Tax News

How to Claim Charitable Donation Deductions on Your Tax Return

charitable donation deductions

The holidays often inspire more taxpayers to donate than any other time of year. Charitable donations are often deductible when filing returns and can provide you with more money back for your refund. However, if you are expecting an itemized deduction, you should know that there are limitations for qualified contributions.

What are qualified organizations?

Your chosen organization must qualify under section 170( c ) of the IRS code for you to file an itemized deduction. Qualified entities include:

  1. A state, possession of the US, the US, or the District of Colombia.
  2. A corporation, community chest, foundation, fund, trust, organized or created in the US and operated exclusively for charitable, religious, educational, scientific purposes, cruelty prevention, or literary purposes.
  3. A religious organization (church, synagogue, etc.)
  4. Nonprofit volunteer fire company
  5. Local, federal, or state law created civil defense organization
  6. War veterans’ organization or its auxiliary, post, trust, or foundation
  7. Domestic fraternal society operating under the lodge system (the donation must be used exclusively for charity)
  8. Nonprofit cemetery (funds must be used for the care of the cemetery as a whole)

What are deduction limitations?

In short, you can only deduct up to 50% of your gross income in contributions. Donations to organizations for veterans, cemeteries, fraternal societies, and some private foundations are limited to 30% of your adjusted gross income. You can utilize the IRS Tax Exempt Organization Search to indicate the limitations for your deduction.

The importance of correctly filing deductions

When you choose to utilize deductions, whether for charitable donations or work-related expenses, it’s important to only file deductions that you qualify for. This may sound like common sense, but selecting deductions that you don’t qualify for can result in a penalty from the IRS. Owing the IRS is more trouble than what it’s worth, so if you’re unsure about which deductions you qualify for, it’s best to ask a professional.

Did you make a mistake while filing?

Mistakes happen, but when the tax debt starts to pile on there are professionals available to assist you. Optima Tax Relief offers free consultations for tax debt relief at (800)536-0734.

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IRS Changes Offer in Compromise Policy

offer in compromise

Tax debt relief may have gotten a little easier. The IRS has just announced a major adjustment to the offer in compromise policy that will remove some obstacles for potentially eligible taxpayers. If you have a large tax liability, now is a great time to seek a resolution!

What is the current OIC policy?

An offer in compromise (OIC) is the most sought-after form of tax relief. In short, this resolution allows taxpayers to settle their debt for less than what they owe with proof of hardship. When an OIC is accepted by the IRS, any refunds for that you receive after an offer is accepted are kept by, or must be returned to, the IRS and goes toward the outstanding balance.

What is the new OIC policy?

Returns

The Taxpayer Advocate Service and the IRS united in a joint effort to make an OIC more attainable. One major change keeps future refunds in the pocket of the taxpayer. Under the new guidance, the IRS will no longer keep, or request the return, of a tax refund. This amendment to the OIC policy is effective as of November 1, 2021. If you would like to apply for an OIC in December of 2021 or later, your next return is yours to keep. This is monumental for taxpayers facing hardship, as we’re expecting more OIC applicants than ever before.

This change isn’t cut and dry, however, as the IRS will not allow you to keep amended returns. Should you receive a refund prior to your offer acceptance or based on an amended return for the tax periods in question of your liability, your refund must be returned to the IRS within 30 days of receiving it.

OBR Remedy

In the original OIC policy, the OBR (offset bypass refund) remedy was unavailable. Now, if you’re experiencing financial hardship, you can qualify for an OBR while your OIC is pending. An offset bypass refund aids taxpayers facing hardship. An overpayment in a return (offset refund) can be given to you by the IRS to help with your tax debt.

Applying for an OIC

Now is truly a great time to seek assistance with tax debt. The IRS is making collaborative effort to create an easy path to a resolution. The process can be long and grueling, but it’s worth the time and energy once you reach the finish line. Give Optima a call for a free consultation at 800-536-0734 and start your journey to financial freedom today!

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How to File Business Taxes for an LLC

Being an owner of a limited liability company (LLC) allows for more flexibility with how the IRS taxes your earnings. LLCs don’t have a unique set of tax rules, so how you choose to tax your earnings will determine which rules you must adhere to. Your choices for tax rules include partnership, corporate, and sole proprietor. Each of these options come with their own filing requirements.

It’s important to choose how you want your earnings to be taxed because the IRS will automatically treat your business as a partnership. This designation doesn’t fit if you’re a sole proprietor or prefer to file as a corporation. Once you choose your tax rules, you cannot change the designation again for five years, which is why you must choose wisely.

Sole Proprietorship/Single Member LLC

As a sole proprietor, you are personally responsible for all tax returns and payments. When you prepare your income tax return, you must include a Schedule C attachment. The Schedule C reports the income and deductions from your business. Any profits calculated on Schedule C are included with the rest of your income on Form 1040.

Partnership LLC

As a partnership, your tax rules indicate that you are responsible for filing annual tax returns on IRS Form 1065, but the company is not responsible for paying the tax on business earnings. Instead, each individual owner (partner) files and reports their income via their own tax returns. Each owner’s earnings are reported by the LLC on a Schedule K-1.

Corporate LLC

With a corporate designation, your business is treated as a separate taxpayer from yourself. The responsibility of reporting income and deductions falls on the business itself. This can be achieved through filing Form 1120 annually and paying income tax on time.

Although you and the other owners are not responsible to file the returns and pay the income taxes, the business earnings are taxed twice. The second tax occurs when the owners receive a dividend. Each owner of the LLC must report on the dividend as taxable income via Form 1040, which is their individual responsibility to pay tax on.

Filing business taxes for an LLC can be confusing. Should you find yourself in tax debt, give Optima a call for a free consultation at 800-536-0734.

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Employee Retention Credit: What You Need to Know

Employee Retention Credit (ERC) could help a lot of businesses thrive if used properly. This is a refundable tax credit that appears to be difficult to attain but is far from impossible. ERC was created to encourage employers to keep employees on their payroll under the CARES Act. Eligible employers have immediate access to ERC by reducing employment tax deposits. Employers may even get an advance payment if the tax deposits are insufficient to cover the credit.

Eligible Employers

The qualifications for the Employee Retention Credit are two main attributes:

  1. Fully or partially suspend operation due to orders from government authority. This would limit commerce, travel and/or group meetings due to the pandemic.
  2. Experience a detrimental decline in gross receipts (income).

The IRS considers a significant decline in gross receipts to be less than 80% of the gross receipts from the previous year. For example: Amazon’s gross receipts for 2020 was 152,757, so if the company earned less than 80% in 2021, then that would qualify Jeff Bezos for the Employee Retention Credit.

How much ERC are you qualified for?

As an employer, you can receive 50% of qualified wages that you typically pay in a year. These wages also include qualified health plan expenses. The maximum amount of qualified wages considered is $10,000, and the maximum credit for wages paid to an employee is $5,000.

Qualified wages

Qualified wages are compensation and health plans paid for by the employer to some or all employees. Paychecks, for instance, are compensated wages.

Qualified health plan

Qualified health plans are group plans covered by the employer that are not reflected in the employee’s gross income.

Additional information

Employee Retention Credit is not compatible with Payment Protection Program (PPP) loans. An eligible employer may only utilize one of these programs under the CARES Act.

Employers are still required to withhold federal taxes on qualified wages. ERC does not make an employer exempt from paying taxes.

Should you find yourself in need of tax relief services, contact Optima Tax Relief at 800-536-0734 for a free consultation.

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The Future of Child Tax Credit

Child tax credit has been a reliable source of additional income for families struggling through the pandemic. While there were plans to continue the monthly checks for at least another five years, it seems the program will be coming to an end in about one year.

What is changing and why?

Proposals to extend child tax credit for one year are being discussed by lawmakers. Initially, the benefits were to be extended through 2025, but it’s now one of the programs being cut as the federal government plans for more stimulus checks.

The previous benefit checks lifted 3.5 million kids out of poverty, according to CNBC. With results like that, many democrats are debating to keep the child tax credit for years to come.

Others, however, are criticizing the program’s broad focus. Some proposed changes from opposing views include:

  • Limiting the credit to families earning $60,000
  • Adding a work requirement

Limiting the child tax credit could limit its impact on American households. Those in favor of extending the credit are hoping that Biden will include children with individual taxpayer identification numbers—such as undocumented children. This would help an additional 1 million kids.

Are the child tax credit changes concrete?

Negotiations are ongoing regarding the future of this benefit. Should the enhanced credit end in a year, there will be benefit options available for those who need it. Prior to the American Rescue Plan boosting benefits, the child tax credit was $2,000 per child under the age of 17. The credit was also partially refundable up to $1,400. There are also programs such as Supplemental Nutrition Assistance Program benefits, which have been enhanced to help low-income families.

Whether the child tax credit enhancement will continue permanently, for another five years, or end in just over a year from now is still being decided. Though it seems the fate of the program will fall into a middle ground to provide a more focused poverty program.

Utilizing child tax credit and other programs

As of now, you are still able to utilize the program and other credit tax programs that you may be eligible for. The child tax credit isn’t gone yet, so it’s best to use it while you still can.

Should you find yourself with a tax liability and in need of additional help with resolving back taxes, the Fresh Start Program may be the best option for you. At Optima Tax Relief, we help clients resolve their tax debt through Fresh Start and help them stay on track after through our protection plan.

Give us a call at 800-536-0734 to speak with one of our tax associates today.

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What You Should Know About Unemployment Taxes

Unemployment benefits saved a lot of American households this past year. Furloughs and lay-offs were at an all-time high due to the pandemic, leaving many without a lot of options.

However, unemployment comes with taxes that few people understand, or know about. Whether you’re considering applying for unemployment, or have already started utilizing these benefits, you should know how this affects your taxes.

Unemployment Taxes

Social Security and Medicare taxes are not something you have to pay for while receiving unemployment benefits. The taxes that are required for you to pay are federal and state taxes (depending on the jurisdiction). Some states wave income taxes for unemployment—states such as California and New Jersey for example. If your state’s benefits program is not tax-exempt like Florida and Nevada, you should opt to withhold taxes from each check.

Withholding Unemployment Taxes

Withholding is presented as an option when completing weekly or bi-weekly check-ins for your unemployment benefits. By withholding, you’re paying taxes upfront, rather than letting them accumulate throughout the year. If you choose not to withhold, then you’ll be expected to pay back the IRS when you file your return.

The flat rate for federal tax withheld is 10% of the benefits. This amount certainly adds up to a sizeable sum by the end of the year if it’s not paid weekly. If the taxes go unpaid, you could be at risk of liability.

To avoid a liability, you can send quarterly estimated tax payments to the IRS, fill out a W-4V with your unemployment office, or if you started working again you may qualify for EITC— Earned Income Tax Credit. Your EITC amount could reduce or cover the amount you owe in unemployment taxes.

What to do if you have a liability

If you’re expecting to owe more than you can pay at the time that you file your return, there are options available to you. You can contact the IRS to set up an installment plan, which allows you to make monthly payments until the balance is paid in full.

You can also contact Optima today for a free consultation, should you find yourself owing a large sum to the IRS. Give us a call at 800-536-0734 to speak with one of our tax associates now!

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Vehicle Mileage Tax

Senate recently passed President Joe Biden’s infrastructure bill, which includes a pilot program for vehicle mileage tax. This tax would charge drivers based on how many miles they drive in a year. The vehicle mileage fee will likely bring in revenue for transportation and future infrastructure projects.

Why is vehicle mileage tax is being enforced?

The goal of the mileage tax is to “test the feasibility of a road usage fee,” according to the infrastructure package. The bill goes on to say, “to conduct public education and outreach to increase public awareness regarding the need for user-based alternative revenue mechanisms for surface transportation programs.”  In short, the tax will be used to raise money and perform outreach regarding transportation options.

When are you expected to pay vehicle mileage tax?

This tax may or may not be implemented, so you don’t have to worry just yet. During a pilot program, volunteers from all 50 states will test out the taxing system by reporting their miles. Driver and passenger miles will be tracked through data apps and GPS. This pilot program could take a while to be completed before a final decision is made.

Will a vehicle mileage tax replace gas tax?

It is uncertain now as to whether President Biden will implement mileage tax in addition to, or in place of gas tax.

Advantages and disadvantages

While drivers could be taxed based on how much they drive, rather than paying more for gas, the drivers may be concerned with privacy. Sharing your GPS data with the government can raise some red flags for some Americans, as well as prove to be a difficult feat to accomplish. There is also the possibility of rural drivers paying more because they drive further than urban and suburban drivers.

More information

As additional information is gathered on the infrastructure bill, we will share with our readers and clients. For now, it seems that there is a lot of uncertainty around whether vehicle mileage taxes will be taken into action in the near future.

For tax relief services and questions, call Optima at 800-536-0734 for a no-obligation consultation today.

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Payment Service App Taxes

Since 2009, apps such as Venmo have been evolving into common payment methods for businesses and individuals. Now, peer-to-peer payment apps are gaining the government’s attention regarding unreported income. To remain compliant with the IRS, there are some things to consider if you utilize these apps for business.

Report your payment app income

Sending money to friends and family isn’t exactly what the IRS is looking for. However, if you’re a business that accepts payment through Paypal, Venmo, or the likes, you are responsible for reporting your income. P2P platforms are expected to report business transactions receiving over $20,000 in gross payment volume and over 200 separate payments. The platform will send you a copy of Form 1099-K, which is also sent to the IRS. Even if you don’t receive the form, you are still required to report taxable income.

Does your transaction raise any flags?

Generally, small transactions aren’t on the IRS radar. Splitting the bill at dinner, for instance, is not a taxable transaction. The IRS is looking for potential noncompliant cases to crack down on unreported income.

Businesses that report less income, but have large transaction records reported by P2P apps, may be at risk of being audited.

What to do if you are found noncompliant

Owing back taxes to the IRS can be a scary time for any business owner. There are options available to help your business get back into compliance and avoid future mistakes with tax returns. At Optima, we amend tax returns and help our clients stay on track with our Optima Protection Plan. You can learn more about our process for resolving tax debt here.

Contacting Optima

Contact us at 800-536-0734 for a no-obligation consultation today. Optima Tax Relief aids individuals and businesses 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 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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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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