Get Tax Help  (800) 536-0734

Home » Tax News

Tax News Blog

14 States That Cut Their Income Tax Rates in 2024

14 States That Cut Their Income Tax Rates in 2024

In a move signaling a significant shift in fiscal policy, 14 states across the United States implemented cuts to individual income taxes in 2024. This development comes as states reassess their tax structures amid changing economic landscapes and evolving political priorities. Here’s a breakdown of the 14 states that cut their income tax rates in 2024.  

Which States Cut Their Tax Rate? 

The decision to reduce individual income taxes reflects a broader trend among state governments. They are aiming to stimulate economic growth, attract investment, and provide relief to taxpayers. The states undertaking these tax cuts span various regions, indicating a diverse range of approaches to fiscal policy. 

Among the states implementing income tax cuts are Arkansas, Connecticut, Georgia, Indiana, Iowa, Kentucky, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Carolina, Ohio, and South Carolina. For residents of these states, the impending tax cuts offer the prospect of increased disposable income and potentially bolstered economic activity. 

Arkansas 

Governor Sanders signed the latest Arkansas tax cut bill into law on September 14, 2023. It decreases the state’s highest income tax rate from 4.7% to 4.4%. This adjustment follows a prior reduction from 4.9% in April 2023. Arkansas taxpayers who earn over $87,000 will reap the benefits of this tax break. In addition, the corporate tax rate was reduced from 5.1% to 4.8% for those earning over $11,000.  

Connecticut 

On January 1, 2024, Connecticut implemented its first income tax rate reduction since the mid-1990s. Additionally, it was the largest cut in state history. The state’s progressive tax structure saw decreases in the two lowest rates. Single filers now pay 2% on the first $10,000 earned and 4.5% on the next $40,000, down from 3% and 5% respectively. Joint filers now pay 2% on the first $20,000 earned and 4.5% on the next $80,000, down from 3% and 5% respectively. 

Georgia 

Georgia Governor Brian Kemp signed HB 1437 into law on April 26, 2022. It replaced the state’s graduated personal income tax with a flat rate of 5.49% starting January 1, 2024. Subsequent gradual reductions will bring the flat rate down to 4.99% by January 1, 2029. However, these reductions may be postponed by one year for each year that specific budget conditions are not fulfilled.  

Indiana 

Indiana’s House Bill 1001 speeds up the state’s scheduled rate cuts by lowering the individual income tax rate from 3.15% to 3.05% in 2024. It also removes related tax triggers associated with state revenue increases. The bill outlines additional reductions to 3.0% in 2025, 2.95% in 2026, and 2.9% from 2027 onwards. 

Iowa 

Iowa’s tax relief efforts persist in 2024. Corporate taxpayers will face a contingent flat tax plan with rates of 5.5% on income below $100,000 and 7.1% on income exceeding $100,000. Individual taxpayers will see a gradual move towards a flat income tax rate of 3.9% by 2026, with the top marginal tax rate reaching 5.7% in 2024. 

Kentucky 

In February 2023, Kentucky passed House Bill 1. This bill lowers the state’s flat income tax rate from 4.5% to 4.0%, which took effect in 2024. 

Mississippi 

The state implemented a single rate for individual tax purposes on income surpassing $10,000. In 2024, this rate will decrease to 4.7% from the initial rate of 5% established in 2023. The rate is scheduled to decrease to 4.0% by 2026. Additionally, the franchise tax is slated to diminish to zero by 2028. 

Missouri 

In July 2023, Missouri Governor Parson signed Senate Bill 190, eliminating the income threshold for deductibility and effectively exempting Social Security payments from state income tax. Consequently, federal Social Security payments will not be taxed. Additionally, for 2024, the top individual income tax rate was reduced to 4.8%, down from 4.95%. 

Montana 

In 2021, Montana enacted Senate Bill 399, initiating changes to the state’s tax code effective in 2024. The law consolidated seven individual income tax brackets into two, lowering the top marginal rate from 6.75% to 6.5%. Additionally, in 2023, the legislature further reduced this rate to 5.9%. Montana will also implement lower tax rates for capital gains income, taxing them at either 3% or 4.1%. 

Nebraska 

Nebraska expedited previously planned reductions to both individual and corporate tax rates, lowering the top marginal tax rate earlier than initially projected. For corporations, the aim is to achieve a flat income tax rate of 3.99% by 2027. In 2024, the top marginal tax rate will decrease from 7.25% to 5.84% on income exceeding $100,000. Similarly, for individual taxpayers, the goal is to reach a top rate of 3.99% by 2027. However, in 2024, this rate will be 5.84%, achieved three years ahead of schedule. 

New Hampshire 

Through S.B. 189, New Hampshire lawmakers have disconnected the state’s tax code from the federal business net interest limitation under IRC § 163(j), enabling businesses to fully deduct interest expenses in the year incurred. Additionally, taxpayers can now deduct any previously disallowed business interest expenses carryforwards over three years. The state’s budget (H.B. 2), enacted in June 2023, hastens the phaseout of the tax on interest and dividends income, now slated for elimination in 2025 instead of 2027. In 2024, the rate will be reduced to 3%, down from 4%. 

North Carolina 

The state’s budget, Session Law 2023-134, sets the individual income tax rate at 4.5% for 2024, down from 4.75%. Further reductions in subsequent years are dependent on meeting revenue targets. 

Ohio 

Ohio’s biennial budget, signed in July 2023, merges the top two marginal tax rates for individual income into a single rate of 3.5%, reduced from 3.75% in 2023. 

South Carolina 

In recent years, South Carolina has lowered personal income tax rates from 7% in 2022 to 6.5% in 2023. It reduced its top individual income tax rate to 6.4% in 2024. Further, the state aims to decrease the tax by .1% each year until it is 6%. However, this will be contingent upon revenue triggers. 

Implications of State Income Tax Cuts 

While the implementation of income tax cuts is poised to deliver tangible benefits to residents and businesses in these states, it also raises pertinent questions about revenue implications and budgetary trade-offs. Policymakers must navigate these challenges adeptly to ensure that tax cuts are sustainable and do not compromise essential public services or fiscal stability. For instance, in 2012, Kansas cut income tax rates by nearly a third and almost eliminated business taxes hoping for a rejuvenated economy. Unfortunately, this resulted in the need to cut some social services and the cuts were eventually reversed. 

Moreover, the efficacy of income tax cuts in stimulating economic growth and generating long-term prosperity remains a subject of debate among economists and policymakers. While proponents argue that lower taxes incentivize work, investment, and entrepreneurship, skeptics caution against potential revenue shortfalls and widening income inequality. 

State Tax Help for Taxpayers 

The 14 states that cut their income tax rates in 2024 signal a significant development in state fiscal policy, with implications for residents, businesses, and policymakers alike. As these states embark on their respective tax relief efforts, the outcomes will be closely scrutinized, offering valuable insights into the interplay between taxation, economic growth, and public welfare in the United States. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success who may be able to help with your state tax issues. You can contact one of our tax professionals to see if they can help in your state.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Optima Newsletter – March 2024

optima newsletter header

Hoping for the Child Tax Credit? Don’t Wait to File

The U.S. House of Representatives has approved a bill that has the potential to grant families significant tax benefits. The aim is to strengthen tax breaks, offering substantial financial support to American households and leading to significant savings. Among the many items addressed in the bill is the expansion of the Child Tax Credit (CTC), a tax benefit designed to assist families with the cost of raising children. In this article, we’ll review the details of the CTC expansion and the next steps needed to pass the bill. 

Read More

Tax Tips and Updates for the 2024 Filing Season

Tax season is in full swing. With several filing options and a potentially larger Child Tax Credit to claim, there’s a lot to know before you file. Optima CEO David King and Lead Tax Attorney Philip Hwang provide a comprehensive guide for the 2024 tax filing season and show you how you can get the most when filing your tax return. 

Read More

An Overview of Estate & Inheritance Taxes

Sometimes after a loved one dies, we must deal with grief, funeral planning, and an estate. In some cases, we inherit assets from a deceased loved one. Unfortunately, not much in this life comes for free, and even the things we inherit can cost us. In this article, we will take a closer look at estate and inheritance taxes, including who is affected by them and how they work.  

Read More

What is the Kiddie Tax?

Navigating the complexities of taxes can be challenging for anyone. When it comes to families with children, there are additional considerations to be aware of. One such consideration is the IRS Kiddie Tax. This set of rules is specifically aimed at taxing unearned income of certain children at their parent’s tax rate. Understanding how the Kiddie Tax works is crucial for parents to effectively manage their tax liabilities. Let’s delve deeper into what the Kiddie Tax entails and how it might affect your family’s tax situation. 

Read More

What is the IRS Collection Statute of Limitations?

What is the IRS Collection Statute of Limitations?

They say that death and taxes are the only two certainties in life. However, taxes are only collectible for so long. The IRS Collection Statute of Limitations is a critical aspect of tax law that often confuses taxpayers and professionals alike. This statute dictates the timeframe within which the IRS can collect unpaid taxes. While it offers protection to taxpayers, navigating its complexities requires a nuanced understanding. Let’s delve into what the IRS Collection Statute of Limitations entails and its implications for taxpayers.

What is the IRS Collection Statute of Limitations? 

The IRS Collection Statute of Limitations is outlined in Section 6502 of the Internal Revenue Code. It establishes the timeframe during which the IRS can pursue the collection of unpaid taxes. Generally, the statute allows the IRS ten years from the date of assessment to collect the owed taxes.  

How Long is the IRS Collection Statute of Limitations? 

The IRS has a 10-year statute of limitations for tax collections, beginning when the IRS first assesses your tax liabilities. In other words, the IRS cannot collect tax debt that is older than 10 years. You should keep in mind that the first IRS notice you receive is not necessarily when your liabilities are assessed. Specifically, there is a Collection Statute Expiration Date (CSED), which marks the last day the IRS can collect tax debt. After the CSED, the IRS cannot legally collect your tax debt, which means that your tax debt essentially disappears.  

If you want to find your CSED, you can count 10 years from the date on your Notice of Federal Tax Lien. You can also request a transcript of your IRS account to find the date your liability was assessed and filed. However, keep in mind that there are several actions that can delay the statute of limitations, thus pushing out your CSED.   

Which Actions Extend a CSED? 

There are several qualifying events that can extend a CSED, including the following.  

Filing for Bankruptcy 

When an individual files for bankruptcy, the Collection Statute of Limitations is typically tolled, meaning it is paused or suspended for the duration of the bankruptcy proceedings. The IRS will pause the statute of limitations while your bankruptcy filing is pending, starting from the filing date until the court decides. The CSED will remain suspended for an additional six months.  

Living Abroad 

Living abroad can also have implications for the Collection Statute Expiration Date. The IRS will pause the statute of limitations while you live abroad for six consecutive months or longer. The CSED could remain suspended for six months after you return to the United States.  

Requesting an IRS Installment Agreement 

The IRS will pause the statute of limitations while it reviews your installment agreement application. If the agreement is rejected, the CSED will remain suspended for 30 more days. This is also the case if your installment agreement defaults. If you appeal your rejection, the CSED will remain suspended until a decision is final.  

Submitting an Offer in Compromise 

When you submit an Offer in Compromise (OIC) to the IRS, the CSED is typically tolled or suspended for the duration of the consideration period, which can last several months or even longer. Once a decision is made, the suspension ends. If your offer is rejected, your CSED will remain suspended for 30 more days.  

Requesting Innocent Spouse Relief 

When a taxpayer requests Innocent Spouse Relief, the CSED is typically tolled or suspended for the duration of the IRS’s consideration of the innocent spouse claim. However, the suspension will only apply to the spouse applying for relief. The IRS will extend the CSED until you either receive a waiver or the 90-day petition expires, whichever happens first. If you appeal the tax court decision, the statute of limitations will be suspended until a final decision is made. In any of the above case, the IRS will also extend the CSED an additional 60 days.  

Requesting a Collection Due Process (CDP) Hearing 

When a taxpayer requests a CDP hearing, the IRS generally suspends the CSED. The IRS will pause the statute of limitations while it reviews your request to stop a levy or remove a lien until a determination is made or until you withdraw your request. Additionally, if there are less than 90 days left in collections when a final decision is made, the IRS will extend the CSED 90 more days. 

Military Deferment 

A military deferment can also have implications for the Collection Statute Expiration Date. The IRS will pause the statute of limitations during military service and for an additional 270 days afterward. If you serve in a combat zone the CSED will be suspended for up to 180 days after military service.  

Being Sued By the IRS 

While this event rarely happens, the IRS will pause the statute of limitations during the court proceedings.  

Can I Ignore My Tax Debt Until the IRS Collection Statute Expires?  

You might be enticed to just wait out the IRS collection statute of limitations. However, this strategy is generally not recommended since it would mean ignoring your growing tax bill and IRS notices. Under these circumstances, simple actions like getting a job, purchasing a home, registering a vehicle, and operating a business would be very difficult. Working with the IRS will typically be your best option, but doing so alone can be tedious, intimidating, and stressful. Working with a credible and experienced tax relief company can help save time, money, and stress. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt. 

If You Need Tax Help, Contact Us Today for a Free Consultation

Net Investment Income Explained

Net Investment Income Explained

Net Investment Income (NII) is a crucial concept in finance, particularly for investors, financial planners, and those subject to taxation. It encompasses various forms of income derived from investment assets, such as interest, dividends, capital gains, rental income, and more. Understanding NII is essential for optimizing investment strategies, tax planning, and financial decision-making. This article aims to provide a comprehensive explanation of net investment income, its components, calculation methods, and its significance in personal finance and taxation. 

Components of Net Investment Income 

NII consists of various income streams generated from investments. The key components typically include: 

  • Interest Income: This refers to the interest earned on investments such as bonds, savings accounts, certificates of deposit (CDs), and other fixed-income securities. 
  • Dividend Income: Dividends are payments made by corporations to their shareholders out of the company’s earnings. They can be received from stocks, mutual funds, or exchange-traded funds (ETFs). 
  • Capital Gains: Capital gains occur when an investment, such as stocks, bonds, or real estate, is sold for a higher price than its original purchase price. Net capital gains are calculated by subtracting any capital losses from the total gains. 
  • Rental Income: Income generated from renting out properties, such as real estate, land, or equipment, is also considered part of net investment income. 
  • Royalties: Royalties are payments received for the use of intellectual property, such as patents, copyrights, or trademarks. 

Calculation of Net Investment Income 

To calculate NII, you can use Form 8960. Net Investment Income Tax. The form calculates the total investment income earned during a specific period and subtracts any investment expenses or deductions. However, you only need to file Form 8960 when both your NII and your modified adjusted gross income (MAGI) are over a certain threshold. When this happens, you’ll be subject to the Net Investment Income Tax (NIIT). 

Remember, MAGI is adjusted gross income (AGI) plus specific adjustments to income. These adjustments include items such as: 

  • Foreign earned income exclusion 
  • IRS contribution 
  • Non-taxable Social Security payments 
  • Passive loss or income 
  • Qualified tuition expenses 
  • Rental losses 
  • Student loan interest 
  • Your portion of self-employment tax 

What is the Net Investment Income Tax (NIIT)? 

The Net Investment Income Tax (NIIT) is a 3.8% tax that applies to the lesser of your NII or the portion of your MAGI that exceeds the threshold. The thresholds are: 

  • $200,000 for single filers and heads of household 
  • $250,000 for married couples filing jointly and qualifying surviving spouses 
  • $125,000 for married individuals filing separately 

For estates and trusts, the threshold is much lower. 

Example: NII is Less Than Excess MAGI 

Let’s say your NNI was $20,000 and your MAGI was $40,000 over the threshold. You would owe the 3.8% tax on the $20,000 of NII since it’s less than your excess MAGI. Your NIIT would be $760 (3.8% x $20,000). 

Example: NII is More Than Excess MAGI 

Now let’s say your NII was $30,000 and your MAGI was $10,000 over the threshold. You would owe the 3.8% tax on the $10,000 MAGI excess since it is less than your NII. Your NIIT would be $380 (3.8% x $10,000). 

Significance of Net Investment Income 

Understanding NII is crucial for several reasons. First, it can affect how much tax you pay. Knowing your net investment income helps in investment performance, setting financial goals, and devising investment and tax strategies. High net worth individuals and families often rely on NII calculations to manage their wealth efficiently. By optimizing investment income and minimizing tax liabilities, they can preserve and grow their wealth over time. 

Tax Help for Those with Net Investment Income 

Net Investment Income encompasses various income streams derived from investment assets and plays a significant role in personal finance, taxation, and investment planning. By understanding the components and calculation methods of NII, individuals can make informed financial decisions, optimize investment strategies, and mitigate tax implications. Whether for retirement planning, wealth management, or tax optimization, a clear understanding of net investment income is essential for financial success. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.   

If You Need Tax Help, Contact Us Today for a Free Consultation 

Common IRS Penalties & How to Avoid Them

common irs penalties and how to avoid them

Owing the IRS doesn’t just stop with your tax balance. If your tax obligations are not met, you could face penalties that can make your debt even more unmanageable. Understanding common IRS penalties and how to avoid them is essential for taxpayers to stay on the right side of the law and minimize financial consequences. Here are some of the most common IRS penalties and how to avoid (or reduce) them.  

Failure to File  

One of the most common penalties imposed by the IRS is the failure to file penalty. If you don’t file by the tax deadline, or the requested extension deadline, and you owe taxes, you will be charged with a failure to file penalty. This penalty is 5% of your unpaid tax for every month or partial month that your return is late. Like the Failure to Pay penalty, it caps out at 25% of your balance. To avoid this penalty, it’s crucial to file your tax return on time, even if you are unable to pay the full amount owed. Filing for an extension can also help avoid this penalty, but it’s important to remember that an extension to file is not an extension to pay any taxes owed. The deadline to file your 2023 tax return is April 15, 2024. 

Failure to Pay  

In addition to the failure to file penalty, the IRS also imposes a failure to pay penalty for taxpayers who do not pay their taxes by the due date. The 0.5% penalty is applied to any unpaid taxes for every month or partial month the tax is not paid. However, it will not exceed 25% of your unpaid taxes. There are some scenarios in which this penalty can increase or decrease. One example is if the IRS sends a notice with an intent to levy. In this case, you have 10 days to pay your taxes. If you do not, the Failure to Pay penalty increases to 1% per month or partial month. However, if you set up a payment plan, the penalty is reduced to 0.25% per month or partial month.   

Underpayment of Estimated Tax  

If you don’t withhold enough taxes throughout the year, you need to make quarterly estimated tax payments. If you don’t pay the correct amount of estimated tax, or if you pay late, you may be penalized. Estimated payments are due every April 15th, June 15th, September 15th and January 15th of the next year. The penalty can change quarterly. As of Q1 of 2024, individuals are charged 8% on underpaid tax while large corporations are charged 10%. You can avoid this penalty by meeting one of two requirements:  

  • Pay 90% of the tax you owe for the current year in four equal estimated payments, or through paycheck withholding  
  • Pay 100% of last year’s tax bill, before withholding or tax credits. If you have an AGI of more than $150,000, you should pay 110%.   

Accuracy-Related Penalties

Taxpayers who file inaccurate tax returns may be subject to accuracy-related penalties. Common reasons for receiving this penalty are if you don’t report all your income or if you claim deductions or credits you don’t qualify for. The two types of this penalty are:  

  • Negligence or Disregard of the Rules of Regulations Penalty: This penalty is common among those who do not follow tax laws or are careless when preparing their return. Examples include not reporting all income or not checking tax deductions that result in a refund that seems too good to be true.  
  • Substantial Understatement of Income Tax Penalty: This penalty is given to those who understate their tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater.   

Both of these accuracy-related penalties charge 20% of the portion of underpaid tax that resulted from negligence, disregard, or understated income. Avoiding this penalty is rather simple. Taxpayers should ensure that their tax returns are accurate and complete. Furthermore, they should maintain documentation to support their income, deductions, and credits claimed. 

IRS Penalty Abatement 

Penalties imposed by the IRS can significantly increase the amount owed by taxpayers and can be financially burdensome. However, under certain circumstances, taxpayers may be eligible to have these penalties reduced or eliminated entirely through penalty abatement. Taxpayers may request penalty abatement for reasons such as reasonable cause, statutory exceptions, or administrative waivers. 

  1. Reasonable Cause: One common reason for requesting penalty abatement is demonstrating “reasonable cause.” This means showing that there was a valid reason beyond the taxpayer’s control that prevented them from complying with tax obligations. Examples of reasonable cause may include serious illness, natural disasters, or death in the family, among others. Taxpayers must provide documentation or evidence to support their claim of reasonable cause. 
  1. Statutory Exceptions: Some penalties may have statutory exceptions that allow for penalty relief under specific circumstances. For example, certain penalties may be waived if the taxpayer can demonstrate that they acted in good faith or relied on incorrect advice from the IRS. 
  1. Administrative Waivers: In some cases, the IRS may offer administrative waivers for certain penalties. These waivers are typically granted on a case-by-case basis and may be available for first-time offenders or taxpayers who have a history of compliance with tax laws. 

Penalty relief may be requested via phone or by mailing Form 843, Claim for Refund and Request for Abatement. If the IRS denies your request, you may be able to appeal the decision. 

Get Help Avoiding and Reducing IRS Penalties  

Remember, the IRS charges interest on penalties and interest will continue to increase your balance until it’s paid in full. Since interest on underpayments begin on the tax due date, it’s important to act as quickly as possible to resolve your tax issue. If you can pay your balance in full, you should do so immediately. If you cannot afford to, you should look into options including payment plans or tax relief. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.   

If You Need Tax Help, Contact Us Today for a Free Consultation 

Which Tax Professionals are Qualified to Work with the IRS on My Behalf?

Which Tax Professionals are Qualified to Work with the IRS on My Behalf?

When facing the difficult task of dealing with the IRS, individuals and businesses often seek assistance from tax professionals. These tax pros can help navigate the complexities of tax laws and regulations. However, not everyone is qualified to represent taxpayers before the IRS. So, which tax professionals are qualified to work the IRS on your behalf? The IRS recognizes three primary types of tax professionals who can represent taxpayers before the agency. These are attorneys, certified public accountants (CPAs), and enrolled agents (EAs). Each of these professionals possesses distinct qualifications and expertise, making them valuable assets in resolving tax-related issues effectively. Understanding the different qualifications is essential to ensure proper representation and advocacy in dealings with the IRS. 

Tax Attorneys 

Attorneys who specialize in tax law are authorized to represent taxpayers before the IRS at all administrative levels, including audits, appeals, and collections. They are licensed to practice law by state bar associations. They’ve also undergone rigorous legal education and training, which may include a focus on tax law. 

Tax attorneys possess comprehensive knowledge of tax codes, regulations, and case law. This knowledge enables them to provide expert advice and representation in complex tax matters. They can offer legal strategies to minimize tax liabilities and negotiate settlements with the IRS on behalf of their clients. Finally, attorney-client privilege applies to communications between taxpayers and their attorneys, providing confidentiality and protection against disclosure in legal proceedings. 

Certified Public Accountants (CPAs) 

CPAs are licensed accounting professionals who have met the educational and experience requirements set by state boards of accountancy. While CPAs are primarily known for their expertise in accounting and financial reporting, many CPAs also specialize in taxation. 

CPAs can represent taxpayers before the IRS in matters related to tax preparation, planning, and compliance. They can assist individuals and businesses in responding to IRS notices, resolving tax disputes, and preparing and filing tax returns. However, CPAs do not have the authority to represent clients in tax court or handle certain types of tax litigation, as their training and licensing focus primarily on accounting and financial matters rather than legal advocacy. 

Enrolled Agents (EAs) 

Enrolled agents are tax professionals licensed by the IRS to represent taxpayers in all matters before the agency. Unlike attorneys and CPAs, who are licensed by state authorities, enrolled agents receive their credential directly from the IRS. They do this after passing a comprehensive examination or demonstrating relevant experience and expertise. 

EAs are tax specialists who possess in-depth knowledge of federal tax laws and regulations. They can represent taxpayers in audits, appeals, and collections proceedings, as well as provide tax planning and preparation services. Enrolled agents are particularly well-suited for resolving IRS-related issues, given their specialized focus on taxation and their authority to represent clients nationwide without state-specific limitations. 

Choosing the Right Representative 

When selecting a tax professional to represent you before the IRS, it’s essential to consider several factors. These might include the complexity of your tax situation, the nature of the tax issue, and the level of expertise required. While attorneys, CPAs, and enrolled agents all have the qualifications to represent taxpayers before the IRS, each brings a unique set of skills and capabilities to the table. 

For complex legal matters or situations involving tax litigation, a tax attorney may be the most appropriate choice due to their legal expertise and ability to navigate the intricacies of tax law. For comprehensive tax planning and compliance services, a CPA with a focus on taxation can offer valuable insights and assistance. And for a broad range of IRS representation and advocacy needs, an enrolled agent provides specialized knowledge and nationwide representation. 

Tax Help for Those Who Owe 

In conclusion, understanding the qualifications and capabilities of different tax professionals is crucial for ensuring effective representation before the IRS. Now that you know which tax professionals are qualified to work the IRS on your behalf, you can decide which to work with. Whether you choose an attorney, CPA, or enrolled agent, selecting the right representative can make a significant difference in resolving tax issues and receiving tax relief. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

How Unemployment Affects Your Taxes

how unemployment affects your taxes

If you spent time unemployed last year, you might be wondering how that’ll affect your tax return this year, especially if it was your first time ever being without work. When it comes to unemployment and taxes, you might have some questions. Here’s a breakdown of how unemployment affects your taxes. 

Is Unemployment Taxable? 

Perhaps the first question people ask about unemployment is: “Is my unemployment income taxable?” In short, it is taxable. The IRS requires you to report any unemployment income on your federal tax return with Form 1099-G, Certain Government Payments. Most states tax unemployment income as well, except for the few that don’t tax any income and the few that exempt unemployment benefits from income taxes. You can check with your state’s Department of revenue to see if your income is taxed at the state level. 

How Do I Pay Unemployment Taxes? 

When applying for unemployment benefits, you can request your state to withhold federal taxes from your checks. In this case, 10% will be used to pay federal taxes. You can also make estimated quarterly tax payments throughout the year. If you go this route, be mindful of the deadlines for each quarter: April 15, June 15, September 15, and January 15 of the following year. Your final option is to just pay all taxes due during tax time. The same three options usually also apply to paying taxes at the state level. 

Does Unemployment Affect My Tax Credits? 

Receiving unemployment benefits might affect your eligibility for certain tax credits. For example, eligibility of the earned income tax credit (EITC) and the child tax credit (CTC) are determined by earned income. Since unemployment benefits are not considered earned income, it could reduce your credit amount or completely disqualify your eligibility. Since the EITC is worth up to $7,430 and the CTC is worth $2,000 per qualifying child in 2024, it is best to check with your tax preparer to see exactly how unemployment will affect your eligibility for tax credits you rely on each year.  

Are Other Government Benefits Taxable? 

Sometimes the unemployed seek other financial assistance from the government, including housing subsidies, childcare subsidies, and SNAP benefits. You might also accept food donations from food pantries. These benefits are generally not taxable, but you should check with your local benefits offices to confirm. 

What If I Can’t Pay My Taxes? 

Being unemployed might mean you’re low on funds and might need extra help if you run into issues during tax time. The IRS offers a free tax filing service on their website and Volunteer Income Tax Assistance (VITA) provides free tax preparation for lower-income taxpayers. If your tax issues are bigger or more complex, it might be best to consider tax relief options. Our team of qualified and dedicated tax professionals can help if you have tax debt. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Tax Guide for New Investors

tax guide for new investors

When considering investing, you may first daydream of the potential rewards of the risky endeavor. But as a new investor, it can be overwhelming to navigate the world of taxes. However, understanding the basics of taxation can help you make informed decisions and avoid costly mistakes during tax time. In this brief tax guide for new investors, we will cover some of the essential things you need to know. 

Capital Gains vs. Ordinary Income 

When you invest, you have the potential to earn income through two methods: capital gains and ordinary income. Capital gains are the profits you make when you sell an asset for more than you paid for it. Ordinary income is income earned through wages, salaries, interest, dividends, and other sources. 

The tax rate for capital gains is generally lower than the tax rate for ordinary income. The tax rate you pay on capital gains depends on how long you hold the asset before selling it. If you hold it for more than a year, it’s considered a long-term capital gain. In this case, the tax rate will be lower than if you hold it for less than a year, otherwise known as a short-term capital gain. Short-term capital gains are taxed as ordinary income. In 2023, the tax rates for long-term capital gains are as follows: 

Filing Status0%15%20%
SingleUp to $44,625$44,626 to $492,300 Over $492,300
Head of HouseholdUp to $59,750$59,751 to $523,050Over $523,050 
Married Filing Jointly orQualified Widow(er)Up to $89,250$89,251 to $553,850Over $553,850 
Married Filing SeparatelyUp to $44,625$44,626 to $276,900 Over $276,900 

The long-term capital gains tax rates for 2024 are:

Filing Status 0% 15% 20% 
Single Up to $47,025$47,026 to $518,900 Over $518,900
Head of Household Up to $63,000$63,001 to $551,350Over $551,350
Married Filing Jointly orQualified Widow(er) Up to $94,050$94,051 to $583,750Over $583,750 
Married Filing Separately Up to $47,025$47,026 to $291,850Over $291,850 

Tax Implications of Different Types of Investments 

Different types of investments are taxed differently. For example, stocks are taxed on capital gains and dividends, while bonds are taxed on interest income. Real estate is also subject to specific tax rules, including depreciation deductions and the potential for tax-deferred exchanges. 

It’s important to understand the tax implications of your investments before you invest. For example, if you’re investing in a high-yield bond, you may be subject to higher taxes on the interest income than if you were investing in a low-yield bond. By understanding the tax implications, you can make informed decisions about where to invest your money. Consulting with a financial advisor before making these financial moves can help you make the most informed decision now and prepare for any tax bill later. 

Investment Expenses 

Investment expenses can be deducted from your taxes, which reduces your taxable income. These expenses can include brokerage fees, investment advisory fees, and other costs related to your investments. It’s important to keep track of these expenses throughout the year, so you can deduct them on your tax return. Be sure to have proper documentation just in case the IRS requests substantiation later. 

Selling Investments 

Knowing when to sell your investments can have a significant impact on your taxes. If you sell an asset for a loss, you can use that loss to offset capital gains from other investments. This is called tax-loss harvesting and can help reduce your tax bill. Tax-loss harvesting could also help reduce your ordinary income tax liability, even if you don’t have any capital gains to offset. To do this, you would sell a stock at a loss and then purchase a similar stock with the proceeds.  

Tax-Advantaged Accounts 

Tax-advantaged accounts are investment accounts that offer tax benefits. These accounts include 401(k)s, IRAs, and 529 college savings plans. Contributions to these accounts are tax-deductible, and the investment interest grows tax-free. When you withdraw the money during retirement or for qualified education expenses, you’ll pay taxes on the withdrawals, but typically at a lower tax rate than during your working years. Investing in tax-advantaged accounts can be an effective way to reduce your tax bill and grow your investments over time. 

In conclusion, understanding taxes is an essential part of investing. By knowing the tax implications of your investments, keeping track of your investment expenses, and taking advantage of tax-advantaged accounts, you can reduce your tax bill and maximize your investment returns. Remember to consult with a tax professional for personalized advice on your specific situation. 

Tax Help for New Investors 

Remember, the most important thing you can do during tax time is ensure that you are reporting all income, whether it is ordinary income, interest earned on a bond, or dividends paid out to you that year. Failing to report income during tax time can put you on a fast path to being audited by the IRS. If you need help with a large tax liability because you were unprepared for the tax implications of investments, a knowledgeable and experienced tax professional can assist. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Ask Phil: What is a Tax Attorney?

Today, Phil explains what a tax attorney is, including what it takes to become one and how they can help you with your tax issues. 

What is a Tax Attorney? 

A tax attorney is a legal professional who specializes in tax law. They are trained and experienced in dealing with complex tax issues, including tax planning, compliance, disputes, and litigation. One of the privileges they have is being able to represent taxpayers before tax authorities, such as the IRS.  

Becoming a Tax Attorney 

What does it take to become a tax attorney? For one, it means going to and completing law school. It also means passing the bar exam. However, they shouldn’t stop there. Staying updated on changes in tax laws and regulations is essential for tax attorneys to effectively advise their clients and navigate complex tax issues.  

Tax attorneys can make a significant impact on their clients’ financial well-being by helping them minimize tax liabilities, resolve disputes with tax authorities, and plan for the future. Just be sure to vet your attorney to ensure they are qualified to represent you before the IRS. Rest assured, the attorneys and enrolled agents at Optima Tax Relief can help.  

If you need tax help, contact us today for a Free Consultation 

What is the Kiddie Tax?

What is the Kiddie Tax?

Navigating the complexities of taxes can be challenging for anyone. When it comes to families with children, there are additional considerations to be aware of. One such consideration is the IRS Kiddie Tax. This set of rules is specifically aimed at taxing unearned income of certain children at their parent’s tax rate. Understanding how the Kiddie Tax works is crucial for parents to effectively manage their tax liabilities. Let’s delve deeper into what the Kiddie Tax entails and how it might affect your family’s tax situation. 

What is the Kiddie Tax? 

The Kiddie Tax is a tax provision established by the IRS aimed at preventing parents from shifting investment income to their children to take advantage of their lower tax rates. Specifically, it applies to children who have unearned income above a certain threshold. It applies to children under 19 years of age or under 24 if they are full-time students. Unearned income includes interest, dividends, capital gains, rents, and royalties, among other types of passive income. However, other common examples include taxable scholarships and income produced by gifts from family. 

Exemptions 

The Kiddie Tax does not apply to all children. If a child meets any of these criteria, they will be exempt from the Kiddie Tax rules.

  • The child has no living parents at the end of the tax year.
  • The child got married and filed a joint return for the tax year. 
  • The child is not required to file a tax return for the tax year.
  • The child is totally or permanently disabled.
  • The child is emancipated.

How Does it Work? 

The first $1,250 of a child’s unearned income is not taxed. However, the next $1,250 is subject to the child’s tax rate of 10%. Additionally, any income that exceeds $2,500 is taxed at the greater rate of the child’s tax rate or the parent or guardian’s tax rate. For example, if a child had $3,000 in unearned income, $500 would be subject to the Kiddie Tax. Finally, the threshold will rise to $2,600 for tax year 2024. 

For 2023, the standard deduction for a child is the greater of $1,250 or the child’s earned income plus $400, if you can claim them as a dependent. This is because $1,250 is the standard deduction for dependents. If you cannot claim the child as a dependent, they’d generally use the standard deduction of a single filer. This figure is $13,850 for 2023.  

Examples 

  1. Emily receives $3,000 in dividend income from stocks held in a custodial account in her name. Her parents’ marginal tax rate is 24%. Under the Kiddie Tax rules, since Emily’s unearned income exceeds the $2,500 threshold, the portion exceeding the threshold ($500) will be taxed at her parents’ tax rate. 
  1. Consider a family with two children, Jack and Lily. Jack is 17 years old and earns $1,800 in interest income from savings bonds. Lily, on the other hand, is 20 and a full-time college student She receives $3,500 in dividends from investments. Jack’s income will be taxed at his individual tax rate of 10%. However, Lily’s income will be subject to the Kiddie Tax at her parents’ tax rates. 
  1. 17-year-old Michael is legally emancipated from his parents. He earns $5,000 in interest income from a savings account in his name. Since Michael is emancipated, the Kiddie Tax does not apply to him. Therefore, his interest income will be taxed at his individual tax rate. 
  1. Sarah, who is 18 years old, has a disability that meets certain criteria outlined by the IRS. Sarah receives $4,000 in dividends from investments. If Sarah’s disability qualifies her for an exception to the Kiddie Tax, her dividends may be taxed at her individual tax rate rather than at trust and estate tax rates. 

How to Report Kiddie Tax 

Reporting the Kiddie Tax on your tax return involves several steps. That said, it’s crucial to ensure accurate reporting to comply with the IRS. Calculate the child’s unearned income for the tax year. Remember, unearned income includes interest, dividends, capital gains, rents, and royalties, among other types of passive income. If the child’s unearned income exceeds the threshold, apply the Kiddie Tax rates to the portion of income exceeding the threshold. For 2023, unearned income up to $2,500 is taxed at the child’s rate. Any amount over $2,500 is taxed at the parent or guardian’s tax rate. This can be significantly higher than individual tax rates.  

If the Kiddie Tax applies, use IRS Form 8615, Tax for Certain Children Who Have Unearned Income. This form helps determine the portion of the child’s unearned income subject to the Kiddie Tax. It also calculates the tax liability at the appropriate tax rate. Parents should attach this form to the child’s Form 1040. In some cases, the parent can include the child’s income on their return instead. They would do this with Form 8814, Parent’s Election to Report Child’s Interest and Dividends.  

Tax Help for Parents 

Understanding the Kiddie Tax is essential for parents who engage in financial planning strategies involving their children’s investments. While the Kiddie Tax aims to prevent tax avoidance, it can significantly impact the tax implications of certain investment decisions. Parents should consider consulting with a tax advisor or financial planner to develop tax-efficient strategies that align with their overall financial goals. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.  

If You Need Tax Help, Contact Us Today for a Free Consultation