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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.

How Your Taxes could be Impacted by the Coronavirus

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.

The potential financial implications from the coronavirus outbreak have affected the stock market and your 2020 tax season could be impacted too. Here’s everything you need to know about how your taxes could be affected by the ongoing pandemic.

Here are the top three ways coronavirus could impact your taxes:

1. Claiming unemployment

A high number of Americans have become unemployed due to the pandemic. In addition, a record number of taxpayers have applied for unemployment compared to past years. If this is your first time applying for unemployment, you may not realize that it is considered taxable income.

When it’s tax time, your state will send you Form 1099-G that will reflect the amount of unemployment compensation paid out to you throughout the year.

If you’ve received benefits, you have the option to withhold enough taxes so you don’t have to face any tax time surprises. On the federal level, taxpayers can withhold at a flat rate at 10%. The withholding rate for state taxes will vary state to state.

2. Working at multiple jobs

Many taxpayers are now choosing to work at multiple jobs or taking on a temporary job in order to make up for lost hours to stay financially afloat. Having more jobs means that your tax return will most likely become much more complex as well as your income tax withholding.

All W-4 forms must be submitted to all employers accurately in order to ensure that the proper amount of taxes is being withheld. For those who are doing contract work, taxpayers should make quarterly estimated payments as to keep up with any tax obligations.

3. Relief for student loans

If you pay for student loans, then you know that the CARES Act has provided temporary relief for many Americans who are currently struggling to pay back their loan. For up to six months, the legislation:

  • Allows you to skip principal payments on certain student loans without any negative effects to your credit score or lending report.
  • Interest rates for federally held loans has been reduced to 0% regardless of their status.

Because most taxpayers will be paying less in student loan interest, you can expect a smaller deduction amount, meaning your return won’t be as big as the year prior.

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

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People Experiencing Financial Hardships May Qualify for an Economic Impact Payment

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 those experiencing homelessness or extreme financial hardship, you may be eligible for a $1,200 Economic Impact payment and an additional $500 for each qualifying child under the age of 17. In order to receive an economic payment, you will need to register with the IRS using the IRS Non-Filers: Enter Payment Info here tool by November 21st, 2020.

If someone’s income is below the income threshold of $12,200 or $24,000 if they’re married, they will most likely need to file a tax return. This most likely means, the IRS may not have enough information to issue their payment.

Taxpayers who don’t typically file their tax return may be eligible for an Economic Income Payment if they:

  • Are a U.S. citizen, permanent resident or qualifying resident alien.
  • Have a work-eligible Social Security number.
  • Cannot be claimed as a dependent of another taxpayer.

In order to use the tool, you will need the following:

  • Your name must appear as it is on your social security card.
  • You must have a work-eligible SSN for self and spouse.
  • For every qualifying child, you must have their name, relationship, and SSN or Adoption Tax Identification Number.
  • A mailing address where you can receive both your payment and confirmation letter. The IRS will typically mail out this letter within 15 days after issuing their payment.
  • An Identity Protection Personal Identification Number.

The non-filers tool will also ask qualifying taxpayers for their license or state ID number to digitally sign the document.

For those who prefer their payment to be direct deposit but don’t have a bank account, can visit the FDIC website for assistance.

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

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IRS Extends Economic Impact Payment for Non-Filers to November 21st

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.

The IRS has extended the deadline to register for an Economic Impact Payment utilizing the Non-Filers tool that can be found of the IRS website. The IRS has extended the deadline until November 21, 2020.

Taxpayers who typically don’t file their tax returns and haven’t received their stimulus checks, are urged to register as quickly as possible before their Economic Impact Payment expires. To register, you can use the Non-Filers: Enter Info Here tool on IRS.gov. Taxpayers should provide their information as soon as possible because the tool will not be available after November 21st.

The extension is only for those who have yet to register or receive the payment and don’t normally file a tax return. Taxpayers who requested an extension because they needed additional time to file their 2019 tax return should do so as soon as possible.

Most eligible U.S. taxpayers already received their Economic Impact Payment. If you don’t have a tax filing obligation, it’s recommended to use the Non-Filers tool to register with the IRS in order to get up to $1,200. This usually includes those who receive little to no income.

This tool is designed for those who have an income below $24,400 for married couples, and $12,200 for singles who could not be claimed as a dependent by someone else. This also includes couples and individuals that have experienced homelessness.

The Non-Filers tool is accessible to anyone that requires it and can speed up the arrival of their payment by opting in for direct deposit. Those who opt out of direct deposit will receive a check.

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

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Will a Covid-19 Relief Deal Be Struck Soon?

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.

As election time creeps closer and closer, more pressure is being placed on Democrats and Republicans to reach a COVID-19 deal in order to provide mass relief for many Americans and businesses that have been financially struggling since the beginning of the pandemic.

Both parties have struggled to make a deal just a days before the election, and both Democrats and Republicans are billions of dollars apart in their proposals and have yet to come to an agreement on any deal that has been presented. Many of the bills brought to the table contained many differences on COVID-19 testing, child tax credit provisions and funding for state and local governments.

Congress previously passed a comprehensive aid package back in March. Since then, many of the provisions that were previously passed have already expired. The increase in unemployment benefits back in July and airline assistance expired in October.

Democrats are requesting about $2.2 trillion in funding while the White House proposed about $1.8 trillion. President Trump has also made it known that he wants more funding than the Democrats and his own negotiators offered.

Many plans have been proposed by both parties but the question is, do any of the proposals include relief checks? Democrats have been strongly advocating to provide additional relief to both taxpayers and businesses; one of the main points presented in their plan includes another round of $1,200 stimulus checks. The White House has yet to release their proposal although President Trump supports another round of $1,200 stimulus checks. Senate Republicans have proposed a $500 billion plan that does not include more individual payments.

No plan has been passed yet and with more time passing, more and more taxpayers and businesses are finding it more difficult to stay financially afloat. The hope is that both parties will come together and agree on a relief package that will benefit all Americans.

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

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Can Working Remotely Lead to Additional Taxes?

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.

Working remotely during the coronavirus pandemic could potentially cause some tax problems for employees when they file their 2020 tax return next year. One issue they may face is being taxed twice.

Taxpayers may have to face numerous difficult tax situations when attempting to file their tax return and could potentially owe a balance they weren’t prepared for. In a few instances, a state may not provide a credit for taxes assessed in the employer’s state because the income was earned in the state of residence. Under certain circumstances states are required to offer credits for taxes paid in non-resident states. 

Additional tax situations employees could potentially face working from home include, having to file multiple state income tax returns which could lead to a taxpayer owing a balance for the first time or owing more than usual even if given a credit in a state of residence. The same scenario can also happen in a nonresident state too. 

If your working situation has changed due to the pandemic, employees are recommended to contact their human resources or payroll department to see what changes have been made. The state where your employer is having your taxes withheld may need to be adjusted– a situation that could pose a problem for both you and your employer if it is not corrected by next year.

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

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