Tax Planning

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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Could I Use My Market Losses to Reduce 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.

When the Coronavirus pandemic first happened, the stock market took a huge hit. Within days, the stock market entered into a correction period. Despite the market recovering most of its losses, large unemployment rates still remain that haven’t been seen since the Great Depression.

Most people investing in the stock market typically don’t enjoy taking losses and want to avoid future tax problems down the road when filing their taxes.

If you are invested in the stock market or debating whether or not you want to in the near future, here is what you need to know in order to avoid tax implications.

Tax-loss harvesting

Whenever a taxpayer has capital losses, it typically means assets such as stocks and bonds lose value and can be used to offset capital gains. The term tax-loss harvesting is used by investors as a way to explain capital losses so you can use them to offset other gains.

Tax-loss harvest is a type of income tax deferral that can be used with non-tax-sheltered investments. By selling losing asset positions, a taxpayer can minimize the capital gains taxes on your winning sales.

Be cautious for the IRS’s “Wash-Sale” rule

Taxpayers need to be cautious of the wash-sale rule when utilizing tax-loss harvesting. 

A wash-sale is considered to have occurred anytime a taxpayer sells or trades securities at a loss and then within a 30 day period before or after the sale, do one of the following:

  1. Buy substantially identical securities.
  2. Acquire substantially identical securities in a fully taxable trade.
  3. Acquire a contract or option to buy substantially identical securities.

The IRS can disallow the loss on the assets sold. However, there are a few steps a taxpayer can take to ensure that their capital losses offset their gain.

Although we can’t predict what further damage could come from the Coronavirus pandemic and how it will affect the stock market for the rest of 2020, there are steps taxpayers can take to protect themselves when it comes to filing next tax season. 

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

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Everything You Need to Know about a Tax Exemption

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.

One common goal that nearly all Americans can agree on is that they either want to reduce the amount of money that they owe on their tax bill or eliminate it altogether. A tax exemption comes in many forms and the good news is, is that many taxpayers are entitled to an exemption on their tax return that can help lower any tax liability they may owe. 

An exemption works the same way any deduction might work. Federal and state governments frequently exempt organizations from income tax entirely should they serve the public. Charities and religious organizations would also fall under exempt organizations as well. Here’s everything you need to know about tax exemptions and if you qualify for it.

Personal exemptions

If you are not claimed as a dependent on another taxpayer’s tax return, then you have the ability to claim one personal tax exemption. This is typically a fixed amount that increases yearly and reduces your total amount of taxable income just like a deduction does but with fewer restrictions. If you are married filing joint on a tax return, both you and your spouse are eligible to each get an exemption.

Dependent exemptions

The IRS typically allows a taxpayer to take additional exemptions for each dependent that is claimed on their tax return. The exemption requires that the children being claimed live with the taxpayer in question for more than half the year, are under 19 years old (or under 24 if a full-time student) and who don’t provide more than half of their own financial support during the tax year. 

Tax-exempt organizations

In order for an organization to receive tax-exempt status, it must first satisfy all of the IRS’s requirements. Organizations should not be operating for profit and also provide vital services to the community such as charity work.

Organizations that fall under the tax-exempt status are not required to pay federal income tax and must maintain accurate records to keep their status. 

State and local exemptions

State, county, and municipal governments also provide tax exemptions to businesses that boost the local economy. In some cases, a business could be exempt from paying local property taxes if they move their operations to a particular geographic area. Many cities and states offer sales tax holidays where consumers can purchase goods without having to pay state or local sales taxes. 

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

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California Tax Rates, Incentives & Exemptions

As the most populous state in the union, California attracts new residents from all over the country and around the world. From the glow of Tinseltown to the technological buzz of Silicon Valley, dreamers and entrepreneurs alike are drawn to the state. But California is also one of the most expensive states to call home – 3rd highest to be exact. California tax rates are some of the highest in the nation.

Businesses in California are not spared from the tax hammer. California imposes corporate income taxes on “C” corporations and limited liability companies that operate like corporations. As a result, many entrepreneurs who operate small businesses in California are subject to quadruple taxation – double taxation from Uncle Sam and double from California.

But as of 2014, California has enacted a series of tax breaks which will award millions of dollars in tax credits to qualifying businesses. These tax incentives were designed to lure businesses to re-locate or keep their base of operations within the state.

Tax Credits and Incentives for Aerospace

One business field seeing some high-profile tax breaks in California is the aerospace industry. California was at one point in time the center of the aerospace industry, before the US government was forced to make drastic cut-backs in the 1990’s, essentially reducing the workforce by more than 50% of its workers. California Governor, Jerry Brown, has been trying to put together an incentive package of sorts to entice some of the larger employers to come back to the state, which would improve employment rates, bring a huge influx of new business and cash flows, as well as help off-set the current financial problems that California is facing.

The Aerospace Tax Clarification Act, which was passed in April, cleared up some ambiguity regarding the classification of rocket propulsion systems. This new act clarifies that these rockets qualify for an existing business tax exemption, rather than being classified as a taxable business supply as the prior law read.

“The space commercialization industry is not only developing some of the most advanced space vehicles in the world,” stated Assembly member Al Muratsuchi, “but is also creating thousands of local, high-paying manufacturing jobs.” This law was a direct nod to the Space Exploration Technologies Corporation, a Los Angeles based enterprise founded by Tesla billionaire, Elon Musk. The bill was also supported by Northrop Grunman, the Commercial Spaceflight Federation, Aerojet Rocketdyne Inc., a division of GenCorp Inc. and Lockheed Martin.

Governor Brown is also pushing for the aerospace bill to be expanded to cover the automotive industry. California is one of several states currently bidding for Tesla to build its proposed $6 billion factory to manufacture a new auto battery, known as the “gigafactory”, here in the state. This addition to California would mean the creation of at least 6500 new jobs as well.

Additionally, Governor Brown signed a law in July 2014 which grants a 17.5 percent tax credit on wages for workers hired to build aircraft. The bill serves as an incentive to score lucrative contracts for high-paid aerospace jobs within the state. There was also a 10-year tax exemption granted for the manufacturing of equipment used for the space travel industry.

Is there a California Tax Credit for a Small Business?

Under the California Competes program, a full 25 percent of the $29 million in tax credits will be reserved to small businesses with gross receipts of less than $2 million annually. Huge corporations are not the only beneficiaries of the new tax incentives in California. The state recently instituted the California Competes tax credit program, designed to provide financial incentives for businesses to relocate to California or for businesses within the state to remain and add jobs.

The California Competes tax credit program replaces the former Enterprise Zone program, which was eliminated in 2013 due to it being wasteful and inefficient. Credits allocated by the program are tentatively set at $30 million for fiscal year 2013/14, $150 for fiscal year 2014/15 and $200 million for each fiscal year after that through 2018. The state’s website lists the following criteria by which California Competes tax credits will be awarded:

  • The number of jobs created or retained
  • Total compensation, including wages and fringe benefits
  • Investment in the state
  • Unemployment or poverty rates where businesses are located
  • Other state and local incentives available to the business
  • Incentives from other states
  • Duration of commitment of the business or project
  • Overall economic impact
  • Strategic importance of the business to the state, region, or locality
  • Future growth or expansion opportunities
  • Expected benefit to the state in excess of benefit to the business from the tax credit

The California Competes Tax Credit is a non-refundable tax credit, meaning that businesses cannot receive cash back even if the credit is greater than what they would otherwise owe in corporate income taxes. But excess funds from the credit can be carried forward for as long as five years, or until the excess funds are exhausted, whichever is sooner.

Other California Business Tax Incentive Programs

Other tax incentives for businesses that locate or expand within the state of California include the Manufacturing Equipment Sales Tax Exemption and the New Employment Credit program. Each program is for businesses located within designated Enterprise Zones, or areas that are struggling economically.

The sales tax exemption allows eligible businesses to exclude the State’s portion of the sales and use tax (currently 4.19%), from the first $200 million in equipment purchases made between July 1, 2014 and June 30, 2022. This program will generate significant savings for eligible businesses, allowing them to pay a reduced sales and use tax rate of 3.3125% on qualifying equipment purchases.

TThe New Employment Credit program allows eligible businesses to receive a credit that may be taken against corporate income tax. This credit may be taken for all qualified employees hired on or after January 1, 2014. The amount of the tax credit equals 35% of the qualified wages paid for each new full-time employee hired, making a potential tax break of up to $56,000 or more per new employee over a five-year period.

In order for a newly hired employee to qualify the business for the New Employment Credit, they must fall into one of the following categories:

  • Unemployed for 6 months or more (excluding students and self-employed workers) either without a degree or having completed a degree more than 12 months before being hired
  • Veterans separated from active duty for less than 12 months
  • Earned Income Tax Credit (EITC) recipients during the previous year
  • Ex-offenders convicted of felonies
  • Current CalWORKS or county general assistance recipients

Trying to keep up with the competition

Many Californians approve of Governor Brown’s latest attempts to keep California in the running when it comes to attracting new businesses and keeping the existing ones from moving to another state that offers better business incentives. California is beginning to offer many appealing incentives to businesses, including State Tax credits, new employee credits, green tax incentives, as well as energy and transportation credits. When combined with available Federal tax credits and discounts, California can be a very profitable place for business owners to call home.

Below is a list of some additional tax incentives and credits currently offered in the state of California.

California Tax Programs, Credits, and Incentives Benefits to Businesses
California Competes $29 million in various tax credits to businesses who create or retain jobs within the state of California
Aerospace Tax Clarification Act Qualifies rocket propulsion systems for an existing business inventory tax exemption
California Motion Picture and Television Production Credit (AB-1839) 20% of expenditures for a qualified motion picture and 25% of production expenditures for an independent film or a TV series that relocates to California
Manufacturing Equipment Sales Tax Exemption Allows businesses to exclude the state share of sales tax (4.19%) from the first $200 million equipment purchases.
SB 1309 Tesla bill to include tax credits, workforce training grants and streamlined permitting and environmental reviews
New Employment Credit 35 percent of wages between 1.5 and 3.5 times the minimum wage for a period of five years.
California Research and Development  Tax Credit Credit for costs attributable to research activities conducted in California
California Capital Access Program Collateral Support (Cal-CAPS CS) Pledges cash (up to 40% of loan) to cover collateral shortfall of loans of $100,000 or more in Severely Affected areas
Small Business Loan Guarantee Program Enables small businesses to obtain a loan it could not otherwise obtain
Industrial Development Bond Provides manufacturing and processing companies low-cost, low-interest financing for capital expenditures
Employment Training Panel Helps assist with post-hire training reimbursement
Community Development Financial Institutions Investment Credit 20% of qualified investments made into a community development financial institution
Disabled Access for Eligible Small Businesses  (FTB-3548) $125 per eligible small business, and based on 50% of qualified expenditures that do not exceed $250
Enhanced Oil Recovery  (FTB 3546) 1/3 of the similar federal credit but limited to qualified enhanced oil recovery projects located within California
Environmental Tax (FTB 3511) $0.05/each gallon of ultra-low sulfur diesel fuel produced during the year by a small refiner at a California facility
Low-Income Housing (FTB 3521) Similar to the federal credit but limited to low-income housing in California
Manufacturing Enhancement Area Hiring Hiring credit for Manufacturing Enhancement Area
Prison Inmate Labor (FTB 3507) 10% of wages paid to prison inmates
Targeted Tax Area Hiring (FTB 3809) Business incentives for trade or business activities conducted within a targeted tax area

 This article was written by staff writers Audrey Henderson and Jennifer Leonhardi. Consult with Optima’s Tax Relief  professionals to learn more.

How to Qualify for the Earned Income Tax Credit

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 Earned Income Tax Credit (EITC) is known as a refundable tax credit that applies to low and moderate-income workers. For those who have children, the amount will vary based on the number of kids placed on their tax return. For the tax year 2020, the current earned income credit ranges from $538 to $6,660. 

If you qualify for this tax credit, be sure to claim it on your tax return so you can get the most out of your tax refund. Here’s how you know whether or not you qualify.

In order to know if you qualify for EITC you have to ensure that your earned income does not exceed a certain range. Taxpayers can meet the requirements for EITC without a qualifying child if you have a child that meets all the qualifying child rules for you or your spouse if filing a joint return. Taxpayers can utilize the EITC Assistant to find out their filing status and how they can qualify.

In order to meet the standards for an EITC credit you must use one of the following statuses:

  • Married filing jointly
  • Head of household
  • Qualifying widow of widower
  • Single

For those filing married filing separately, they will not be able to claim the EITC. If you or your spouse are a nonresident alien for any part of the year, you will be unable to claim the EITC unless your filing status is married filing jointly. 

Additional 2019 income rules taxpayers must follow in order to qualify for the EITC:

  • Tax year investments must be $36,000 or less.
  • Form 2555, Foreign Earned Income, Form 2555-EZ, and Foreign Earned Income Exclusion can’t be filed.
  • Total earned income must be at least $1.

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

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How To File Taxes For The Unemployed : 10 tax Tips

If you lose your job unexpectedly, your first reaction may be to panic. Your second reaction may be to despair about whether you will ever work again. Unemployment brings many challenges and money considerations. What you may not consider are the implications for federal and state income taxes. But you will have to deal with your taxes sooner or later. Fortunately, the IRS provides tax breaks that may ease the blow of losing your job and make the task of seeking a new job easier. Here is everything you need to know about filing taxes unemployed.

How Do You File Taxes if You Don’t Work?

1. Don’t Forget to File Your Return

This may seem painfully obvious, but in your efforts to deal with reduced (or no) income, resumes and job interviews, tasks like filing your income tax return can be shoved to the side. You still need to be filing taxes unemployed. Depending on how long you’ve been unemployed, you may qualify for a sizeable tax refund, which would provide much needed cash. If you lose your job right before the filing deadline, and you really just can’t handle filing a return, file a request for an automatic extension to give yourself an extra six months. But don’t forget to pay at least an estimated amount of taxes that you owe to avoid underpayment penalties. If you’ve got some time to plan before you file then be sure to research the benefits and tax credits that may be available to you.

2. Utilize Free Income Tax Filing Services

If you never took advantage of free tax filing services before, now is the time to check out this benefit. The IRS allows taxpayers with adjusted gross incomes under a certain amount ($58,000 for 2013 tax returns) to file their federal returns for no charge through the Free File program. Many states also allow taxpayers to file their income taxes for free. Depending on your circumstances, you may also qualify for face-to-face assistance in filing your income tax returns from nonprofit agencies in your area.

3. Keep Track of Job Search Expenses

If you always just take the standard deduction on your return, you may wish to reconsider that position when filing taxes unemployed. That’s because job search expenses for a position in your present line of work are tax-deductible, but only if you itemize your deductions. Job search expenses must exceed 2 percent of your adjusted gross income to be deductible, but if you are receiving unemployment or no income at all, this hurdle is relatively easy to overcome. Expenses such as printing and mailing resumes, travel expenses for job interviews, employment agency fees and career counseling add up quickly.

4. Medical Expenses May be Tax Deductible

Clearing the hurdle of 7.5 percent of adjusted gross income necessary to deduct medical expenses is ordinarily a tall order, barring major surgery or catastrophic illness. But if your income is reduced due to job loss, clearing that hurdle may be easier. Save receipts for doctor visits, prescriptions, and over-the-counter medications just in case.

5. Take the Health Insurance Tax Credit if You Qualify

If you lost your job as a result of a foreign trade agreement, you may be able to claim the Health Insurance Tax Credit. You must be receiving Trade Adjustment Assistance benefits to qualify. The HITC covers 80 percent of your health insurance premiums, which can free up a significant amount of cash for other areas of your budget.

6. Consider Your Retirement Plan

If you have an employer-sponsored 401(K), you will need to roll those funds into a traditional IRA or other qualified retirement funds to avoid paying taxes on the money. If you already have a traditional IRA, it may make sense to convert the account to a Roth IRA while your income is lower. You will have to pay income taxes on the funds that you convert, but you may still come out ahead financially in the long term. Consult with Optima Tax Relief to determine the best strategy for you.

7. Take Advantage of Tax Breaks for Low and Moderate Income Earners

Since you lost your job, your income has likely decreased dramatically, while many of your expenses have remained the same. Tax credits like the Earned Income Tax Credit (EITC), the Child Tax Credit, Child and Dependent Care Credit and Savers Credit allow low and moderate income taxpayers to reduce the amount of income that they must declare on their federal income tax returns and in some cases, such as with the EITC, receive a tax refund, even if they don’t actually owe federal income taxes.

8. Don’t Get Blindsided by Taxes on Severance Pay or Unemployment Insurance

It is a cruel irony that unemployment insurance and severance pay are considered taxable income. As painful as it may be, plan to set aside funds from each unemployment check or your severance check to cover your estimated federal income tax liability if at all possible. The IRS receives copies of Form 1099 which reports unemployment income and Form W-2 which reports income – including severance pay – from your former job. Underreporting this income or failing to pay the taxes you owe could land you in serious trouble. The risks simply aren’t worth it. Bear this in mind when filing taxes unemployed.

9. Get to Know Schedule C

While your ultimate goal may be to find another full-time or part-time job, you may take temporary jobs or self-employment to fill gaps in your income during your search. Income and expenses from self-employment are calculated on Schedule C, which is filed along with your federal income tax return. Deductions and credits differ significantly for income from self-employed workers and small business owners than for wage earners.

Depending on how long you remain unemployed, you may be able to claim tax breaks through Schedule C that would be difficult or impossible to claim as a wage earner itemizing your deductions on Schedule A. In particular, self-employed workers can claim tax breaks on health insurance premium payments without itemizing deductions. Who knows, you may decide to ditch the job search in favor of full-time self-employment.

10. Withdraw from Your Retirement Fund Only as a Last Resort

When the balance in your bank account shrivels and your bills begin to pile up, funds that you have set aside for your kids’ education or for your retirement begin to look like a lifeline. If you are really hard up for money and you must choose between Junior’s education fund and your traditional IRA as a source of much-needed cash, deplete Junior’s college fund first. This is not to punish Junior, but because resources such as grants, scholarships, loans, and part-time work are available to help college students with financial need. If all else fails, Junior can attend a community college for a year or two before transferring to a four-year institution.

On the other hand, draining your retirement fund deprives you of funds that you may or may not be able to replenish. Even if you can replace the funds you withdraw, it is unlikely that you will ever be able to make up for the earnings that those funds would have generated had they remained in your account. Worse, you may have to pay a stiff tax penalty for early withdrawal from your traditional IRA. That said, the IRS allows unemployed taxpayers or their heirs to make hardship withdrawals from traditional IRAs before age 59 ½ without paying a tax penalty under strictly defined circumstances.

Do You Get a Tax Break For Being Unemployed?

Yes, you can get tax breaks if you’re unemployed. Taking advantage of tax breaks designed to assist job seekers and other taxpayers with moderate or reduced incomes may help you provide your family’s basic financial necessities until you are back on the job. Losing your job and going through the grind of seeking work can wear on even the most determined job seeker. While it’s tempting to give up, you should do whatever you can to continue your search. If you’re one of many American’s who lost their jobs or were furloughed in 2020 during the Covid-19 pandemic you may be eligible for additional relief. See our dedicated content for additional information on Coronavirus Tax Relief and benefits.

If you need tax help, contact one of our dedicated tax experts for a free consultation.

Taxpayers should Report Tip Income on Their Tax Return

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.

Receiving additional pay on top of your income can have its benefits. No matter how you receive additional income, it needs to be reported to the IRS when you file your taxes – even tips. Here’s what you need to know to stay on the good side of the IRS.

If you receive tips worth more than $20 each month, it will be considered taxable income. These tips are also subject to Social Security and Medicare tax withholding. The average tip rate in the United States is typically 8%, and those who earn this much in tips are expected to report it to the IRS. 

If the reported tip income is less than 8%, employers are required to allocate unreported income among their employees. This is only applicable to companies that employ more than 10 employees on a typical business day. 

Taxpayers must include all tips they receive on their tax return as it is considered additional taxable income. This includes:

  • Tips directly from customers.
  • Tips added using credit cards.
  • Tips from a tip-splitting arrangement with other employees.

The IRS recommends three ways for a taxpayer to report their tip income correctly:

  • Keep a daily tip record.
  • Report tips to their employer.
  • Report all tips on their income tax return.

It is vital for taxpayers to report their tips as income to ensure that the IRS does not come back at a later date inquiring about missing income that was not reported. To learn more about how your tips should be reported on your tax return, you can visit the IRS website

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

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What is the Difference Between Form 1099-Misc and 1099-K?

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.

Being self-employed comes with a lot of benefits like being your own boss and making your own hours. Although there are a lot of perks to being self-employed, there are also a lot of additional responsibilities you will have to take on that most W-2 employees don’t have to deal with. For instance, you are responsible for keeping track of all your expenses you incur throughout the tax year, tracking your mileage and maintenance associated with your work vehicle, and ensuring that you are making estimated tax payments throughout the year to avoid owing when filing your taxes.

If you are self-employed or have worked on a contract basis where no taxes were withheld from your pay, it is extremely important to understand the difference between a 1099-MISC versus a 1099-K when filing your taxes.

1099-MISC

This form is issued to independent contractors or those that are self-employed who have been paid $600 or more. If you were paid under $600, this may not trigger a 1099-MISC to be generated, however, you are still responsible for reporting all tax income that you have received throughout the tax year. It is also required to report all self-employment income if your net earnings are $400 or more. 

When a taxpayer receives their 1099-MISC form, they can also claim deductions against their income that should be listed on their schedule C. Adding any work expenses as deductions can help reduce a possible balance you may owe at the end of the tax year.

1099-K

A 1099-K, also known as a Payment Card or Third Party Network Transactions, is used by credit card companies and third-party processors like Paypal and Amazon to report payment transactions they process for retailers or other third parties. You’ll typically receive a 1099-K if you have accepted credit cards or third-party processors and also had more than $20,000 in sales as well as over 200 individual transactions through a third-party processor.

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

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Four Reasons Why You Should File a Tax Extension

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.

Although all tax returns are traditionally filed on April 15, due to the coronavirus pandemic, the deadline was extended to July 15 this year. If you have yet to receive all your tax documents or are unable to make a tax appointment with your tax professional before the tax deadline, you can fill out Form 4868 and submit it to the IRS in order to be granted an extension to file your tax return. It is important to know that even if you file an extension, you must still pay your taxes owed in full by the tax deadline in order to avoid penalties. 

Here are a few additional reasons why you may need to file an extension:

  1. Unexpected life events. Even if your intention was to file your tax return before the deadline, sometimes life events will interfere with your ability to do so. If you have an unexpected death, illness, or natural disaster with you or your family, you may be unable to file. The IRS doesn’t expect taxpayers to list a reason as to why they are filing an extension but will allow you additional time to recover your tax documents and file at a later date.
  2. Incomplete tax documents. If you file an extension, it will allow you more time to review your taxes in order to ensure that your tax return is accurate. If you’ve lost any tax forms like your W-2 or 1099 that your employer sent you, you can request a copy be mailed again to you. It may also be beneficial to request an extension when waiting for additional tax information to be sent to ensure that all income has been properly reported on your tax return. It will also help you avoid having to make future corrections on your tax return.
  3. Tax laws are constantly changing. Should you choose to file a three-month extension, you might be eligible for brand new tax deductions or a change in taxpayer status. Tax laws are always changing so if you decide that you need a while longer to file your taxes it may be to your benefit.
  4. Avoid the tax filing chaos. As the tax deadline draws near, more taxpayers will be scrambling to make last minute appointments with a tax preparer to file their taxes. If you are unable to get an appointment before the tax deadline or you know that your tax return will be complex and will take time to file, consider filing for an extension and making a tax appointment after the initial tax deadline. This will help you avoid the crowds and get additional one-on-one time with a tax preparer.

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

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Is Your Hobby Considered a Business?

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.

Having a hobby can sometimes make you money on the side. This extra money can be used to go shopping or put in savings. But, did you know that if the IRS deems your hobby as a business, you’ll have to report any income that you’ve earned?

Here’s how to distinguish whether you have a business or a hobby:

What’s the difference between a hobby and a business? For the most part, hobbies are considered a recreational pastime that people do. A business on the other hand is operated to earn either a profit or a loss. As a business you are also able to deduct certain expenses throughout the year that could help you receive a bigger refund or take away from a tax liability that you may owe

How can I distinguish my hobby from self-employed income? There are a few ways to understand if your hobby is more than just a hobby. One way is to ask yourself the following questions and if you say yes to any of them, your hobby could be considered a business:

  • Do I rely on this income to survive?
  • Do you intend to earn profit off your hobby and have you previously?
  • Do you expect to make a future profit off of it?
  • Are your losses a normal part of startup costs or are they due to circumstances you can’t control?

If you’re still confused even after answering the above questions, then you can refer to the IRS guidelines. If you have made a profit in three of the last five years, the IRS will consider that profit towards a business. 

Can I make tax deductions for my hobby? The answer to this is no. Under the Tax Cuts and Jobs Act, miscellaneous itemized deductions can no longer be deducted for tax years after 2017. To put it simply, it means that your hobby-related expenses do not qualify as an actual deduction.

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

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