What is Income Tax?

Governments require money as a way to operate which is why income taxes were put into place and are generally based off the amount of money an individual earns in a year. Most money that is received is subject to being taxed such as salary, interest, dividends, rents, royalties, lottery winnings, unemployment compensation and the earnings from a business you own.

Where does income tax come from?

Income tax is typically paid for by workers and people with income. Corporations, trusts, estates and many other types of entities also pay income tax on the profits they receive.

Many states also impose a similar form of taxation on individuals and entities that have a significant connection to the state. As of 2020, there are several states that don’t charge income tax. For those living in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, you are most likely responsible only for federal income tax.

Voluntary reporting of income tax

The U.S. income tax system is a voluntary system. Although it is a voluntary system it does not mean that paying your taxes is optional. The federal government relies on taxpayers to voluntarily report all income that is earned on their tax return and calculate the appropriate tax using the current tax laws.

The IRS has ways to ensure that income taxes are paid and receives copies of taxpayer’s W-2 every year should a taxpayer not file their taxes. The IRS can also calculate your taxes and send you a bill based off the tax forms the IRS has received. Additionally, the IRS charge interest and penalties against those who owe a tax balance.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Small Businesses have been hit with Another PPP tax Change. Here’s Everything You need to Know.

The IRS has added to the Small Business Administration’s Paycheck Protection Program. The new guidance was issued on November 18th and offers additional details the entail tax-deductible items will no longer be deductible if they were paid with PPP funds.

Small businesses have been prohibited from deducting expenses in 2020 taxes that are associated with PPP loan forgiveness even if it takes until 2021 or 2022 to reach actual forgiveness, or if the business has yet to fill out a forgiveness application.

Businesses that plan to defer 2020 tax liabilities for the year while waiting for their loans to be forgiven may no longer be allowed due to the new guidance that the IRS has provided around the PPP.

Without the PPP, small business would be forced to lay off their staff in order to save on any expenses they may incur throughout the year. The only reason why staffing levels have been able to maintain at their current rate is due to the PPP.

Many businesses will still financially benefit from PPP loans even though there are limits on tax deductible items.

The Biden administration may review the current guidelines for the PPP loan in order to see if there are any alterations that need to be made to it. However, it is unlikely that they would be able to entirely reverse guidelines created for the loan.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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If a $50,000 Student Loan Forgiveness is Adopted, it Could Impact Your Taxes. Here’s How.

Senate Minority Leader Chuck Schumer has requested that President-elect Joe Biden forgive up to $50,000 for student loan borrowers.

Debt cancellation is something that has been highly considered but often carries with it a tax bill for the borrower. Schumer believes that Biden can help avoid that entirely.

Many households that are currently suffering financially due to the ongoing pandemic would need the problem of student loan debt addressed, including the issue of monthly payments and balances that have continued to accrue interest.

There are several situations that could allow for tax-free debt forgiveness under the current law:

  • The first to consider is the Public Service Loan Forgiveness program. A borrower’s remaining federal loan balance will be wiped after 120 qualifying payments. Students must be working from a government organization or a 501(c)(3) not-for-profit.
  • Those who have student loans should be aware that nearly 180,000 unique borrowers have applied to have their debt wiped clean while only 3,469 have been forgiven from the U.S. Department of Education.
  • A taxpayer will be granted relief from their student debt due to death or total and permanent disability of the student is also considered tax-free.

Back in January, The IRS and Treasury Department gave tax relief to defrauded students who have had their balances wiped when their colleges closed. As of now, it still remains to be seen how Congress or how the new Biden administration will assist student loan borrowers with taxes that comes directly from debt forgiveness.

We will continue to update you with new information as this story develops.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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When Can Taxpayers Expect to Receive their Stimulus Payment? Your Questions Answered

A second round of stimulus checks are starting to be issued out by the IRS and the Treasury Department to individuals as of last week.

Taxpayers should be aware that the distribution of their payment could potentially take several days to post to individual accounts. Those who opted for direct deposit on their tax return will likely be able to view the payment as pending or as a provisional payment in their account before the scheduled payment date of January 4, 2021, which is the official date the funds will be made available.

Paper checks have already began being distributed to taxpayers and will continue to be mailed out through all of January. A handful of individuals can also expect to be mailed debit cards in January. The IRS strongly recommends people check their mail carefully and to be aware that sending out the checks will take the IRS more time to process compared to those who chose direct deposit as their method for their impact payment.

No action is required on the taxpayer’s end and those who are eligible for the second stimulus check will receive the payment automatically and should not contact their financial institutions or the IRS with payment timing questions.

Eligibility

U.S. citizens and resident aliens who are not eligible to be claimed as a dependent on another person’s income tax return, are eligible for this second payment. Qualifying individuals can receive up to $600 or $1,200 for married couples and up to $600 for each qualifying child.

Individuals who have an adjusted gross income for 2019 up to $75,000 ($150,000 for married couples filing joint returns) will qualify for the full amount of the second stimulus payment. Filers who earn income above these amounts will receive a reduced amount.

Check the status of a payment

Taxpayers now have the ability to check the status of both their first and second payments by using the Get My Payment tool on the IRS website.

Payment not received or is the incorrect amount? Taxpayers can now claim this on their 2020 tax return

Payments will be made to those who have provided valid routing and account information on file. If a payment was sent to an account that is no longer valid, the financial institution that received the payment must return it to the IRS. If you have yet to receive your full payment by the time you file your 2020 tax return, you may claim the Recovery Rebate Credit on your tax return.

Updating bank account or mailing information

Eligible taxpayers should be aware that the IRS does not have the ability to change an individual’s payment information such as a bank account or new mailing address. Eligible taxpayers who do not get a payment or it is less than expected may be able to claim it on their 2020 tax return as a Recovery Rebate Credit.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Tax Implications when Buying and Selling Stocks During a Market Downturn

The stock market can be extremely volatile, especially throughout the entirety of this year due to the pandemic, businesses closing down, and unemployment numbers increasing, and of course, the presidential election that just took place.

Millions of American invested in the stock market and took advantage of stock prices when they hit their lowest while millions of others chose to sell the current stock they had in order to avoid any additional losses they could face in the near future.

If you currently invest in the stock market or sold your stocks this year, you may be wondering if you will face any tax implications when it comes time to file your taxes. Here is everything you need to know about reporting your stocks on your tax return.

Taxes on Capital Gains

Shares of stock that were sold at a higher rate compared to when you purchased them means that you will be responsible for reporting and perhaps paying on any capital gains you may have created. One thing to consider when selling during a downturn is how long you’ve had your stock for. You may have a tidy gain even if it has fallen from its previous highs.

Long-term vs. Short-term Capital Gains

Taxpayers that have a gain on a sale of security they have held for over a year will receive the benefit of lower long-term capital gains tax rates depending on their income. However, if their gains come from the sale of a stock that has been held for one year or less, their stock sale will be taxed as a short term capital gain.

Offsetting Capital Gains with Capital Losses

If you’ve sold losing stock and have a capital loss, you can offset your losses with your capital gains. This is also known as tax-loss harvesting meaning investors analyze their capital losses so they can offset their capital gains.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Tax Tips for Taxpayers Filing Federal Tax Returns Amid the Pandemic

The IRS is encouraging all tax filers to prepare in advance when it comes time to file their 2020 tax returns. Taking necessary action ahead of time can help a taxpayer file a much more accurate return and avoid making simple mistakes.

Taxpayers should start gathering Forms W-2, Wage and Tax Statement, Forms 1099-Misc, Miscellaneous Income, and other income documents in order to help determine what credits and deductions you could be eligible for. If you received Notice 1444, Your Economic Impact Payment, you’ll want to calculate any Recovery Rebate Credit that you may be eligible for on your 2020 federal income tax return.

It is important to know that most income will be considered taxable and that this will also include unemployment compensations, refund interest, and income and virtual currencies.

For those who have an Individual Tax Identification Number, you will need to double check that it has not expired before filing your taxes in order to avoid any processing delays. If your ITIN has expired, the IRS recommends submitting a Form W-7, Application for IRS Individual Taxpayer Identification Number. Those who fail to renew their ITIN could face a delayed refund or may even be ineligible for certain tax credits.

The IRS recommends that tax filers use the Tax Withholding Estimator on the IRS’s website. This will help determine if you are withholding the correct amount for federal on your paycheck in order to avoid having a balance when file their taxes. If you need to adjust your withholding for the rest of the year, you should submit a new Form W-4, Employee’s Withholding Certificate, to your employer.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Tax Deductions Taxpayers can Qualify for when they Refinance their Mortgage

One of the biggest tax deductions a taxpayer can have is the interest that they pay on their mortgage loan. Typically, the mortgage interest is tax deductible, meaning that it reduces the total amount of earned income for the tax year. This is only true if the following applies:

  • The loan must be for your primary residence or a second home that is not rented out.
  • The loan must be secured by your home meaning that your home serves as collateral for the loan. If you fail to make payments, the lender can foreclose on the home.
  • You itemize deductions on your tax return. This means that you list all deductible expenses, add them up and deduct them from the total amount of your income.

Mortgage Points

If you paid points when refinancing your mortgage, it may be possible for you to deduct them. Points are prepaid interest that is paid upfront in order to get a lower interest rate during the period when you’re repaying the loan. Points can also go by the following names:

  • Loan origination fee
  • Maximum loan charge
  • Discount points
  • Loan discount

Points are paid as part of a mortgage refinance and usually must be deducted over the life of the loan.

Settlement fees

A mortgage refinancing is settled when a taxpayer signs all their paperwork to officially take out a new loan and pay off the old one. There are a number of fees and charges that may be applied at settlement. Closing costs can also add up or hundreds or thousands of dollars and could include the following:

  • Appraisal fees
  • Attorney fees
  • Inspection cots
  • Legal and recording fees

It is important to know that these costs are typically not deductible in a mortgage refinance if they are for your residence.

Rental Properties

Rent received from tenants on your rental property is considered taxable income and must be reported when you file your taxes. Money that is spent to generate your income from these rental properties can typically be deducted from your rental income. Interest and points paid on a mortgage on rental property, closing costs and fees can also be deducted on your tax return.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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The IRS has more than 1 Million Unprocessed Returns and 3 Million Pieces of Unopened Mail Due to COVID-19

The IRS is currently dealing with over one million 2019 tax returns that have yet to be processed due to the coronavirus pandemic and distribution of millions of stimulus checks that buy a delay on IRS operations.

Approximately one million unprocessed returns still remain which is down from the 2.5 million unopened returns back in October. In addition, more than 3 million pieces of unopened mail remain which is down from the 5.3 million.

After the agency extended their tax deadline to allow Americans more time to file their 2019 federal tax returns because of COVID-19, the influx of paper returns as well as IRS employees having to transition to a work-from-home environment has caused a major delay in processing due to limited staff.

Although the delay has been stressful to tax filers who are still waiting for their return to process and are anticipating a refund, the IRS has promised that they will pay interest on overdue refunds once they have processed their return.

Currently, 6.8 million returns are being processed by the IRS. Saturday, November 21st, was the deadline for those who have yet to file their income taxes to register on the IRS nonfilter portal to obtain their $1,200 ahead of next tax season.

The IRS has attempted to reach out to over 4,000 shelters in order to notify people who are homeless that they could possibly qualify for a stimulus check and to go to the IRS website in order to obtain it.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Americans can Expect to Receive a $600 Stimulus Check

An agreement has been made to issue a second round of stimulus checks to millions of taxpaying Americans. Congressional leaders passed a $900 billion economic relief package on December 20 along with a broader government funding deal in an effort to stimulate the economy and help struggling taxpayers and businesses as the novel coronavirus continues to spread across the country.

There are several big differences between this second stimulus package and the original $3 trillion Cares Act deal passed in late March, including the maximum amount of the stimulus check, which has dropped from $1,200 to $600 per individual.

Here is a breakdown on how some of the economic deal will be distributed to both businesses and individuals:

$166 billion in stimulus checks

Individuals who have an annual income up to $75,000 will receive the full $600 payment. Couples making up to $150,000 will receive $1,200.  One change is that taxpayers who receive the stimulus check will now receive an additional $600 per dependent, up from $500 per dependent in the Cares Act. This new stimulus deal will also make the stimulus checks more accessible for immigrant families.

$120 billion in unemployment benefits              

Those who are currently out of work can expect to receive an extra $300 per week in federal cash through March 14. Employment benefits have also been extended for the self-employed, gig workers and for those who have exhausted their state benefits.

$325 billion for small businesses

Because of the ongoing pandemic, many small businesses have had to close down or are currently struggling to stay afloat. Small businesses can now expect to see a total of $325 billion, including the $284 billion in loans through the Paycheck Protection Program, $20 billion for businesses in low-income communities and $15 billion for struggling live venues such as theaters and museums.

$45 billion for transportation aid

$15 billion will go to aid airlines in order to maintain their payrolls, $14 billion for mass transit, $10 billion for state highways, $2 billion for airports and $1 billion for Amtrak.

$69 billion towards vaccines, testing and tracing

$20 billion will go towards the purchase of vaccines, $9 billion for vaccine distribution and $22 billion to assist states with testing, tracing and COVID-19 mitigation programs.

Rental assistance and eviction bans

$800 million has been set aside for Native American housing entities. A federal eviction ban has also been extended through the end of January.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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A Second Stimulus Check May Finally be on the Way. Here’s What You Need to Know.

A new stimulus check may finally be underway for millions of Americans. The expectation is that the payments will be $600 per individual, a 50% reduction from the $1,200 that the government provided in their previous stimulus check in the spring.

As of November 28th, more than 20.6 million Americans were receiving unemployment, and that’s not including the 885,000 first-time claims reported between then and December 12th. This is the largest per-week increase since September 5th.

Senator Josh Hawley has plans to go to the Senate Floor in an attempt to convince others to increase the relief payment amount to $1,200 per individual and $2,400 for married couples who file jointly. Like the first checks that taxpayers initially received through the CARES Act, those who earn under $75,000 and couples earning less than $150,000 would receive the full amount.

Americans previously received a stimulus paycheck payment of up to $1,200 per person, or $2,400 per married couple filing jointly, in addition to $500 for every dependent under the age of 17. Taxpayers would receive the full stimulus payment if their income threshold was at or under $75,000 for individuals, $112,500 for head of households or $150,000 for married couples.

Americans are still waiting to see if they will receive a stimulus check by the end of December or if they will have to wait even longer to be provided financial relief in the new year due to COVID-19.

We will continue to update you with new information as this story develops.           

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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