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Filling out a tax return can be a challenging task. What’s more, unless you’re a tax expert, you may be unaware of how you can use tax laws to reduce how much you pay to the Internal Revenue Service. That’s why, come tax season, many people enlist the help of a tax preparer.

What does a tax preparer do? Services run the gamut from ensuring documents are mistake-free to spotting and claiming potential tax benefits to filing income tax returns on behalf of their client.

Here’s a look at the different types of income tax preparers, the pros and cons of hiring one, and under what circumstances they can help their clients pay less to the IRS.

What Is an Income Tax Preparer?

A tax preparer completes and files income tax documents and forms for clients. People use tax preparers because they are experts in tax rules and know how to use those rules to claim deductions or credits on tax returns.

That’s why, according to the Internal Revenue Service (IRS), 54% of all individual tax returns filed in 2023 were prepared by paid preparers.

Recommended: What Are the Different Types of Taxes?

Credentialed Tax Preparers

Credentialed tax preparers tend to work full time on tax- and accounting-related tasks. There are three types of credentialed tax preparers: Certified Public Accountants (CPAs), Enrolled Agents (EAs), and tax attorneys. CPAs receive certification from state boards, EAs receive certification from the IRS, and state bar associations license tax attorneys.

CPAs

CPAs are certified by a state government as having the required expertise to maintain financial records, certify financial statements, and conduct tax and financial audits.

CPAs must pass the Uniform Certified Public Accountant Examination, a comprehensive test given by the American Institute of Certified Public Accountants. Most states require CPAs to pass an ethics exam and stay up to date on changing accounting and tax laws.

CPAS can also represent clients on tax and IRS issues, such as tax audits, payment and collection issues, and appeals.

Enrolled Agents (EA)

An EA obtains licensing from the IRS to represent clients before the IRS. To become an EA, an individual must pass the IRS’ Special Enrollment Examination or have qualifying work experience if they were an employee of the IRS. Once certified by the IRS, EAs are required to stay up to date on changes in the tax law by completing at least 16 hours of continuing education each year, or 72 hours of continuing education every three years.

Tax Attorneys

Tax attorneys specialize in tax law, advise clients on the legal aspects of their taxes, and prepare their clients’ tax returns. They can represent their clients before the IRS on all tax matters. Tax attorneys have a law degree, have passed a state exam, acquired a state license, and keep up with updates to the tax code through ongoing education.

Non-Credentialed Tax Preparers

Non-credentialed tax professionals are not licensed or certified by a third-party organization and tend to be self-taught. These individuals may have worked for a tax store during tax season but may not be involved in tax-related work full time.

Non-credentialed tax preparers include Volunteer Income Tax Assistance (VITA) program volunteers, tax accountants not certified by the American Institute of CPAs (AICPA), and Annual Filing Season Program participants.

What Does a Tax Preparer Do?

In addition to preparing, completing, and filing tax documents for their clients, income tax preparers also advise their clients on how they can reduce their tax liability in the coming year.

Preparing tax documents and returns requires calculating tax brackets, credits, deductibles, and liabilities. However, income tax preparers are also responsible for making sure tax reports comply with government tax rules and regulations. For example, there are strict due diligence requirements when certain tax benefits are claimed, such as earned income tax credit, or when an individual claims head-of-household status.

Following due diligence requires interviewing clients to verify the information they are providing, such as earnings, tax withholdings, and dependents, to gather supplemental documentation that back up the claims.

Recommended: What Tax Bracket Am I In?

How Much Does It Cost to File Taxes with a Tax Preparer?

How much you pay a tax preparer depends on who you use and what services they provide. For example, credentialed tax attorneys and CPAs will likely charge more than a seasonal worker or non-credentialed preparer. A credentialed preparer will also have more expertise and can take on more complex tasks, such as representing the client in tax resolution cases.

A tax preparer might charge a flat fee for a tax return or an hourly rate. Also, the more complex your taxes, the more a preparer may charge.

Where you live can affect the amount charged by a tax preparer. Fees tend to be higher on the West coast and in New England, and lower in the Southeast.

Wondering how to cover the cost of a tax preparer? A spending app can help you create budgets, organize your spending, manage bills, and more.

Pros and Cons of Hiring an Income Tax Preparer?

There are several advantages to hiring an income tax preparer, though there are some potential disadvantages, too.

Pros

•   Using a tax preparer could save you time.

•   Using a tax preparer minimizes errors on your return, which can help protect you from an audit.

•   You may save money if the tax preparer finds ways to reduce the amount of tax you pay.

•   The cost of using a tax preparer is often deductible.

Cons

•   The cost of working with a tax preparer may be high if your taxes are complex.

•   It might be difficult to find an available licensed tax preparer during tax time.

•   A non-credentialed tax preparer may not be able to take the time to fully understand your situation.

•   Some tax preparers could be frauds, so always check their credentials.

What Are the Job Requirements to Become an Income Tax Preparer?

A credentialed income tax preparer typically has a degree in finance or accounting. They also must have a thorough knowledge of the tax system and be up to date on the latest rules and changes. Tax preparers must also be familiar with tax software, Excel, and other tools and information resources.

What Skills Do Tax Preparers Need?

Tax preparers need to be skilled with numbers and in dealing with clients. They are required to interview clients and ask them sometimes intrusive questions to verify that the information they are providing about income and lifestyle is true.

Tax preparers must also have in-depth knowledge of the tax code and the tax benefits that apply to various situations and be able to apply those rules using their analytical and mathematical skills.

When Is Hiring an Income Tax Preparer Worth It?

As you’re preparing for tax season, you may want to consider hiring an income tax preparer if your situation is complex or there are tax benefits that you could qualify for. This might be the case if you are a business owner or self-employed; have diverse investments or rental properties; bought property during the tax year; or had a major life event, such as marriage, a birth or adoption, divorce, retirement, or inheritance.

If you have had issues with the IRS in the past or are under audit, you should also use a tax preparer. This is because a professional knows how to navigate the IRS’s rules to your advantage and help you understand the options open to you.

Whether you owe taxes or are getting a refund, using a money tracker app can help you manage your money.

The Takeaway

Not everyone can afford to hire a tax attorney or a CPA to help them with their tax returns. However, if you are a business owner, an independent contractor, or have experienced life events that make your tax situation complicated, hiring a credentialed tax preparer could help save you money in the long run.

Not all income tax preparers are the same, so if you choose to hire a tax preparer, make sure you choose a reputable one by checking with the Better Business Bureau for complaints and verifying their credentials. The IRS’ Directory of Federal Tax Return Preparers can be a good place to start.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What are the responsibilities of a tax preparer?

Tax preparers are responsible for completing and filing tax forms for their clients. They are also responsible for ensuring the forms are accurate and the information provided by their clients is truthful. This often requires interviewing clients and collecting supporting documentation. Tax preparers also provide tax strategy advice to clients to help them to pay less tax in the future.

Can you make good money as a tax preparer?

Tax preparers’ salaries vary depending on whether they are credentialed and where they live. According to the Bureau of Labor Statistics, tax preparers in general earn an average of $58,160 a year, and accounts make around $79,880 a year. Tax attorneys stand to make more: According to Glassdoor, their average annual salary is around $145,000.

What is the difference between a CPA and a tax preparer?

A CPA is typically better qualified than a tax preparer. A CPA not only has accounting credentials, but they are also certified as a tax specialist by their state board. A tax preparer who is not a CPA, EA, or tax attorney is uncredentialed and may only have worked part time on taxes during the tax season.

Photo credit: iStock/Pra-chid

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

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.

SORL-Q125-004

The average credit score for a 20-year-old is 681, according to 2024 data from Experian. This is considered a “good” score and signals to creditors that you can manage credit responsibly, increasing the likelihood you’ll get approved for a loan or a credit card. However, you may not get the best interest rates or most favorable terms — those are usually extended to people with higher credit scores.

Find out what a credit score is, how a 681 score compares to the average American’s, and steps you can take to bolster your score.

What Is a Credit Score?

A credit score is a three-digit number lenders use to help them determine how likely you are to repay a loan on time. It’s based on information from your credit reports, including your payment history, length of credit history, amounts owed, and credit mix. The higher your score, the more attractive you are to lenders — and the more likely you are to get approved for a loan or credit card.

Lenders typically report information to credit bureaus on a monthly basis, and in general, your credit score updates every 30 to 45 days. This means your score will likely fluctuate over time.

You may also have more than one credit score, depending on which credit scoring model a lender uses. The two primary models are FICO®, which is used in most lending decisions, and VantageScore. As you’ll see below, scores are categorized slightly differently in FICO vs. VantageScore.

FICO Score Ranges:

•   Poor: Less than 580

•   Fair: 580-699

•   Good: 670-739

•   Very good: 740-799

•   Exceptional: 800-850

VantageScore Score Ranges:

•   Subprime: 300-600

•   Near prime: 601-660

•   Prime: 661-780

•   Super prime: 781-850

Average Credit Score by Age 20

As we mentioned, the average credit score for a 20-year-old is 681, which is a good credit score, especially for someone that age. After all, most 20-year-olds are still relatively new to the credit scene, and it takes time to build up credit.

What Is the Average Credit Score?

The average 20-year-old has a lower credit score than the typical American — but not by that much. As of 2024, the national average FICO Score is 717, which falls within the “good” range. By comparison, the average American’s VantageScore is 702 as of 2024, which the credit scoring model classifies as “prime.”

Recommended: FICO Score vs. Credit Score

Average Credit Score by Age

While age doesn’t directly impact your credit score, it can play a role. Credit scores tend to rise with age, as older borrowers generally have more time to establish a strong payment history and demonstrate responsible credit usage. In the chart below, notice how average FICO Scores rise from one generation to the next.

At What Age Does Credit Score Improve the Most?

As the chart above shows, the biggest jump in credit scores is between those in Generation X (43-58) and the Baby Boomers (59-77). With the average Gen X credit score at 709, and Baby Boomers at 746, there’s a 37 point increase between the two age groups.

What’s a Good Credit Score for Your Age?

Regardless of your age, a “good” FICO Score is anywhere from 670 to 739. If you fall between those numbers — or exceed them — you’re on solid footing.

That said, many 20-year-olds are just starting to build their credit. As a result, their starting credit score most likely won’t be in the “good” range, but it also won’t be zero (no one’s credit score is) or at 300, the bottom score. Often, a starting credit score is in the good or fair credit score range (580-669).

Keep in mind that it can take up to six months before you even get your first credit score. Once you’ve established a track record of staying on top of your finances, you’ll likely see your score begin to increase. (Need help managing your money? A money tracker app can be a useful tool.)

Factors Influencing the Average Credit Score

Individuals who want a higher credit score can benefit from learning about the five key factors that affect your credit score. Some have more impact than others, but even the least-impactful factor can bring your credit score down.

What Factors Affect My Credit Score?

According to FICO, here are the factors that influence your credit score, in order of importance:

Payment History

This accounts for 35% of your credit score and carries the most weight. Prioritize making on-time payments, even if it’s just the minimum amount due. And practice smart budgeting, either with a spending app or a DIY method, so you can stay on top of monthly payments.

Credit Utilization

This refers to the amount of credit you’re using compared to what’s available to you, and it figures into 30% of your score. Lenders want to make sure you can handle your debts without being spread too thin or maxing out your available credit.

Length of Credit History

How long you’ve had credit makes up 15% of your score. The longer you’re able to show lenders that you’re responsible with credit, the higher your score will likely be.

Credit Mix

Having a diverse mix of credit contributes to 10% of your credit score and indicates to lenders that you can responsibly handle different kinds of debt.

New Credit

The amount of new credit accounts you open, and how quickly you do so, counts toward 10% of your score. Note that seeking out additional lines of credit means the lender will likely do a hard credit inquiry, and each hard credit check can temporarily lower your score by up to five points.

How Are Credit Scores Used?

Potential lenders use your credit score information as the basis for their decision whether to extend you credit. People with scores in the “good” or higher range generally have a better chance of being approved for a mortgage, loan, or credit card, than those who are in the “fair” or “poor” categories.

Your credit score may also be important in other areas of your life. For example, a landlord may run a tenant credit check before renting you an apartment or hoouse, and some employers may check your credit score during a background check.

How Does My Age Affect My Credit Score?

As we mentioned, credit scores tend to increase as people get older. This is most likely because they have a longer financial history and have adopted healthy financial habits along the way. But more impactful than age is the way someone manages their debt. For instance, a 50-year-old with a history of late payments will likely have a lower score than a 30-year-old with a spotless payment record.

How to Build Credit

When it comes to how to build credit, there are many strategies you can try. Here are some to consider:

•   Become an authorized user on someone else’s credit card. If you have a family member with a high credit score, you may want to ask if they can add you as an authorized user on their account. This allows you to use their credit card for purchases (without being liable for the payments) and begin establishing a credit record.

•   Look into getting your rent and utility payments reported to the credit bureaus. There are several services out there that will report your rent and utility payments to the credit bureaus.

•   Open a secured credit card. With this type of card, you put down a deposit that acts as your credit limit. Credit card issuers will report your payments to the credit agencies, allowing you to build your score by making on-time payments.

•   Get a store credit card. A credit card that can only be used at a particular retailer (think gas station or department store cards) can allow you to build credit, as long as the activity is reported to the major credit bureaus. Compared to traditional credit cards, store cards will have lower credit limits and may be easier to obtain.

How to Strengthen Your Credit Score

Whether or not you’re in the early phases of understanding how long it takes to build credit, there are steps you can take now to help bolster your credit score. Here are a few strategies to explore:

•   Pay your bills on time. As previously discussed, this is the most influential factor in your credit score. Setting up automatic payments from your bank account can help ensure you don’t miss a due date.

•   Keep credit utilization low. If you can’t pay your credit card balances off each month, strive to keep your total outstanding balance at 30% or less than your total credit limit. For example, if your credit card has a $1,000 limit, you’ll want to have a maximum balance of $300.

•   Ask for an increase in your credit limit. Doing so could raise your credit score as it can improve your credit utilization ratio. But be careful: Running up a balance on a card with a higher limit will defeat the purpose.

•   Avoid applying for too many credit cards or loans in a short period of time. With each application, a lender will likely perform a hard inquiry, which can lower your score temporarily. Multiple applications in a short time frame may also indicate to creditors that you’re a financial risk because you’re seeking a substantial amount of credit.

Credit Score Tips

Along with all of the aforementioned suggestions for building and strengthening your credit score, it’s important to monitor your score regularly by checking your credit report and disputing inaccuracies. You can get a free weekly copy of your credit report from each of the three credit bureaus via AnnualCreditReport.com.

Additionally, you can also use a credit score monitoring service to track any changes to your credit report and credit score.

Recommended: Why Did My Credit Score Drop After a Dispute?

The Takeaway

What is the average credit score for a 20-year-old? According to FICO, it’s 681, which is considered “good.” Handling credit responsibly is important in order to maintain — and eventually increase — this credit score. Making on time payments, not applying for too much credit at once, maintaining a diverse credit mix, keeping credit utilization low, and building a strong credit history are all important financial habits that will help a 20-year-old build and strengthen their score.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

Can a 20-year-old have a 700 credit score?

Technically, yes, it’s possible. But it’s more likely that someone this early on in their credit journey will have a score somewhere in the mid-to-higher 600 range.

What is a bad credit score for a 20 year-old?

FICO categorizes any score under 580 as “poor” credit. The score would make it challenging to get credit cards or be approved for loans. If you are approved, you can expect higher interest rates and more restrictive terms.

Is 760 a good credit score for a 20 year-old?

A credit score of 760 is in the “very good” range and is only 40 points away from the top category of “exceptional,” per FICO. Achieving this high of a score usually requires a long history of responsible credit usage, which most 20-year-olds haven’t achieved yet.

How rare is an 825 credit score?

Having an 825 credit score is fairly unusual, since it’s in the top tier and only 25 points away from the highest score you can obtain. Arriving at and maintaining this credit score signals you have near-flawless credit.

Is a 900 credit score possible?

No. The highest possible credit score you can get is 850.

Can I buy a house with a 735 credit score?

Yes, you can buy a house with a 735 credit score. In fact, a 735 credit score exceeds the usual qualifications for all types of mortgage loans.

Photo credit: iStock/FG Trade

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SORL-Q424-024

The IRS divides income into taxable and nontaxable categories. In general, income is taxable unless there’s a law exempting it.

As you’d expect, all taxable income must be included on your yearly income tax return. But here’s the twist: Nontaxable income may also need to be listed on your return, too.

Because anything tax-related is complicated, we’ll show you some examples of taxable and nontaxable income.

What Is Nontaxable Income?

You might think that nontaxable income is money that you can plausibly leave off your tax return. However, that’s not the case. Nontaxable income won’t be taxed even if you include it on your tax return. On the flip side, leaving income off your tax return won’t shield you from taxes. It just means you’ll be liable for those taxes, plus late fees and penalties, when the IRS figures it out — and they usually do. For questions about your specific income tax liabilities, consult an accountant or tax advisor.

Nontaxable Income Examples

The IRS provides a chart on nontaxable income limits — or how much you need to earn before you’re required to file an income tax return. For example, a single person age 65 or over can earn up to $16,500 without needing to file a federal tax return. A head of household under age 65, meanwhile, can earn up to $21,900 without needing to file.

There are many other types of income besides what appears on a W-2 or 1099. Here are examples of income that’s nontaxable, even if you might think otherwise.

•   Inheritances and bequests. Money and other assets you inherit are typically exempt from federal income tax. That’s because any taxes are levied before the estate is settled, and the threshold for estate taxes is high: $13.61 million in 2024 and $13.99 million in 2025.

•   Cash gifts. In 2025, gifts up to $19,000 are excluded from taxes, up $1,000 from the 2024 limit. Above that, the gift giver typically pays the tax.

•   Rebates. This refers to cash you receive back from a retailer, manufacturer, or dealer.

•   Life insurance payouts. If cashed in after someone dies.

•   Scholarships. If used to pay school tuition and fees. However, when the funds are used to pay for room and board or personal expenses, they may be taxable.

•   Alimony for divorces finalized after 2018, and child support payments.

•   Welfare payments

If you need help taking control of your finances, a free budget app can help you track spending, spot upcoming bills, and analyze your spending habits.

How Taxable Income Works

All taxable forms of income must be listed on your IRS return and will count toward whatever tax bracket you’re in.

Taxable income can include funds that aren’t yet in your bank account, such as when a check arrives but you don’t cash it during the tax year. The IRS offers examples of this to provide clarity. For instance, if your mail carrier tries to deliver a check to you on the final day of the tax year but you “are not at home to receive it,” that counts as income for the current year. If the check was mailed but couldn’t reach you during the tax year, that money goes toward next year.

Types of Taxable Income

Taxable income comes in three forms: money, property, and services. Money includes wages, salaries, self-employment income, and commissions; royalties, strike pay; rental income; and alimony if the divorce was finalized before 2019. Stock market gains are another example of taxable income.

Fringe benefits are typically taxable. This category could include a company vehicle, holiday gifts from your employer in cash or gift certificate form, an off-site gym membership, or childcare services.

Nontaxable vs Taxable Income

Putting money away for retirement often involves depositing funds into a tax-sheltered account to benefit from the IRA or 401(k) tax deduction. With these accounts, there’s a tax impact when you make your contributions or withdraw your money but not at other times. These retirement accounts come with annual contribution limits, though, so you may decide to invest in taxable accounts when those limits are reached.

When opening a taxable brokerage account, the goal is tax-efficient investing instead of the tax-deferred investing that happens with an IRA or 401(k). This can include investing into long-term stocks or municipal and treasury bonds.

Recommended: What Is a Taxable Account?

Examples of Income That Is Both Taxable and Nontaxable

If your employer pays for your tuition, it can be nontaxable. But if it goes over a certain amount, it can become taxable. The same is true with employer-paid group life insurance. You may also want to take a close look at the category of “unearned income.”

Unearned income is passively earned income that you make without working. This can include retirement distributions, Social Security benefits, interest from bank accounts, stock dividends, and so forth. It also includes debt cancellation or forgiveness, which can be taxable or nontaxable, depending whether it was canceled or forgiven for less than the amount due.

How to Reduce Your Tax Liability

Reducing taxable income makes good sense. Some strategies to consider include:

•   Choosing the right filing status

•   Maxing out your retirement contributions

•   Deducting qualified health care expenses

•   Opening a 529 savings plan if your children may attend private school or college

Another strategy is to reduce or avoid capital gains tax. You can do that a few ways:

•   Donating appreciated shares of stock. This applies when you have held the stock for more than a year.

•   Selling stocks at a loss to offset capital gains, which can reduce your taxable income.

•   Investing in property via a Qualified Opportunity Fund. You can temporarily defer paying taxes on your gains.

Each of these strategies can be complex, and professional help is recommended.

The Takeaway

The IRS divides income into taxable and nontaxable categories. With the second, the income may or may not need to be listed on your federal tax return, even though taxes aren’t owed. Some common forms of nontaxable income include inheritances, cash gifts of $19,000 or less, scholarships that cover school tuition and fees, alimony, child support, and welfare payments.

Taxable income can be “earned” on the job, as with wages, salaries, and commissions. Unearned income is the term for passive revenue, such as stock gains in taxable accounts, interest on savings, and benefits you receive from your employer. To prepare for tax time, it can help to have a quality money tracker app that gives you high visibility into what you’ve spent.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What is an example of nontaxable income?

Nontaxable income examples include child support payments and, as of 2019, alimony. Other examples include inheritances (which may be taxed in other ways) and cash gifts from friends or family. Contributions to an IRA may be partially or fully tax deductible, depending on your income and filing status. The funds would be taxed only when you make a withdrawal.

What are some examples of income that is taxable?

Money earned through a salary, wages, and self-employment income are some of the most common types of taxable income. Other types include royalties, commissions, rental income, and strike pay.

What are four items that are taxable income?

Wages, salaries, self-employment income, and commissions are four commonly applicable forms of taxable income.

Photo credit: iStock/andresr

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SORL-Q125-003

The due diligence tax preparer penalty is a fine for income tax preparers who fail to meet due diligence requirements when preparing tax returns that claim certain credits or head of household filing status.

The IRS takes due diligence very seriously because fraudulent claims are becoming increasingly common. The agency even conducts “Knock and Talk” visits as part of its Preparer Compliance Program to educate preparers, discuss errors, and explain the risks of not providing accurate tax returns.

Let’s take a closer look at what due diligence for tax preparers means, how preparers should perform it, and the penalties for not following the rules.

What Is Due Diligence for Tax Preparers?

People use tax experts to prepare their income taxes for them because the experts know how to take advantage of tax rules. By claiming all possible tax credits or tax deductions, clients keep more of the money they earn rather than handing it over to the IRS.

U.S. income tax preparers must adhere to tax laws and conduct due diligence when they prepare tax returns for taxpayers who claim certain tax credits or head of household (HOH) filing status. HOH status gives an unmarried filer with a qualifying dependent certain tax advantages that a single filer does not have.

The IRS requires due diligence from tax preparers to make sure their clients really do qualify for the credits or HOH status because they will pay less tax to the IRS.

The credits that fall under due diligence are the following:

•   Earned income tax credit (EITC)

•   Child tax credit (CTC), additional child tax credit (ACTC), credit for other dependents (ODC)

•   American opportunity tax credit (AOTC)

•   Head of household (HOH) filing status

Recommended: What Are the Different Types of Taxes?

What Is the Due Diligence Tax Preparer Penalty for 2025?

Each failure on a return filed in 2025 carries a penalty of $635. (By comparison, the penalty for returns filed in 2024 is $600 per failure.) If a preparer claims all four benefits on a return and fails to perform due diligence for each benefit, the penalty for that return is $2,540. The preparer can also be referred to the Office of Professional Responsibility, or even the IRS Criminal Investigation Unit, if their failure to comply is deemed willful. It’s also possible that the IRS may request the Department of Justice to seek an injunction to stop the preparer from preparing any future returns.

What Are the Four Due Diligence Requirements?

To comply with due diligence and avoid a penalty, the IRS requires a tax preparer to do the following:

Complete and Submit Form 8867

The form must be based on information obtained from the client. It can be submitted to the IRS with the e-Filed return or claim, or included in the filed return or claim.

Compute the Credits

The preparer must complete the appropriate worksheets for each applicable credit (such as those found in the instructions for Form 1040 or Form 8863) and keep records of the information and calculations used.

Conduct the Knowledge Test

The preparer must interview the client to verify that the information on income tax withholdings, earnings, dependents, and all relevant data are correct, consistent, and complete. The preparer must also keep a record of the interview.

Keep the Records for Three Years

Documents can be held in electronic or paper format.

Recommended: Your 2025 Tax Season Prep List

What Are Examples of a Due Diligence Penalty?

Let’s say a taxpayer who is preparing for tax season wants to claim the earned income tax credit (EITC). This credit is calculated by multiplying the taxpayer’s income by a percentage determined by the IRS. The amount of the credit phases out above certain income levels that vary depending on the number of qualifying children the taxpayer has. A due diligence penalty might be levied if the tax preparer makes one of the following common errors:

•   The tax preparer fails to verify if a child qualifies under the EITC in terms of their age, relationship, or residency requirements.

•   The tax preparer files claiming the client is single or head of household even though the taxpayer is married.

•   The tax preparer reports inaccurate income or expenses for the client.

The IRS gives more specific guidelines to tax preparers in Publication 4687. The publication gives specific examples of situations where the practitioner should ask further questions to fulfill the due diligence requirement. For example, “A 22-year-old client wants to claim two sons, ages 10 and 11, as qualifying children for the EITC.”

In this case, the IRS recommends the tax preparer does some further checking because the children’s ages are so close to the client’s age. The preparer is expected to make reasonable inquiries to verify the children’s relationship with the client.

Another example from the IRS: “A client has two qualifying children and wants to claim the EITC. She claims to have earned $20,000 in income from her Schedule C business and had no business expenses.”

The IRS considers it unusual for someone who is self-employed to have no business expenses. Due diligence expects the preparer to ask additional reasonable questions to determine whether their client is carrying on a business and whether the information about her income and expenses are correct.

Need help organizing your money? A spending app can help you create budgets, keep tabs on your spending, manage bills, and more.

Pros and Cons of the Due Diligence Penalty

The due diligence requirements demand extra work from tax preparers, such as conducting in-depth interviews and storing documents. However, preparers can establish policies and procedures with checklists and consistent practices, which should keep them organized and prevent them from falling foul of the IRS.

Pros

•   If the tax preparer can show they have “reasonable cause” for an understatement on the return, and the preparer acted in “good faith” while preparing the return, the preparer generally will not be penalized.

•   Following a due diligence checklist for every tax return ensures office procedures to minimize mistakes.

•   If a checklist is always followed, it is more likely that the preparer acts in good faith while preparing returns and will not be penalized.

Cons

•   Tax preparers may need to develop a system and a checklist for due diligence cases and follow it consistently.

•   Tax preparers need to keep meticulous records of interviews and documents.

•   Tax preparers must stay up to date with current and new requirements related to due diligence, as the IRS rulings change frequently to help reduce tax fraud and abuse.

Staying organized is essential for tax preparers, but it’s also important for taxpayers to have their finances in order during tax season and beyond. A money tracker app can help.

The Takeaway

The IRS takes due diligence seriously when taxpayers are claiming certain tax benefits or head of household status. Therefore, it’s critical that tax preparers follow the due diligence rules and develop consistent processes and checklists to ensure they comply. Due diligence penalties are significant, and a preparer may even be referred to the Department of Justice and prevented from practicing. The due diligence requirements may mean extra work for tax preparers, such as conducting in-depth interviews, creating checklists, and storing documents. However, the extra work is well worth it to keep them organized and on the right side of the IRS.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What is the due diligence penalty for 2025?

The penalty for returns filed in 2025 is $635 for each failure on a return. If a preparer claims all four benefits on a return and fails to perform due diligence for each benefit, the penalty for that return is $2,540.

What happens to a paid preparer who fails to meet the due diligence requirements IRC 6695 G?

Under IRC 6695 G, the penalty in calendar year 2025 is $635 for each failure of a tax preparer to meet due diligence requirements and determine a taxpayer’s eligibility for the head of household filing status or the following credits:

•   Any dependent credit, including the Additional Child Tax Credit and Child Tax Credit

•   American Opportunity Credit

•   Earned Income Tax Credit

•   Lifetime Learning Credit

What happens if a tax preparer doesn’t meet the due diligence requirements?

In addition to facing penalties, a tax preparer who does not do due diligence will be referred to the Office of Professional Responsibility. If the failure is deemed willful, the preparer can be referred to the IRS Criminal Investigation, and the Department of Justice may take away the right for the preparer to work on any future returns.

Photo credit: iStock/fizkes

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

SORL-Q125-005

It can take time to build credit and achieve a high credit score, especially for a 23-year-old, who may have recently entered the workforce or still be in school. But as of August 2024, Generation Z, which includes people aged 18-26, has an average FICO® credit score of 681. This is considered a “good” score that gives you access to more financial products and better interest rates than people with a lower score.

Learn more about the average credit score of a 23-year-old, what factors play a role in calculating credit scores, why credit scores matter, and some steps you can take to boost your score.

The Average Credit Score for a 23-Year-Old

As mentioned above, the average credit score for a 23-year-old is 681, according to Experian, one of the three credit bureaus. (The other two are TransUnion and Equifax.)

Since the lowest credit score you can have is 300 and the highest 850, this number puts you in a favorable place. You also have an opportunity to work on increasing your score.

Recommended: FICO Score vs. Credit Score

What Is a Credit Score?

A credit score is a three-digit number creditors use to determine how likely you are to repay a loan and make payments on time.There are two main credit scoring companies that generate your credit score: FICO and VantageScore. However, 90% of lenders rely on FICO when making borrowing decisions.

Though FICO and VantageScore use different models for credit scoring, they both have a score range of 300 to 850 to signify creditworthiness. The higher your score, the less of a financial risk you may pose to lenders — and the more likely you are to get approved for a credit card, mortgage, or loan. A more robust credit score also means you’ll typically qualify for more favorable terms, such as lower interest rates, and possible credit card perks such as earning cash back on purchases, airline miles, or higher credit limits.

Here’s a look how the scoring range of VantageScore vs. FICO differs so you can see where you stand with both:

What’s a Good Credit Score for Your Age?

A “good” FICO credit score falls somewhere between 670 to 739 or higher, regardless of your age. If, like many 23-year-olds, you lack a substantial credit history, your starting credit score probably won’t be within that range. The good news is, your score won’t be zero (no one’s credit score is), nor does it mean you’ll start out with 300, the lowest possible credit score.

Once you start showing you can manage your credit responsibly over time, your score should begin to rise. A spending app can help you manage bill paying and set budgets, which can make bill paying easier.

As you work on boosting your score, you’ll want to check it about four times a year to track your progress and make adjustments as needed. Credit scores update every 30 to 45 days, so it could take a little time before you start to see any changes.

How Are Credit Scores Used?

Credit scores are but one factor lenders consider when evaluating whether to approve you for any type of credit or loan. If your credit score is considered “good” or better, you may be more likely to get approved because in creditors’ eyes, you’ve shown you’re able to manage debt responsibly.

Credit scores aren’t just important for people looking to borrow money or apply for a new line of credit. If you’re renting an apartment, for instance, the landlord may run a potential tenant credit check to determine if you’re a safe bet. And, along with a background check, some employers may want to pull a prospective candidate’s credit score. Employer credit checks are more common in companies or businesses where the employee will be handling money and/or have access to customer’s financial information.

What Factors Affect My Credit Score?

There are five common criteria used to calculate credit scores. Here’s how much each one counts toward your FICO Score and why they can affect your credit score:

•  Payment history (35%). Your track record of bill paying can have a significant impact on your FICO Score. The more consistent and timely your payments, the better.

•  Credit utilization (30%). Credit utilization refers to the amount of available credit you’re using, and it’s a key factor in determining your credit score. A lower credit utilization rate is better for your credit score.

•  Length of credit history (15%). Generally, the longer an account is open and in good standing, the better it is for your credit score.

•  Credit mix (10%). Though not required, having a diverse array of credit, such as credit cards, installment loans, and even a home equity line of credit (HELOC), can show lenders you can handle different types of debt.

•  New credit (10%). When you apply for a loan or credit card, the lender will make a hard credit inquiry, which can cause a small, temporary dip in your credit score. If you apply for multiple loans or credit cards in a short period of time, your score can drop a bit. Lenders may also see it as a red flag that you’re taking on too many financial obligations.

How Does My Age Affect My Credit Score?

Your age doesn’t impact your credit score — your credit history does. But as noted earlier, credit scores do tend to increase with age and income levels. This means a 23-year-old has the opportunity to establish positive fiscal habits early on, such as setting budgets, using a money tracker app to monitor spending, and living within or below your means.

At What Age Does a Credit Score Improve the Most?

According to Experian FICO Score data, Baby Boomers and the Silent Generation tend to have the highest credit scores of all age groups. But the biggest jump in scores — 37 points in 2024 — generally occurs between Generation X and Baby Boomers.

How to Build Credit

Wondering how to build credit? A good place to start is to acquire credit accounts so you can start establishing your credit history. Remember, lenders want to see a track record of responsible debt management, so it’s a good idea to create sound financial habits now. Pay your bills on time consistently. Resist the temptation to use up all of your available credit. And keep tabs on your finances so you don’t spend more than you’re bringing in.

And keep in mind, this is a long game. How long does it take to build credit? It depends, but generally speaking, it may take three to six months to build enough credit and get your first credit score.

Credit Score Tips

Whether you’re just starting on your credit journey or are preparing your finances for a major purchase, increasing your credit score is always a worthy goal. Here are some tips to help you do just that:

•   Pay your bills on time, every time. It bears repeating: A track record of on-time payments shows lenders that you’re serious about being fiscally responsible. It also can go a long way toward building your credit score.

•   Keep older accounts open. Closing any credit card accounts ends your payment history with that lender. Eventually, this account will drop off of your credit report and potentially impact your credit length and credit utilization rate. If you have an older credit card account in good standing, consider keeping it open — and even using occasionally for smaller charges.

•   Get credit for other bills you pay. A 23-year-old can work toward increasing their credit score by looking into including rent payments, streaming services, and even some utility bills. Check out Experian Boost, which allows you to include these types of on-time payments in other accounts to your Experian credit report.

•   Check your credit report. You can check your credit reports without paying weekly via AnnualCreditReport.com. Ensure all the information is correct, and fix any errors you see.

   Note that your credit report won’t show you your credit score. Instead, you may be able to get that important three-digit number from a number of sources, including your bank, credit card company, or Experian. As with checking your credit report, monitoring your credit scores helps you identify discrepancies or fraudulent activities.

Recommended: Why Did My Credit Score Drop After a Dispute?

The Takeaway

The average credit score for a 23-year-old is 681, which is considered a “good” credit score. Having a score in this range can help make getting loans, credit cards, apartment rentals, and maybe even certain jobs a little easier. If you’re able to boost your credit score into a “very good” or even “exceptional” range, you may be able to qualify for loans with better terms or credit cards with attractive perks.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

FAQ

What’s a good credit score for a 23-year-old?

No matter what your age is, a credit score that falls between 670 and 739 is considered good. The average credit score for a 23-year-old is 681, which falls in the “good” range.

Is a 760 credit score at 23 good?

Yes, a 760 FICO credit score puts you in the “very good” range, and it shows lenders that you’re creditworthy and able to capably manage credit.

What is a good credit limit for a 23-year-old?

Credit limits differ from person to person, but the average limit for Generation Z consumers is around $13,000.

Is 720 a good credit score for a 23-year-old?

Yes, it is. A 720 credit score is classified as a “good” score, according to FICO, and a “prime” score per VantageScore.

How rare is an 800 credit score?

It’s not that common to have a credit score of 800 or higher, which is categorized as “exceptional.” Case in point: Only about 22% of Americans have a score in the 800s.

How rare is an 825 credit score?

As mentioned above, less than a quarter of Americans boast a credit score of 800 or higher. Having an 825 credit score is rarer because it reflects, among other things, a near-perfect history of on-time payments. Late payments, defined as 30 days past due, appear on only 1% of credit reports for people with a credit score of 825, according to Experian.

Photo credit: iStock/BongkarnThanyakij

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

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Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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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