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What to do if You’re Projected to Owe Taxes

Tax season will be upon us shortly, which means it’s time to start preparing all your tax documents in order to ensure that you receive the maximum amount in your refund. Here’s a list of ways you can get the most from your taxes.

Contribute More Towards Your Retirement

Taxpayers who contribute towards their company’s 401(k) or their traditional IRA will automatically lower their taxable income. Currently, the contribution limit for a 401(k) is $19,000 ($25,000 for 50 or older) and $6,000 ($7,000 for 50 or older) for an IRA.

Taxpayers may also be eligible for the Savers Credit which is worth up to $1,000 ($2,000 if married filing jointly). Lower to middle-income taxpayers can qualify for this credit if they are contributing to their retirement. The credit also assists qualifying taxpayers reduce their taxes should they owe a tax liability.

Donate to a Charity

The holiday season is a great way to give back and also give back to those in need, all while also reaping the tax benefits. Tax deductions for non-cash and monetary donations donated to qualifying charitable organizations can get you the most out of your tax refund when itemizing your tax deductions. Those volunteering at a charitable organization can deduct their mileage (14 cents of every mile).

Review Your Tax Withholdings

With the end of the year approaching, it’s important to know where you stand with both your taxes and your finance. One way to know if you’re on the right track is to review how much federal and state taxes are being withheld from your paycheck every month. 

The IRS provides a tax withholding calculator for taxpayers to use to ensure that they’re withholding the accurate amount and to avoid owing the IRS. If a taxpayer does end up owing a balance, they will need to either pay it in full after filing their taxes or make estimated tax payments to the IRS prior to filing their tax return to avoid any interest and penalties.

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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How to Deduct Medical Expenses for an Illness or Injury

Deductions for Medical Expenses

It’s common knowledge for many taxpayers that medical expenses can be deducted on their tax return but very few actually benefit from the deduction. In order to claim a medical expense deduction, a taxpayer must qualify for the following:

  1. You must itemize deductions in order to write off medical expenses. Only one-third of taxpayers have itemized in the past.
  2. Medical costs are deductible only after they exceed 7.5% of your Adjusted Gross Income (AGI) in 2020.

For many taxpayers, it can seem stressful when attempting to claim these types of medical deductions. There are certain situations when it actually works out:

  • If your medical expenses are high due to a serious illness or injury or you need dental work done for you or your family.
  • Your AGI is low due to low taxable retirement income or being out of work for part of the year.

HSA, MSA and FSA Distributions

These types of distributions allow you to make tax-free withdrawals for medical purchases. The following plans include:

  • Health Savings Accounts
  • Archer Medical Savings Accounts
  • Flexible Spending Accounts

In order to qualify for HSAs and MSAs, it’s required that you have a high deductible health plan and are established in making medical payments.

  • You can establish these types of plans and nearly anyone can contribute to them on behalf of the account beneficiary.
  • Money can grow tax-free in these accounts.
  • Withdrawals for medical expenses are not subject to tax.

FSAs are established by employers and don’t need to be paired with a high deductible health plan.

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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Reducing Taxes on Your Holiday Bonus

As the spirit of generosity is in the air, companies and employees need to know that holiday bonuses are considered supplemental wages and subject to taxes. Holiday bonuses are viewed by the IRS as compensation, just like paychecks, so taxes need to be withheld from your holiday bonus.

How Much are Holiday Bonuses Taxed?

Some of the taxes you will need to pay on your holiday bonus include:

Social security tax:

You pay social security tax on all compensation up to $132,900 in 2019. If you haven’t passed this threshold, then you can expect your employer to deduct 6.20% from your bonus for social security.

Medicare tax:

You can expect another 1.45% to be deducted from your holiday bonus for Medicare tax.

Federal income tax:

The IRS requires a set percentage of your bonus to be withheld when you receive it. This is because your holiday bonus is considered a supplemental income. Under tax reform, the federal tax rate for withholding on a bonus was lowered to 22%. This is lower than the federal income tax rate of 25%.

State income tax:

depending on which state you live in, state income tax will be withheld at the rate the state requires by law.

Retirement Plans (401k):

If you have requested that your employer contribute a portion of your wages to your retirement plan, then the rate at which you have set will be the same rate that will be taken out of your holiday bonus.

Ultimately, you should check with your employer about your holiday bonus and taxes. Your employer has the option to combine your regular paycheck and holiday bonus and withhold taxes on the whole amount. If your employer does this, it may result in a higher withholding than 22%.

If this is the case, don’t worry as you will eventually get some of the money back as part of your federal tax refund when you file your taxes.

How to Avoid Holiday Bonus Tax

Are there any ways to avoid paying tax on the bonus? No. And failing to report and pay taxes could lead to problems down the road. But there are ways to minimize or delay the impact. Here are three options:

Give a little more:

Employers can estimate the taxes an employee would have to pay on the bonus and add that to the total amount. That way, after taxes, the employee would get to keep the intended bonus amount. Obviously, this requires the employer to be more generous, which is not always possible.

Invest in the future:

Another option – that would avoid both payroll and income taxes – is to put the bonus into the employee’s 401K retirement plan. While employees would not actually receive a check during the holidays, they would also not have to pay taxes on that money until they withdraw it. In the meantime, that bonus could continue to grow.

Kick Off a Healthy New Year:

Employers can decide to award holiday bonuses in January and offer the option of placing the money in a Flexible Spending Account for healthcare. None of that money would be taxed, but the employee would have to use it on qualifying health or dependent care expenses.

If you’re an employee and your company will not offer any of the options above, then do your best to plan ahead and factor the taxes into your holiday budget. And if it makes you feel any better, giving is always better than receiving.

Looking for assistance with tax relief? Optima Tax Relief’s licensed professionals offer a range of tax services to help you. Reach out for a consultation today.

Pause on Student Loans could End Soon. Here’s what You Need to Know.

Updated on December 7, 2020

  • Betsy Devos has extended the pause on student loan payments through January 31.
  • Devos has also extended the pause of interest accrual and the suspension of collections on defaulted loans.
  • Despite month-long negotiations, Congress has yet to approve additional pandemic aid to both individuals and Americans.  

If you’re one of the 37 million student loan borrowers that has been taking advantage of the pause on student loan payments that was part of the CARES Act, you may need to start preparing for your payments to begin again starting January 1st.

The Department of Education suspended student loan debt payments, paused accruing interest, and stopped collections on defaulted federal loans in March in the midst of the pandemic when unemployment was surging. The idea was to provide financial relief to Americans that were suffering due to the coronavirus outbreak.

It’s not clear yet as to whether or not another extension will be made during President Trump’s presidency since the government has been unable to reach a deal on providing assistance to  individuals by distributing stimulus checks and giving out loans to business  that are struggling to keep their doors open.

The idea of student loan forgiveness has become increasingly popular and a variety of proposals have been presented in order to help student loan borrowers that struggle to make their monthly payments.

  • House Democrats passed the HEROS Act back in May. The Act would have provided $10,000 in both federal and private student loans forgiveness that are economically distressed.
  • President-elect Joe Biden proposed forgiving all undergraduate federal student loan debt for borrowers who attended public colleges and universities, as well as historically black colleges and universities and private minority-serving institutions. Borrowers earning less than $125,000 per year would be eligible for student loan forgiveness.
  • Senator Elizabeth Warren previously pushed for across-the-board student loan forgiveness of up to $50,000 per borrower for those who earn under $100,000 per year. The benefit would gradually phase out for those earning between $100,000 and $250,000 per year.

Additional proposals have been suggested that would be geared towards certain professions in response to the ongoing COVID-19 pandemic. First responders, medical personnel and teachers were included in the group of people that should be given student loan relief. Although many ideas have been passed around about erasing college debt to assist those who are having difficulty making ends, there has yet to be any student loan reform bills that have passed.

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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IRS Creates Taxpayer Relief Initiative that makes it Easier to Set Up Payment Agreements

The IRS just announced new changes to assist taxpayers who are financially struggling due to the ongoing pandemic in order to make it easier to settle any owed tax debts.

Taxpayer payment plans and alternative options have been expanded with the intention to provide relief for those who were impacted by COVID-19. The newly revised COVID collection procedures will take the stress off taxpayers so they can focus on getting compliant, specifically to those who have a history of filing their past tax returns and paying their taxes on time.

Additional changes made to the Taxpayer Relief Initiative:

  • If you qualify for a short-term payment plan, the IRS could allow you to have up to 180 days instead of 120 days to resolve your ongoing tax burden.
  • For those who are temporarily unable to make their payment terms for their accepted Offer in Compromise, the IRS is offering flexibility until they’re able to meet the terms of their agreement.
  • Individuals and business taxpayers who are in an agreement with the IRS will automatically have new tax balances added to their payment agreement. This new update will occur instead of the IRS automatically defaulting an agreement for any new tax liability that is accrued for current or future tax years. 
  • Qualifying taxpayers who owe less than $250,000 have the ability to set up an installment agreement without having to provide any financial substantiation to the IRS.
  • Taxpayers who only owe for the tax year 2019 or owe less than $250,000 could qualify to set up an Installment Agreement only if they have yet to have a federal tax lien filed by the IRS.
  • Taxpayers with existing Direct Debit Installment Agreements may not be able to use the Online Payment Agreement system to try to get a lower payment plan or change the payment due dates.

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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IRA Hardship Withdrawal: Everything You Need to Know

If you are facing financial hard times, your retirement funds begin to look like a good source of much-needed cash. In cases of dire emergency, you may indeed be able to make withdrawals from those funds before you reach retirement age. However, the potential short-term and long-term consequences can be severe. Nonetheless, if you must make an early withdrawal from an Individual Retirement Account (IRA) or 401(k), there are certain circumstances under which you can minimize the bite from Uncle Sam.

The Covid-19 pandemic and the 2020 CARES Act have made easier for taxpayers to withdraw funds from their retirement accounts. Learn more about taking a CARES Act retirement withdrawal HERE.

What are the Three Types of Retirement Funds?

There are three primary types of tax optimized retirement funds in the United States:

  • Traditional IRAs
  • Roth IRAs
  • 401(k)s

Traditional IRAs

Traditional IRAs are drawn from pre-tax earnings. When you deposit funds in a traditional IRA, the taxes on those funds and your earnings is deferred until after you retire, presumably when your income is lower and you qualify for a lower tax bracket.

Roth IRAs

By contrast, Roth IRAs are drawn from post-tax earnings. Because you pay taxes on Roth IRA deposits up front, you do not have to pay taxes on either the principle or the earnings, provided that your Roth IRA has been open for five years or longer and you are at least 59 ½ years old when you begin making withdrawals.

401K

401(k) funds are sponsored by your employer. You can invest either pre-tax earnings or post-tax earnings, with tax implications similar to those for a traditional or a Roth IRA. Many employers match their employees’ contributions dollar for dollar. The catch is that you can’t access your employer’s contributions to your 401 (k) until you are fully vested in the company, which translates to being employed or a certain length of time which varies but five years is common.

For What Reasons can you Withdrawal from IRA without Penalty?

If you are younger than age 59½, taking withdrawals from either a traditional or Roth IRA or from a 401(k) will usually trigger a 10 percent tax penalty in addition to paying any income taxes that are due. However, there are exceptions that vary depending on whether you are withdrawing from a traditional or a Roth IRA or from a 401 (k). You can avoid tax penalties from withdrawing from a traditional IRA even if you are younger than age 59 ½ for the following reasons

  • Purchasing a first home.
  • Educational expenses for yourself or a family member.
  • Death or disability of a family member.
  • Covering unreimbursed medical expenses.
  • Purchasing health insurance coverage (only if you are not already covered).

To claim one of these exceptions, you will need to complete IRS Form 5329 along with your income tax returns the following year. Even if you avoid the penalty, you will still need to pay taxes on the money you withdraw. This means that you should withdraw enough to cover your needs, plus a little extra for taxes.

Is there a Penalty for Withdrawing from a Roth IRA?

Yes, penalty-free early withdrawals for Roth IRAs apply to only two circumstances: first –time home purchase or death or disability of a family member. However, the penalty for early withdrawal from a Roth IRA only applies to earnings, since you have already paid taxes on the principle. You will also need to submit Form 5329 along with your tax return.

Can you pull money out of a 401k early?

It is possible to make early withdrawals from a 401(k). However, the IRS is especially harsh on early withdrawals from 401 (k) funds. You may make what are known as hardship withdrawals before age 59 ½ for the following reasons:

  • Purchase a first home.
  • Pay for college for yourself or a dependent.
  • Prevent foreclosure or eviction from your home.
  • Cover unreimbursed medical expenses for yourself or a dependent.

However, hardship withdrawals from a 401 (k) differ from hardship withdrawals from an IRA. You will be assessed a 10 percent penalty in addition to paying income taxes on your withdrawal. To avoid the 10 percent penalty on early withdrawals from a 401(k), you must fulfill one of the following circumstances.

  • Total disability.
  • Medical expenses that total more than 7.5 percent of your adjusted gross income (AGI).
  • Court order to give the money to a divorced spouse, child or other dependent.
  • Permanent separation from your job (including voluntary termination) during or after the year you turn 55.
  • Permanent separation at any age with a plan for equal yearly distributions of your 401(k) (once you begin taking distributions, you must continue them until you reach age 59 ½ or for five years, whichever is longer).

How do you avoid Penalty on 401k Withdrawal?

A better option than a hardship withdrawal from your 401(k) may be to take a loan against the value of your 401(k) with an outside lender. The lender places a lien against your 401(k) which remains in place until you repay the loan. Your funds remain in your 401(k), safe from the reach of Uncle Sam. However, if you default on the loan, the lender will have the right to seize your 401(k) to collect payment.

Is it bad to withdraw from IRA?

It should be clear that IRA and 401k withdrawal should be considered a last resort. Even if you avoid tax penalties, you are depleting the available funds available for your retirement so in this sense, it is a bad idea and if can avoid it, you should. If you must borrow, borrow enough to cover your obligations plus taxes, and repay the funds as quickly as possible. After all, you are actually repaying yourself – and your future.

Need to speak with a licensed tax professional? Optima Tax Relief provides a comprehensive range of tax relief services. Schedule a consultation with one of our professionals today.

Are Political Donations Tax Deductible?

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.

Many Americans show their support for their political candidate by voting or donating to the political party of their choice. If you’re wondering if your financial contribution to a political campaign affects your taxes in any way, you’re not alone. Here’s everything you need to know about campaign donations and your tax return.

Can Political Contributions be Tax Deductible for Businesses?

Businesses are cautioned to not deduct political contributions, donations or payments on their tax returns.

Can I Deduct my Expenses if I Volunteer for a Political Campaign?

For those who volunteer for a political candidate, campaign, or political action committee, the time you volunteer will not be considered tax deductible when filing your taxes.

Is it Considered a Tax Deduction when Supporting a Presidential Campaign?

 When filing your taxes, you have the option to set aside $3 of your taxes to go towards the Presidential Election Campaign Fund when you complete your 1040 federal income tax return form. You can check the box to donate the funds and it will not affect your taxes or deductions.

Are there Political Contribution Limits?

Taxpayers wanting to support a political candidate or party can donate the following amounts:

  • Up to $2,800 per candidate and election.
  • Up to $10,000 to state, district, and local parties combined each year.
  • Up to $106,500 to a national political party, per account, and per year.

Are there any Donations that are Tax Deductible?

In order to qualify, you must be a registered non-profit organization that operates as true charity in order to take a tax deduction for the donation.

If you volunteer, give cash or non-cash items to a 501(c)(3) organization, your donation may be a qualified tax-deductible charitable contribution. To confirm if the organization you gave a donation to is a 501(c)(3) organization, you can use the Tax-Exempt Organization Search Tool from the IRS.

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

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Will a Covid-19 Relief Deal Be Struck Soon?

The ongoing pandemic has caused many Americans to suffer financially due to a loss of jobs and businesses shutting down. Proposals for another coronavirus relief package are currently ongoing and should include another stimulus check distributed out to taxpayers as well as providing assistance to businesses that are finding it difficult to stay open.

Read more here

Can Working Remotely Lead to Additional Taxes?

Many taxpayers have switched from working in the office to working at home because of COVID. Most people don’t realize that there could be tax implications when working from home and could end up with a tax-time surprise if they’re not up to date on current tax laws.

Read more here

Economic Impact Payment Extended for Non-Filers to November 21st

Taxpayers who don’t typically file their taxes and have yet to receive a stimulus check should register online on the IRS website in order to receive their economic impact payment. The IRS is allowing Americans to register online until November 21, 2020.

Read more here

Taxpayers in Financial Hardship could Qualify for Stimulus Check

Many Americans are facing homelessness or financial hardship during the ongoing pandemic could qualify for a $1,200 Economic Impact payment. If your income threshold is below $12,200 or $24,000 if you’re married, you will need to register with the IRS by November 21st in order to receive your money.

Read more here

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What Taxpayers need to know about Their Right to Finality

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.

For taxpayers who have been working with the IRS, it is important for them to know that they have a right to finality. Specifically those who have had their tax return(s) audited by the IRS should know that there is a Taxpayer Bill of Rights in place to protect them.

For taxpayers currently in the audit process, here is what you need to know about your right to finality:

  • Taxpayers have the right to know
    • The maximum amount of time they have to challenge the IRS’s position.
    • The maximum amount of time the IRS has to audit a tax year or collect a tax debt.
    • When the IRS has finished an audit.
  • The IRS typically has three years from the date that a taxpayer files their return to review for an additional tax for the year in question.
  • There are very few exceptions when it comes to the three-year rule. An exception would be considered if a taxpayer fails to file a return or files a fraudulent return. In either case, the IRS would have an unlimited amount of time to assess tax for the tax years in question.
  • The IRS generally has 10 years from the date of assessment to collect unpaid taxes. It is important for a taxpayer to know that the 10-year period cannot be extended unless a taxpayer enters into a payment plan or the IRS obtains court judgments.
  • A 10-year collection period may be suspended when the IRS cannot collect money because a taxpayer has an ongoing bankruptcy or there’s a collection due process proceeding involving the taxpayer.
  • A taxpayer will only be subject to one audit per tax year. The IRS has the ability to reopen an audit for a previous tax year if the IRS deems it necessary.

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

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Reporting Foreign Income To The IRS: What You Need To Know

You may live or work abroad, but if you are an American citizen or legal permanent resident, Uncle Sam still wants his rightful share of your income. Even if you reside outside the United States and receive earnings from a source located outside the United States, you must report that income.

Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the Internal Revenue Service. However, in some cases you may receive tax credits or tax exclusions for some or all of your foreign income.

The details of reporting foreign income vary according to individual circumstances. Nonetheless, there are general guidelines for nearly everyone who receives foreign income.

Foreign Income Tax Credit

If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the tax credit is to ensure that the total income tax that you pay is no more than the highest result that you would have paid to a single government.

If you hire an accountant or a tax attorney to figure your taxes, he or she will undoubtedly apply the Foreign Income Tax Credit on your income tax return. Some tax preparation software programs also include provisions to calculate the Foreign Income Tax Credit if it applies to you. If not, choose a different tax preparation program.

Foreign Earned Income Exclusion

Do not confuse the Foreign Earned Income Exclusion with the Foreign Income Tax Credit. The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability. The amount of the exclusion varies each year; for 2013 the maximum exclusion was $97,600 per individual taxpayer. Married couples could conceivably claim a larger exclusion.

The Internal Revenue Service has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.

  • Must have foreign earned income
  • Must have established a tax home in a foreign country
  • Must pass either the bona fide residence test or the physical presence test

The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.

foreign money

U.S. Government Employees Living Overseas

Income earned by employees of the United States government, including military personnel on active duty, does not qualify for the Foreign Income Credit or for the Foreign Earned Income Tax Exclusion, even if the income was earned overseas. However, spouses of government employees who earn income from foreign sources may be eligible for either the Credit or the Income Exclusion. It is necessary to consult with an attorney or accountant who specializes in this subject with specific questions about your particular circumstances.

Foreign Income Earned While Living in the United States

If you reside within the United States full time, in most instances, you must report income earned from foreign sources on your federal income tax return, even if you are taxed on that income by the foreign government. This requirement pertains to earned and unearned income. Self-employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.

No W2 or Form 1099? No Excuse

The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent form from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements or PayPal monthly statements.

Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return. Failure to report foreign income is considered tax evasion, and if you are caught, the consequences could be dire. You could be hit with hefty fines or even face jail time.

Need to speak with a licensed tax professional? Optima Tax Relief offers a comprehensive range of tax relief services. Schedule a consultation with one of our professionals today.