Tax Planning

Tax Tips for Taxpayers Filing Federal Tax Returns Amid the Pandemic

The IRS is encouraging all tax filers to prepare in advance when it comes time to file their 2020 tax returns. Taking necessary action ahead of time can help a taxpayer file a much more accurate return and avoid making simple mistakes.

Taxpayers should start gathering Forms W-2, Wage and Tax Statement, Forms 1099-Misc, Miscellaneous Income, and other income documents in order to help determine what credits and deductions you could be eligible for. If you received Notice 1444, Your Economic Impact Payment, you’ll want to calculate any Recovery Rebate Credit that you may be eligible for on your 2020 federal income tax return.

It is important to know that most income will be considered taxable and that this will also include unemployment compensations, refund interest, and income and virtual currencies.

For those who have an Individual Tax Identification Number, you will need to double check that it has not expired before filing your taxes in order to avoid any processing delays. If your ITIN has expired, the IRS recommends submitting a Form W-7, Application for IRS Individual Taxpayer Identification Number. Those who fail to renew their ITIN could face a delayed refund or may even be ineligible for certain tax credits.

The IRS recommends that tax filers use the Tax Withholding Estimator on the IRS’s website. This will help determine if you are withholding the correct amount for federal on your paycheck in order to avoid having a balance when file their taxes. If you need to adjust your withholding for the rest of the year, you should submit a new Form W-4, Employee’s Withholding Certificate, to your employer.

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 Claim a Domestic Partner as a Dependent

Every tax year, a large number of people are claimed as dependents on tax returns. Under certain circumstances, a dependent can be claimed if they are not related to you. Once someone is identified as a dependent and placed on your tax return, you’re essentially informing the IRS that you’re financially responsible for that person.

For 2020, the dependent credit for other than qualifying children is $500. A credit is different from a deduction because the credit reduces any taxes that are owed while a deduction will reduce the amount of income that is subject to tax.

A partner can be claimed as a dependent if they meet the following criteria:

  • No one else is able to claim your partner as a dependent child on their tax return.
  • The person that is being claimed must be a U.S. citizen, a U.S. national, a U.S. resident alien, or a resident of Canada or Mexico also might qualify.
  • Your partner must live with you year-round.
  • Your partner’s gross income for the year cannot exceed $4,300 for 2020.
  • You will need to require half of your partner’s financial support during the year.
  • Your partner cannot be married to someone else or file a joint return with that other person.

You and your partner must live together for the entirety of the year in order to qualify as a dependent. If you have moved in the middle of the year, you will be required to wait until the next year before claiming your partner as a dependent.

If you’ve taken a vacation, or were deployed with the military, you will be considered living together. Based off IRS guidelines, the following types of absences will not count against you:

  • Illness, such as time spent in a hospital or rehabilitation facility
  • Vacations
  • Business travel or assignments
  • Education-related absences
  • Absences for military service

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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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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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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Having the Right Payroll Service can Protect Employers from Fraud

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.

Choosing a company to handle your payroll tax should be chosen carefully in order to avoid missed deposits for employment taxes and unpaid bills. Every year, there are a few payroll service providers who don’t submit their client’s payroll taxes and close down. 

Clients of a payroll firm are typically responsible for paying the taxes that are due even if the employer sends funds to the payroll service provider for required deposits or payments.

Employers need to understand their payroll and employment tax responsibilities in order to file properly. When looking to hire a payroll service to handle your payroll taxes, here are two options to consider:

  • Certified professional employer organizations (CEPOs) are liable for paying the customer’s employment taxes, filing returns, and making deposits and payments for the taxes reported related to wages as well as compensation.
  • A payroll service provider that informs the IRS of its relationship with a client using Form 8655, Reporting Agent Authorization, which is signed by the client. Reporting agents must deposit a client’s taxes using the Electronic Federal Tax Payment System and can exchange information with the IRS on behalf of a client, such as to resolve an issue. 

It’s encouraged that employers enroll in the Electronic Federal Tax Payment System (EFTPs) to ensure that the payroll providers use EFTPS to make deposits. The service provides employers with easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their payroll service provider is meeting its tax deposit responsibilities.

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

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This Tax Break Could be Yours if You Make the Right Moves

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.

During tax season, most taxpayer’s goal is to save as much money as possible and to receive the biggest refund check. Regardless of your age, salary, and financial situation, no one wants to deal with a tax bill after filing their tax return. 

There are a few tax breaks that are difficult to come by. For example, if you don’t own a home, you won’t be able to itemize any expenses such as, mortgage interest on your tax returns. It’s important to keep in mind when filing that if you’re a moderate to high income earner, you may miss out on certain tax credits that low-income filers may qualify for.

Taxpayers should research what tax breaks they will qualify for based on their filing status and financial situation. Here is a way for taxpayers to get a tax break when filing their next return:

Max out your retirement plan contributions

It’s necessary for most people to start saving for their retirement as early as possible and now, there are tax benefits to save money while putting it away in your retirement. 

Both traditional IRA and 401(k) contributions are made with pre-tax earnings. Every dollar put into your retirement, is a dollar of income the IRS can’t tax you on. The savings associated with your retirement will determine the tax bracket you fall into.

If you’re looking to get a tax break on your 2021 taxes, be sure to contribute to a traditional retirement plan, not including a Roth account. If you’re investing in Roth contributions, you need to know that it’s made up of after-tax dollars so you won’t see the benefits of immediate tax savings. 

For those wanting to lower their tax bill in 2021, try maxing out your retirement plan in order to see the most savings when filing your taxes. This could potentially lead to you receiving a higher refund or reducing your tax bill.

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

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Renting out a spare room and taxes – everything you need to know.

Tax Tips For Landlords

If you have decided to join the sharing society and rent out a room or part of your home, either through a service like AirBnB or independently, you should inform yourself about the implications of renting out a room and taxes.

Renting a room requires some work up-front, and ongoing management. You have several tasks ahead of you. You will most likely want to spruce up the place with comfy furnishings and linens, and maybe a fresh coat of paint. Check the legal regulations for renting in your local area, you may discover there are limitation on the type of rentals you can offer, be they short-term or long term.

And then, there’s landlord tax. Running afoul of the IRS can potentially wipe out any financial gains you may reap from opening your home to complete strangers – be sure to abide by the laws of landlord tax. Fortunately, you can reduce your potential tax bite with diligent record keeping. Here is everything you need to know about renting out a room and taxes.

Do I have to pay taxes if I rent out a room in my house? – The 14 Day Rule

The most convenient and potentially lucrative scenario would be to completely avoid reporting or paying income taxes on the income you earn from renting out your couch or your spare room. Well, you can, if you meet two relatively easy requirements set by the IRS.

First, you must use the residence as a home at least 14 days out of each calendar year. Second, you must limit the time that you rent any part of the residence that you use as a home to 14 days or less each tax year. That’s it.

So if you have a primary residence plus a vacation home where you spend at least two weeks of the same year, you could rent out rooms in both and collect rental revenue for 28 days (14 days for each residence) completely tax free. It gets better: the IRS places no upper limit on how much income you earn as long as you don’t exceed 14 total days of rental per property. (IRS.gov)

If you live near the town where the All-Star game for a major sport is being played that year, you could rent out one room or the entire place for the week, rake in major cash and never report a dime on your tax return. Pretty sweet. But if a renter burns a hole in your floor, you are stuck paying for the repairs.

What happens if I use my rental property more than 14 days?

Should you exceed the 14-day threshold, matters become somewhat more complex. First, you must determine whether you or one or more family members resides in the residence or uses it for personal purposes for at least 10 percent of the time that you rent at fair rental price. You don’t have to be there at the same time you’re renting, but your time in the residence must equal at least 10 percent of the total rental time. So if you rent out your vacation home for 300 days each year, you or another qualifying person will need to live there for at least 30 days during the same year for the IRS to qualify the residence as a home. For the purposes of this article, the assumption will be that the residence qualifies as a home for IRS purposes. (IRS.gov)

The rules differ for rental properties that are used for what the IRS calls “personal purposes” rather than as residences. There are also different regulations that apply if you use the rental property as a residence, but don’t live there enough of the time for the residence to qualify as a home. To sort out those types of issues, consult with a professional such as an attorney with Optima Tax Relief.

What IRS forms are needed for rental property?

As a contractor with AirBnB living within the United States, you would complete Form W-9, Request for Taxpayer Identification Number and Certification. You would also receive Form 1099, Miscellaneous Income before you file your federal income tax return for the following year. (International contractors complete different forms.) If you operate as an independent, you will need to maintain your own records for rental income and expenses, preferably separate from your personal household expenses.

If you provide sleeping space, but no frills, report income and losses on Schedule E, Supplemental Income and Loss, attached to Form 1040, Form 1040NR or Form 1041. If you splash out on fluffy towels, turn-down service, and catered breakfast in bed for your guests, report income and expenses through Schedule C, Profit or Loss from Business, also filed with Form 1040, Form 1040NR or Form 1041.

In either case, you are also allowed to deduct the costs of repairs, depreciation (by filing Form 4562, Depreciation and Amortization), uncollected rents and actual operating expenses. But if a renter trashes the place and you file Schedule E, you will also need to complete Form 6198, At-Risk Limitations or Form 8582, Passive Activity Loss Limitations. If you’re not sure which form you should complete, consulting a tax professional is your best strategy.

What is considered fair rental price and how is it calculated?

If you live in the heart of Manhattan or in a condo overlooking Lake Michigan in Chicago, you might think that setting your rents at bargain basement levels would help you beat the competition. If you set your prices too low, you may well attract the unfavorable attention of the IRS.

That doesn’t mean that you must charge exactly what every other landlord or private renter in your area charges for rent. It does mean that you must set prices for your rental that are comparable to the going rent for similar properties in your area – what the IRS calls “fair rental price.”

If you fail to charge fair rental prices or if you never report a profit from your rental, the IRS may decide that you’re not serious about making money. You don’t have to show a profit every year, but he IRS assumes that you have a genuine profit-making motive if you show gains during at least 3 of the most recent 5 years, including the current year. (IRS.gov)

The Hobby Loss Rule

If you fail to show profit you could you could be hit by the so-called “hobby loss rule,” which prevents you from using losses related from your venture to offset other income on your federal tax return. Instead, you use must losses related to your rental activities as itemized deduction on Schedule A. Deductions would be limited to the following strict limitations.

  • Deductions such as mortgage interest and taxes are allowed in full
  • Deductions like advertising, insurance and premiums are allowed only to the extent that gross income exceeds deductions from the first category
  • Deductions such as depreciation and amortization are allowed only to the extent that gross income exceeds the amount of deductions taken for both of the prior two categories.

Participating in the Sharing Economy

Knowing the ins and outs of renting out a room and taxes can be tricky. However, this article is not intended to discourage you from renting out a room in your home, being a live-in landlord, or otherwise participating in the sharing economy. It’s a potentially exciting way to meet interesting people from all over the country or even other parts of the world.

But just as you want your house or apartment to look its best, you’ll also want your financial house to be in order, too. That way you can concentrate on being the best host you can be, without being hit with unpleasant surprises at tax time.

Need some help with landlord tax? Consult one of our tax professionals to learn more about renting out a room and taxes.

Corp vs LLC – Which One is Right for You?

When you first went into business, you may have operated as a sole proprietor or as a partnership. However, as your operation has grown, a more formal business structure has become necessary.

Depending on your personal circumstances and the nature of your business, you may reorganize as a limited liability company, or LLC, an S-corporation, or a C-corporation. Each business structure has advantages and disadvantages concerning taxes and liability for adverse legal and financial circumstances.

What is an LLC?

LLCs are simple to organize and run. The owners (known as members) of an LLC can distribute revenues generated by the company among themselves — there are no shareholders demanding dividends. LLCs also provide a shield against legal liability for adverse actions taken against the company.

In plain English: if your LLC is sued, you won’t lose your shirt (or your house, car or any personal possessions that are not tied to the LLC as collateral) if the person filing the suit wins in court.

However, the Internal Revenue Service does not recognize LLCs as separate entities for federal income tax purposes. Each member of an LLC pays individual federal income taxes on any revenue received from the LLC. In addition, revenue generated by an LLC is also subject to self-employment taxes.

Why Would You Choose an S-Corporation?

In many ways, S-corporations represent the best of both worlds. If an S-corporation is sued, its officers are generally shielded from personal liability. This is because S-corporations, like C-corporations, are technically owned by shareholders who entrust officers (such as a CEO) to run the company in the best interests of those shareholders. As a result, the IRS considers S-corporations to be separate tax entities. Officers of S-corporations are also exempt from self-employment taxes. Also, S-corporations are exempt from the double taxation that the IRS imposes on C-corporations.

However, the IRS limits S-corporations to 100 or fewer shareholders. Non-resident aliens cannot be shareholders in an S-corporation. Certain types of companies, such as insurance agencies, are not allowed to organize as S-corporations. In addition, profits from S-corporations that are not distributed as income to officers must be distributed as dividends to shareholders.

What is the Benefit of a C-Corporation?

When people refer to “corporations,” in most cases, they are referring to C-corporations. Like S-corporations and LLCs, C-corporations shield officers from financial and legal liability for the actions of the corporation. The IRS also considers C-corporations to be separate entities for tax purposes, which means that the officers of C-corporations are not subject to self-employment taxes.

However, much of the revenue that C-corporations is subject to double taxation – taxed once through corporate income taxes and again when profits of the corporation are distributed as dividends to shareholders. As separate tax entities, C-corporations must file separate income tax returns to the IRS. In addition, shareholders must declare dividends as personal income on their individual income tax returns.

Corp vs. LLC – Which is Better for Taxes?

In considering whether to organize as an LLC, S-corp or C-corp, consider whether flexibility, exemption from self-employment taxes or avoiding double taxation is more important. If you want flexibility in operating your company, an LLC is a good option. If avoiding both self-employment taxes and double taxation is your main goal, and if your company is eligible, consider forming an S-corporation. For larger companies, organizing as a C-corporation is almost always a necessity. However, you should consult with an attorney or CPA who specializes in corporate tax law before making a final decision.

Looking for some assistance with your taxes? Optima Tax Relief offers a range of professional tax services. Consult with one of our licensed professionals to learn how we can help you today.