Taking a CARES Act Retirement Withdrawal could Lead to a Tax Liability

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.

With taxpayers still dealing with the financial fallout from the COVID-19 outbreak, many are falling on hard times and needing to get cash quickly. The Coronavirus Aid, Relief and Economic Security Act, also known as the CARES Act, has a provision that can aid Americans that are financially strapped.

The CARES Act makes it easier for taxpayers to withdraw funds from their retirement accounts like 401(k)s and traditional Individual Retirement Accounts (IRAs). The temporary changes made to retirement accounts allows taxpayers to make early withdrawals without worrying about tax penalties as well as relaxed rules on loans you take out from your retirement.

What is my retirement contribution limit?

In most cases, taxpayers are able to deduct up to $6,000 for a traditional IRA. If you are 50 years or older, you are able to deduct $7,000. If you have a different retirement account, the amount will differ based on your age and type of plan you have chosen. Your contribution amount may also be limited based on the amount of income you earn.

Here is everything you need to know about the CARES Act.

Eligibility on early withdrawals from retirement accounts with the CARES Act

Some tax-advantaged retirement account holders may not qualify for some of the CARES Act’s relaxed early distribution and loan provisions. Legislation restricts relief to certain participants with a valid COVID-19 related reason in order to receive early access to funds. This includes:

·         If you have been diagnosed with COVID-19.

·         If your spouse or dependent is diagnosed with COVID-19.

·         Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19.

·         Lack of childcare because of COVID-19.

·         Closing or reducing hours of a business owned or operated by an individual or spouse due to COVID-19.

Additional rules for early distribution

Eligible participants in tax-advantaged retirement plans typically have 401(k)s, 403(b)s,457s, and Traditional IRAs. This includes taking an early distribution of up to $100,000 during the calendar year 2020 without having to pay the 10% penalty tax that is typically imposed on most retirement account withdrawals before an account owner is 59 ½.

The act also suspends the mandatory 20% tax withholding requirement that is typically applied to early distributions from a 401(k) or other workplace retirement plan. The CARES Act allows taxpayers up to three years to redeposit the withdrawn money back into their retirement account or pay it all back in 2020 if your income is much lower this year.

Can contributing to an IRA change my tax bracket?

Contributing to your retirement plan can change the tax bracket you are typically in, if your income is near a bracket level. It is important to know that contributing to your plan does not have as big of an effect on your income bracket as you may think because each level of your income is taxed at the income tax rate for that bracket.

If you need tax help, contact us for a free consultation.

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Setting Financial Goals for the New Year

Women writing in her journal

The new year is the one time of year when everyone reevaluates their life goals and vow to make big changes in their lives. Typically, you’ll see people going back to the gym to reach their goal weight or decide that this is going to be the year that they’re going to travel the world. While any aspiration you set for yourself is a great start, some of the best resolutions are the ones with objectives that will help you move up into the dream position that you’ve always wanted or even buy that house you’ve had your eye on for a while. Here are a few simple tips to get you on the right track for both advancing your career opportunities and saving more money in the bank.

Look for growth opportunities

More and more companies are looking to create growth for employees internally. If you’re looking for a way to earn more money and gain a new set of skills, you may not have to look too far. You can start by looking at job listings that your company is hiring for, if you see something that interests you and you feel you’re more than capable of handling the position, talk to your recruiting team or even the manager of the department that you are interested in. Alternatively, you can also look at positions at other companies and apply.

Create a budget

With the new year comes new ambitions, which means it may be time to economize your budget for the year. Creating a budget means that you set limits on how much you are spending every month to ensure that you don’t overspend and cut into your savings goals. Typically, a budget requires you limit what your spending on necessary items you need throughout the month. For example, if you are going grocery shopping, stick to the basics that you will need; don’t spend frivolously on snacks and sweets just because you’re craving them at that moment. Avoid eating out consistently throughout the month and save it more for a special occasion. If you are looking to splurge, you can always allot a certain amount of money to spending on personal items throughout the month.

Build your savings

Having a cushion to land on if you fall onto hard times, or if you need cash right away in order to respond to an unexpected emergency, is exactly the reason millions of Americans open up a saving’s account.  If you don’t have one yet, then the new year is the perfect time to start. Whether you’re building your savings to invest in a house, vehicle, school, etc., it’s vital to have a savings account as a backup to ensure that you’re able to get out of a financial bind quickly.

Cancel old subscriptions

Make sure to review your monthly bank statements; you may be surprised to find you are paying for services that you no longer use or thought you had canceled long ago. Be on the lookout for subscriptions or gym services that are automatically being deducted from your bank account. You could potentially save yourself some money.

Look into paying down your debt

 If you receive a tax refund of about $3,000, that means that you are missing out on pocketing an extra $250 a month. This money could be used to pay down any loans or negative balances you have to ensure that you remain in good standing on all your debts. 

You don’t have to get a financial rut in the new year, with just a few simple changes you can get off to the right start and reach your financial goals. Looking for career opportunities, starting a budget, opening up a savings account or getting rid of old subscriptions could help you move in the right direction and provide you with a better outlook on your financial future.

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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What is an IRS Revenue Officer?

Revenue Officers deal with the most advanced tax collection cases that the IRS has on file. If you owe a large sum of money to the IRS, you could potentially have a Revenue Officer assigned to you. Optima CEO David King and in-house Revenue Officer expert and Enrolled Agent, Rosie Steele, provide helpful tips on what individuals can do if they have been assigned a Revenue Officer.

Got an IRS Notice? Get a FREE Risk Review with our Optima® TAX APP with Notice Analyzer

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IRS issues guidance on Taxability of Dependent Care Assistance Programs

The IRS has issued guidance on the taxability of dependent care tax assistance programs for 2021 and 2022. In the guidance, it was clarified that any amounts that were attributable to carryovers or an extended period for incurring claims would typically be non-taxable events. In addition, under the American Rescue Plan Act, the new guidance has mandated a one-year increase in the exclusion for employer-provided dependent care benefits from $5,000 to $10,500 for the 2021 tax year.

Due to the ongoing pandemic in 2020 and 2021, individuals were unable to use the money that they had previously set aside in their dependent care assistance programs. Under these plans, an employer typically allows employees to set aside a certain amount of pre-tax wages in order to pay for any dependent care expenses they may have.

In most cases, carryovers of unused dependent care assistance program amounts are not allowed. However, because of legislation related to coronavirus such as the Taxpayer Certainty and the Disaster Tax Relief Act of 2020, employers are allowed to change their plans and can now permit the carryover of unused dependent care assistance program amounts to plan years ending in 2021 and 2022.

Notice 2021-26 states that dependent care benefits would have been excluded from income if used during taxable year 2020 (or 2021, if applicable). These benefits will remain excludible from gross income and are not considered wages of the employee for 2021 and 2022.

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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Tips on how to manage your Small Business

When it comes to filing a business-related tax, small business owners know that it can be extremely time-consuming and very complicated.  It can be especially difficult for owners who do not have a strong understanding of the federal, state, and local taxes required to file as well as knowing what type of taxes you will need to include on your return such as income, employment, excise, and sales.

It is critical for business owners to file their taxes in order to run their business and remain compliant with the IRS. Here are few ways a small business owner can manage their taxes.

Hire an Accountant

For the most part, small business owners will hire an accountant to make sure all of their tax filing is accurate and to also pay and keep track of all of their tax payments. Hiring an accountant can help reduce the amount of time a business owner spends on taxes and bookkeeping. An accountant’s services can range from making estimated tax payments, filing taxes and asset depreciation. Owners should specifically search out small business accountants who are well seasoned in their role and have had success working with current or previous small businesses.

Understand how much taxes you will owe and how to pay them

One of the first conversations you have with your accountant should be about your tax liability and how to determine how much you will owe. One thing that needs to be considered is the type of business structure an owner has; this will determine the type of federal income tax that a business will be required to file. Owners will also need to understand that the number of assets such as stocks, equipment, or property will also impact their businesse’s overall tax liability.

Avoid common mistakes

Businesses should take preventative measures in order to avoid common mistakes that many small business owners run into. For example, owners should always keep track of when their estimated taxes are due to avoid missing a payment and having to pay additional penalties to the IRS. Small business owners should also keep detailed and accurate records to help make their tax filing process much more seamless. Finally, business owners need to be prepared for the unexpected costs that come with having a business. Owners should keep extra money on the side just in case they have to cover any unexpected costs. 

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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IRS Audits: Tips for Staying on the IRS’s Good Side

The IRS has the authority to audit any tax return. Optima CEO David King and Lead Tax Attorney Philip Hwang explain what an audit is and help taxpayers understand what they can do to stay on the right side of the IRS. (One important tip: The IRS sends audit notices through the U.S. Postal Service. “Audit notices” coming to you over the phone or email can safely be considered a scam.)

Confused or scared by an IRS notice? Download the Optima®TAX APP and easily understand the severity of your tax situation.

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New Tax Plan could raise Taxes by $213,000 next year on wealthy Americans

As a result of President Joe Biden’s tax plan, the top 1% could see their taxes increased by more than $213,000. This could mean that households that earn $800,000 or more could see their after-tax income decline by about 11% according to the Urban-Brookings Tax Policy Center’s analysis.

The proposed plan would increase taxes on the ultra-wealthy Americans and corporations in order to pay for an expansive infrastructure plan and add more features to the social safety net that would largely benefit low- and middle-income families.

Americans that earn at least $3.6 million would be required to pay an additional $1.6 million which would make their income fall about 17%, according to the Tax Policy Center.

Biden’s plan would increase the top marginal income-tax rate to 39.6% from the current 37%. The plan would also tax the appreciation of unsold stock and other assets at death. Previously these assets were able to pass to many heirs tax-free.

The plan would additionally extend the recent temporary increases to the child tax credit, the child and dependent care credit, and the earned income tax credit. These benefits are largely to assist the low and middle-income households.

The plan would give households earning $26,000 or less an average tax cut of $600 next year which would increase their after-tax income by about 4%. Middle earners that make between $52,000 to $93,000 would receive a $300 tax cut, or 0.5% of after-tax income.

This new initiative is an attempt to help low to middle-income earners that have kids and need the additional tax breaks to stay financially afloat.

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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Received a Math Notice from the IRS? Here’s what to do.

The IRS sent out more than 5 million math error notices to individuals, many of them having to do with the economic impact payment issued in 2020 and 2021. Optima CEO David King and Lead Tax Attorney Philip Hwang help explain what this notice means and provide guidance on what to do if one is received in the mail.

Got an IRS Notice? Get a FREE Risk Review with our Optima® TAX APP with Notice Analyzer

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IRS Audit Red Flags to look out for

The IRS has the ability to audit an individual’s tax return to ensure that there is not any fraudulent activity occurring. A general rule is that the IRS can go back at least three years for an audit; however, if there are major errors on your return, the agency does have the ability to go back another few years – but typically no more than the last six years.

If you are being audited, the most important thing to remember is that you will need to have solid documentation to back up any claims you make about your overall financial picture, particularly your deductions.

Here is a list of additional items that could get your return flagged by the IRS:

  • Claiming a home office deduction. Taxpayers are required to have a dedicated space in their home that is strictly used only for their business in order to take advantage of this type of deduction. This deduction allows an individual to prorate some of their household expenses such as utility bills, homeowner’s association fees and more on a fractional basis. When claiming this deduction, an individual will need to figure out how much square footage is dedicated to their business in their home versus how much square footage they have in their home at large.
  • Deducting unreimbursed business expenses. Unreimbursed business expenses are only deductible beyond 2% of your adjusted gross income. Most workers are also reimbursed by their employers for most out of pocket expenses. Expenses such as license fees, subscriptions to trade journals, tools and supplies, and specialty uniforms are deductible expenses. Non-allowable deductions such as commuting costs and everyday work clothes should not be placed on your tax return and could trigger an audit with the IRS. This could end up being very costly for an individual if the IRS rejects your deductions.
  • Claiming 100% business use of a vehicle. Taxpayers should consider keeping a paper log on their dashboard and writing down every mile that is used for work, the date and what it was for. If you do want to claim all the costs for a business expense, be sure you have another vehicle too.
  • Hiring a preparer who falsifies your return without your knowledge. Taxpayers should be cautious when hiring a tax preparer. There are many incompetent and unethical tax preparers who could end up costing you more than you expected. If the IRS sees a pattern of problems on your returns coming from one preparer, they may flag the entire operation’s returns for that year or the past several years. If an egregious error is found on your return, you will most likely be held accountable for it.
  • Taking an alimony deduction. Alimony is paid under divorce agreements and after the 2018 tax year, is no longer deductible. In addition, ex-spouses get taxed on alimony received under post-2018 divorce agreements. Individuals that attempt to deduct their alimony expense will likely trigger an audit with the IRS if there is a mismatch in reporting by the payer and the recipient of alimony on each of their tax returns

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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What to Expect When You Call the IRS

Individuals seeking assistance from the IRS may be wondering if they have the option to contact the agency and what they should expect when speaking with an IRS agent. Whether you received a tax notice and are seeking more information on it, or you are looking to set up a payment agreement, here is everything you need to know before calling the IRS. 

Do not reach out to the IRS if you have tax questions or need assistance filing your tax return. Taxpayers should not waste their time waiting on hold trying to reach an agent to discuss any questions or concerns they have about filing their taxes. Instead, it is recommended to seek out assistance from a tax professional that can address any tax filing questions you have about your return and how to file it once it has been prepared.  

The IRS also has interactive tools on their website that can be used to provide updates on the status of a tax return or find out the status of a refund. The IRS has even established a portal for taxpayers to use when checking on their stimulus check status. 

Taxpayers should contact the IRS if they owe a tax balance but cannot pay the amount in full, if they are being audited, or if they have received correspondence from the IRS requesting them to call in. 

 Individuals who are unable to afford paying off their tax balance have the option to work with the IRS to establish a payment plan or apply for an offer for tax debt forgiveness. Taxpayers who are being audited should also reach out to the IRS to discuss their situation and should also get their tax preparer involved just in case additional information needs to be provided.  

When contacting the IRS, be prepared to verify your identity and your accounts. Taxpayers should have their name, date of birth, and social security number ready. If you are calling on behalf of someone else, you will need to provide proof of a power of attorney that shows you have permission and authority to do so. 

Once an IRS agent has verified your identity, you should have the following forms on hand for reference: 

  • Your completed tax return. 
  • Your EIN or Taxpayer Identification number. 
  • Proof of past payments if you have made quarterly payments or put money toward a debt to the IRS. 

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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