working their way through the IRS rises significantly. So being an early bird can be among the quickest ways to get your refund.

Recommended: What Is Income Tax Withholding?

Finding Out Where Your Refund Is

Once everything is filed, taxpayers can check their tax refund status on the IRS’s Where’s My Refund? page. This requires inputting your Social Security number, filing status, and the exact amount of the refund, which can be found on the tax forms that were submitted.

Can I Track the Status of My Tax Refund?

Taxpayers can check “Where’s My Refund?” starting 24 hours after e-filing.

The site is updated daily, usually at night. The IRS cautions that you may experience delays in getting your refund if you file by mail, or you are responding to a notice from the IRS.

If it’s been more than 21 days and you still haven’t received your refund, you can call the IRS at (800) 829-1040 for help. You may also want to contact the IRS if “Where’s My Refund?” instructs you to do so.

Can You Get Your Tax Refund Back the Same Day?

Unfortunately, there is currently no way to get a tax refund back the same day. The speediest timing tends to be closer to eight days from e-filing to direct deposit of a refund.

However, if taxpayers are in a bind, some tax preparation services offer 0% interest tax-refund loans. Tax-refund loans, also called “refund advances,” allow you to access your refund early, but you may want to keep in mind that tax preparers typically charge fees for filing tax returns.

If you are paying a tax preparer just to get the advance, you’ll essentially be paying a company in order to access your refund. Consider these points:

•   Some providers may charge an additional fee for the advance service.

•   These short-term loans range from $200 to $4,000. In some cases, there may be a minimum amount your refund must meet in order to qualify for a refund advance (how much can vary from one company to another).

•   You may only get part of your expected refund in advance.

•   Some companies may offer to give you a prepaid card with the loan amount on it within 24 hours.

•   Once your tax refund is issued, the tax preparer will typically deduct the loan amount from your refund.

Also be aware that you may be offered this kind of quick cash from other non-bank lenders with significant fees. Proceed with caution.

If you’d rather not pay any fees, however, you may also want to look into other options.

•   If you have bills that are due, it may be worth calling up your providers or credit card companies to see if they can extend their due date while you are waiting for your refund.

•   You might open a 0% interest credit card, such as a balance transfer one, and charge an urgent expense on that card and then pay it off as soon as the refund comes in.

What’s the Best Way to Spend Your Tax Refund?

Finally! Your tax refund has arrived. You may wonder about the best way to use the funds. Yes, it can be tempting to splurge on a weekend away or those new boots you’ve had your eye on, but consider this financially-savvy advice first:

•   If you are carrying any high-interest debt, one smart move might be to put your tax refund towards minimizing the debt or, if possible, wiping it out all together. Doing this can help you avoid spending more money on interest charges. It may also help boost your credit score, which may help you qualify for loans and credit cards with lower interest rates in the future.

•   Or you might consider using your tax refund to jump-start one of your current savings goals, such as building up an emergency fund, a downpayment on a home, or buying a new car.

For an emergency fund or savings goals you hope to accomplish within the next few years, you may want to put your refund in a high-yield savings account. These options typically offer a higher return than a traditional savings account but allow you easy access to your money when you need it.

•   Your tax refund can also help you start saving for the longer term, such as retirement or paying for a child’s education. Using a tax refund to buy investments can help you create additional wealth over time to help fund these far-future goals.

The Takeaway

To get your tax refund as quickly as possible, it’s a good idea to file early, and, if possible, avoid the mail. That means filing electronically (using the IRS’s free service or tax software, or hiring a tax pro) and signing up for direct deposit when you file.

It’s also wise to keep track of your refund on the IRS site and reach out to the agency if you haven’t received your refund within three weeks.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.20% APY on SoFi Checking and Savings.

FAQ

How can I receive my tax refund sooner?

To receive your tax refund as soon as possible (which typically means within three weeks of filing), file electronically and request that the refund be paid by direct deposit.

Is direct deposit faster than mail for tax refunds?

Direct deposit will typically save time versus a check sent by mail in terms of tax refunds. If you file your return electronically too, you’ll likely have the shortest possible time from finishing your return to receiving funds that are due to you.

When should you start planning to file your tax return?

Tax season begins in January, with the forms you need having to be sent by January 31. It’s wise to start getting organized as soon as possible in the New Year to get your return done. If you work with a professional tax preparer, you might want to book them even earlier since January through April will be their busy season.

SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Feb
13
2024
What is a Stag in the Stock Market?

What Is a Stag in the Stock Market?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Stag in the Stock Market?

A stag is an investor who engages in speculative trading activity. When discussing a stag in stock market terms, you’re using a slang term to talk about day traders who buy and sell securities with a goal of reaping short-term profits.

Stags base their trading strategies around current market movements, relying on technical analysis to help them identify trends, with a focus on initial public offerings (IPOs). That sets them apart from bull and bear speculators, who take a longer view of the market when anticipating price movements.

Stag Definition

Stag isn’t an acronym for anything; instead, it’s a slang term used to describe investors who engage in short-term, speculative trading. Stags aim to benefit from short-term price movements by buying low and selling high. They can trade different types of securities and employ different strategies, either bullish or bearish, in executing trades to achieve maximum profit.

Stags and Market Speculation

To understand stag in stock market terms, it’s helpful to look at the difference between investing and speculation. Investing typically means putting money into the market in the hopes of seeing a long-term result, usually capital appreciation. For example, an investor may purchase 100 shares of a value stock in the hope that those shares will have increased in price by the time they’re ready to sell them 10, 20 or 30 years down the road.

Speculation is different. Investors who engage in market speculation, including stags, focus more on what’s happening in the short term and how they can leverage those trends when trading. Stags will generally accept a higher degree of investment risk in order to turn a profit within a fairly short time frame. They use technical analysis, rather than fundamental analysis, to help them make educated guesses about which way a security is most likely to move.

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Is a Stag a Day Trader?

Investors who follow a day trading strategy buy and sell securities to capitalize on large or small price movements throughout the day. For example, they may buy 100 shares of XYZ stock in the morning and sell those shares in the afternoon before the trading day closes. Some day traders may buy and sell the same stock minutes or even seconds apart in order to lock in profits from fluctuating prices.

Following that line of thought, a stag could be considered to be a type of day trader. Both stags and day traders typically require a sizable amount of capital in order to execute trades aimed at making a short-term profit. They also have to be relatively savvy when it comes to using online brokerage platforms to buy and sell securities. And, of course, they have to be willing to accept the risk that goes along with engaging in speculative day trading.

The stag meaning in the stock market isn’t limited to retail investors, however. Institutional investors can also fall under the stag umbrella if they engage in speculative trading activity. Institutional day traders can work with different financial institutions such as private equity funds and hedge funds to execute speculative trades on their behalf.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Understanding Stag Trading Strategies

Stag investing revolves around active trading strategies and there are different approaches an investor may take in their efforts to secure short term stock profits. The goal with active trading is to beat the market’s performance whenever possible. Stag investors approach that goal by paying attention to market trends and momentum.

For example, if a security’s price is steadily trending upward a stag investor may speculate as to whether that trend will continue or whether a pullback might happen. If the security’s price drops, the investor may choose to buy shares if they believe that the price will rebound and they can sell those shares at a profit later. They can employ a similar strategy with stocks that are in decline already, if they believe that a price reversal lies ahead.

A stag investor may use a stacking strategy to maximize profits. Stack meaning in stock market terms can refer to different things but when discussing day trading, it means aligning trades to move in the same direction. Assuming the investor’s guess about a security’s price movement proves correct, this strategy could help them to multiply profits.

Stag traders may study stock trading charts in order to identify points of support and points of resistance when tracking price movements. They may be looking for signs that a stock is approaching a breakout, which could suggest a substantially higher price in the future. Stock charts can also be useful for telling a stag investor whether a security’s trading volume is moving bearish or bullish, which can hint at which way prices are likely to move in the near term.

Differences Between Stags, Bulls, and Bears

Stags, bulls, and bears are all different animals, so to speak, when it comes to trading. While stag investors focus primarily on the short term, bull and bear speculators take a longer view of the markets.

Bullish speculators are banking on a rise in stock prices over time. So they may buy securities with the expectation that they can turn around and sell them at a higher price. Bearish speculators, on the other hand, have a more pessimistic outlook in that they expect prices to drop. They may sell off short positions in stocks in anticipation of being able to buy those same securities later at a lower price.

Stag investors can act bullish or bearish in their approach to trading, depending on the overall mood of the market. They may even change from bullish to bearish and back again several times over the course of the same trading day as stock prices rise and fall. Again, that’s not unusual considering the short-term nature of stag trading versus the longer outlook assumed by bull and bear traders.

Do Stags Trade IPO Stocks?

An initial public offering, or IPO, marks the first time a company makes its shares available for trade on a public exchange. Investing in IPOs can be highly speculative, as IPO valuations don’t always align with a company’s performance once it goes public. Some highly anticipated IPOs can end up being flops while other IPOs that fly under the radar initially end up delivering better than expected results to investors.

Stag investors may buy IPO stocks if they believe there’s an opportunity to capitalize on volatility in price movements during the first day or first few days of trading. The challenge with IPO investing is that there isn’t a lengthy track record of performance for the investor to study and analyze. Since the stock hasn’t traded yet, the same technical analysis rules don’t apply.

That means stag investors who are interested in IPOs must do a certain amount of homework beforehand. Specifically, they have to study the financial statements and documents released as part of the IPO process. They also have to take the temperature of the markets to get a feel for how well the company is likely to do once it goes public before deciding what type of bet they’re going to make on that stock’s debut.

IPO Flipping

Since stags typically aren’t looking for long-term positions, it’s not unusual for them to buy IPO shares then resell them in a short period of time. For example, they may buy shares of an IPO in the morning and sell before the first day of trading ends if pricing volatility works in their favor. It’s also possible for stag traders to buy into an IPO before the company begins trading on an exchange, then sell their holdings once trading opens.

This practice is referred to as IPO flipping and it works similar to house flipping, in that the investor seeks to buy low and sell high quickly. Flipping IPO stocks isn’t an illegal practice as far as the Securities and Exchange Commission (SEC) is concerned, though it is generally frowned upon.

Brokerage platforms can enforce an IPO flipping policy that outlines what investors are and aren’t allowed to do in order to discourage this practice. For example, SoFi’s flipping policy may impose limits on future IPO investments and/or fees for traders who are identified as flippers.

Stag Trading Strategy Example

Here’s a simple example of how a stag trading strategy might work.

Say a new company is set to launch its IPO with an expected valuation of $35 per share. After studying the company’s financials and market expectations for the launch, a stag investor decides to buy 1,000 shares of the stock 10 minutes after trading opens. Within an hour of the company going public, investor demand pushes the stock’s price up to $45 per share.

At this point, the stag trader could sell and collect a $10 profit per share, less any commission fees their brokerage charges. But they have a hunch the price may climb even higher before the trading day is done so they hold onto their shares. By 3 pm the stock’s price has climbed to $52 per share, at which point the trader decides to sell.

Of course, this example could have gone the other way. It’s not uncommon for an IPO to open trading at a higher price point and drop throughout the day. If the investor’s hunch had proven wrong and the price dropped to $25 per share, they would have had to decide whether to cut their losses or carry over their position for another trading day to see if the price might turn around.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

The Takeaway

Stag trading is a term used to describe investors who engage in short-term, speculative trading, and stags aim to benefit from short-term price movements by buying low and selling high. This is common when a company issues stock through an IPO, which may allow an opening for a stag to generate quick returns.

IPO investing can be attractive if you’re hoping to get in on the ground floor of an up-and-coming company. You may also be interested in IPO flipping if you’re an active day trader. Given that this is all fairly advanced, it may be best to speak with a financial professional before trying it for yourself.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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Photo credit: iStock/AleksandarGeorgiev

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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