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Can you Report a Foreclosed Rental House on Your Tax Return?

For rental properties that have been foreclosed on, the IRS will view it as a sale. It is required to report any gain or loss you incur on your tax return. If the foreclosure increases the complexity of the transaction for tax reporting purposes, other factors must be considered such as who would be responsible for any remaining mortgage debt after the bank takes possession of the rental house.

How to calculate the tax basis on a rental house

The tax basis represents the total cost of the home in order to calculate your taxable gain or loss. It will also include the price that was paid for the rental house in addition to the cost of the permanent improvements that are made to it.

Calculating the amount on the foreclosure

In a typical sales transaction, the amount a taxpayer can realize is also known as the sales price. In a foreclosure, the amount will depend on if you are considered responsible for paying the mortgage debt or not. Should you be held responsible for the remaining mortgage balance, then the amount that you realize is equal to the fair market value of the house when it’s foreclosed on.

If the bank chooses to cancel any debt that is left on the mortgage, meaning you will no longer be liable for paying any of the debt back, then any amount in excess of the fair market value of the house is part of the ordinary taxable income. The ordinary income is considered separate from the gain or loss that is calculated on the foreclosure of a home.

Calculating the gain or loss

Once the realize amount is determined on the foreclosure, a taxpayer will need to subtract their tax basis from the amount to arrive at a gain or loss. If you’ve owned a rental house for more than a year, all losses will be considered ordinary. This means that it is fully deductible form the other income you report on a personal tax return.

Reporting the transactions to the IRS

It is required to report any foreclosures as well as the resulting gain or loss to the IRS by filling out Form 4797. If the foreclosure results in a long-term capital gain, then this amount will also need to be included on a Schedule D attachment with your return.

If a loss has incurred, then Form 4797 will be sufficient. Any cancelled debt that is taxable as ordinary income will also need to be reported on Form 1040.

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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Optima Tax Relief makes the Orange County Register Top Workplaces List for the Sixth Consecutive Year

Optima Tax Relief is proud to announce that it has been on the Orange County Register Top Workplaces for the sixth year in a row. The announcement represents the ongoing efforts Optima has put toward its employees in order to create a strong company culture and positive work environment.

Employee satisfaction was measured through anonymous third-party surveys that went out to all Optima employees. The feedback received was overwhelmingly positive despite the challenges Optima faced early on when the company had to shift from employees working in the office to working from home.

Employees have always been Optima’s top priority.  During a turbulent year, the company has made an even greater effort to stay connected with their employees while maximizing safety by hosting virtual events designed to boost morale among their staff.

105 companies were selected to make the Orange County Top Workplace list, a testament to how exclusive a club the list is.  You can find the full list of winners on the Orange County Register.

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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Are Short-Term Disability Claim Payments Considered Additional Income?

If you’re temporarily disabled with an injury, serious medical conditions, or a pregnancy, it is possible you could be covered by short-term disability payments that can be obtained through private insurers and also as part of your employer’s compensation for employees. Payments that you receive could potentially be taxable, it all depends on how and when they are paid. Here’s what you need to know.

Income exemptions

Typically, all income that is received is considered taxable unless it is expressly exempted. These types of exemptions will include worker’s compensation payments and certain compensation that was awarded for damages through litigation.

Short-term disability payments that are received under an insurance policy are not considered exempt and could lead you to be liable for additional taxes if you have already taken on the cost of taxation through the structure of the plan.

Employer disability benefits

If both you and your employer share the cost of a disability plan then you will only be liable for taxes on the amount received due to payments made by your employer. If a taxpayer pays the entire cost of a sickness or injury plan with after-tax money, they will not need to report any payments received under the plan as income.

If an employer only pays half the cost of premiums and does not deduct these payments from a taxpayer’s pay, then a taxpayer will most likely report half the payments received as income. Medical costs that have been paid for after the plan was established and have yet to be reimbursed are generally not taxable.

Cafeteria plans

This is an insurance program that allows employees to pick the coverage they would like to receive from a menu of options. This coverage is typically paid for by directing pre-tax dollars to the plan.

If the amount of the premiums is paid for by an employer or by you with before-tax dollars, then a taxpayer will most likely need to report any payments received as income. However, if the income used for the plan was paid for by a taxpayer with after-tax dollars, they are considered to have paid the premium and no payments under the plan will need to be reported.

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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5 Reasons why You should File your Tax Return

Many Americans are required to file their taxes yearly to either receive their refund or pay off their tax balance in order to stay compliant with the IRS. Taxpayers who earn low income may not be required to file their tax returns.

Here are five tips taxpayers should know about when deciding whether or not to file their tax return.

1. How to determine if you should file.

One way to determine whether or not your taxes needs to be filed is typically based off your income, filing status and age. Additional rules that may play a part as to whether or not you will need to file your tax return is if you are self-employed or you can be claimed as a dependent of someone else. For those who are unsure if they need to file this tax year, the IRS offers an Interactive Tax Assistant that can help determine if you need to file.

2. Check your taxes that are being withheld or paid.

Questions that you should ask yourself when deciding whether or not you will receive a refund when you file your tax return:

  • Did your employer withhold federal income tax from their pay?
  • Did you make estimated tax payments?
  • Did you overpay last year and have it applied to this year’s tax?

3. See if you can claim an earned income tax credit.

If you have earned less than $55,592 last year, you could possibly receive an Earned Income Tax Credit (EITC) as a tax refund. A taxpayer must qualify for this credit before placing it on their return. You can check your eligibility by using the EITC Assistant on IRS.gov. In addition, a taxpayer will most likely need to file a tax return in order to claim the EITC.

4. Child tax credit or credit for other dependents.

You can claim a child tax credit if you have a qualifying child under the age of 17 as well as meet additional qualifications. In addition, taxpayers may also be eligible for the credit for other dependents. This includes people who have:

  • Dependent children who are age 17 or older.
  • Parents or other qualifying individuals they support.

5. Education credits.

There are two higher education credits that can reduce the amount of tax that is owed on your tax return. There are two types of education credits that you can qualify for, one is the American opportunity tax credit and the other is the lifetime learning credit. In order to qualify, a taxpayer, their spouse or their dependent must have been an enrolled student for at least half the time for one academic period to qualify.

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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McConnell Announces Second COVID-19 Stimulus Deal may be Reached by the End of the Year

Senate Majority Leader Mitch McConnell is hopeful that a coronavirus stimulus deal will be reached by the end of December. Although McConnell’s COVID-19 stimulus deal has yet to be announced, House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, both agreed to cut their aid demands. A $908 billion bipartisan proposal is now being strongly considered as a starting point for negotiations with McConnell.

Both Democrats and McConnell have outwardly supported a deal that will include Paycheck Protection Program loan funding, money for education and vaccine distribution.

However, Democrats have strongly opposed one part of the deal which provides COVID-19 liability protections for businesses and universities. Although McConnell’s plan does not include it, both Pelosi and Schumer have reportedly supported state and local government aid and supplemental federal unemployment payments.

The current surge in coronavirus cases and the record number of hospitalizations have led to additional economic restrictions as well as fears that the job market may become weakened once again. Protections for unemployed Americans, renters and federal student loan borrowers put into place at the beginning of the pandemic are due to expire at the end of December.

Congress is running out of time and will need to all make a collective decision by December 11th in order to add relief measures to a government funding bill to provide financial assistance to both taxpayers and businesses.

A few republican senators have begun to advocate for little or no new stimulus spending, arguing that the economy has improved enough to the point that Americans are now capable of financially sustaining themselves until most of the population has received a vaccine. Other GOP lawmakers have argued that the federal government should offer additional support to the 20 million Americans who are currently receiving some form of unemployment benefits.

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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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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