Tax Planning

Common Errors Taxpayers should Avoid when Filing their Taxes

Filing a tax return electronically can help reduce mistakes since tax software notifies a taxpayer if there are any math issues, flags common errors, and prompts taxpayers for missing information. Using a tax software can also help a taxpayer claim valuable credits and deductions.

Using a reputable tax preparer, certified public accountants, enrolled agents, or other knowledgeable tax professionals can help an individual prevent making avoidable errors.

The IRS recommends that taxpayers file electronically and opt for the direct deposit to get their refund much faster and avoid any pandemic-related paper delays.

Here are some common errors taxpayers should avoid when preparing their tax return:

  • Missing or inaccurate Social Security numbers (SSN). Each SSN on a tax return should appear exactly as printed on the Social Security card.
  • Misspelled names. A name listed on a tax return should match the name on that person’s Social Security card.
  • Math errors. Math errors are one of the most common errors taxpayers make on their return. Taxpayers should always take the time to double-check the math on their return before submitting it over to the IRS.
  • Credits or deductions. Taxpayers should look into credits to see if they are eligible to place them on their tax return. Some of the most common credits are the earned income tax credit, child and dependent care credit, and recovery rebate credit. Individuals eligible for the recovery rebate credit and did not receive their payment, can claim the recovery rebate credit when they file their taxes.
  • Incorrect bank account. Taxpayers who are due a refund should choose direct deposit. This is the fastest way for a taxpayer to get their money. However, taxpayers need to make sure they use the correct routing and account numbers on their tax return.
  • Unsigned forms. An unsigned tax return is considered invalid and will not be accepted by the IRS. In most cases, both spouses must sign a joint return. Exceptions may apply for members of the armed forces or other taxpayers who have a valid power of attorney. Taxpayers can avoid this error by filing their return electronically and digitally signing it before sending it to the IRS.

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 Taxpayers can end up in the 0% Tax Bracket

A majority of individuals have a portion of their income go to taxes when they file. Those who are looking for a way to legally decrease or eliminate their tax bill altogether, should take advantage of certain tax perks when filing their tax return.

Look into deductions

Tax deductions are a great way for taxpayers to have more money in their pocket and reduce their total tax bill. Individuals who qualify for tax deductions, should take advantage by including them on their tax return. Utilizing tax deductions will reduce the total amount of income that was earned throughout the year which could reduce your tax bill or even get you a refund.

Hold onto winning investments

If you invest in stocks, it is important to understand how it can affect you when you file your taxes. If you are looking to reduce the total amount of taxes you may have to pay when filing your taxes, you my want to consider holding your stocks even if the price shoots up. If you hold your investments for over a year, you will be eligible for the long-term capital gains tax rates of 0%, 15%, or 20%.

Earn more qualified dividends

For those who are not ready to sell their stocks, there is another way to get the same rates you would get for long-term capital gains.

Qualified dividends allow individuals to bypass the higher tax rates that are associated with ordinary dividends. Qualified dividends also give individuals exclusive access to the 0%, 15%, and 20% tax brackets if they qualify for the following:

  1. The dividend must have been paid by a U.S. corporation or a qualifying foreign company.
  2. The dividends must be deemed as qualified in the eyes of the IRS and cannot be listed as a non-qualified dividend.
  3. You have held the stock paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

Look into credits

Taxpayers who know they will owe a tax liability should look into tax credits they may qualify for. The Earned Income Tax Credit could help individuals receive a tax refund after filing their return. For those who contribute to a qualified retirement savings account, you may also be eligible for a tax credit that could potentially wipe out your entire tax bill.

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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Filing your Taxes may be much harder this year

Taxpayers have received an additional month to file their federal tax returns due to COVID-19 along with new stimulus provisions that made the current filing season even more complicated. With so many changes that happened to individuals throughout the ongoing pandemic, taxpayers should be cautious how they file their taxes. Here is everything you need to know before submitting your tax return to the IRS.

Unemployment benefits

Millions of Americans received 2020 unemployment benefits meaning that their taxes will be much more complex compared to their prior returns. Unemployment benefits are subject to federal income taxes and in some cases, state income taxes. Individuals who did not have their taxes withheld from their jobless benefits may end up having a tax bill after filing their taxes.

Under the new $1.9 trillion stimulus deal, the first $10,200 in unemployment benefits are not taxed on the federal level for eligible filers. The newly added tax exemption applies to the 2020 tax year and for households earning up to $150,000.

Taxpayers who have filed their federal tax returns and did not take the $10,200 tax exemption on unemployment benefits do not need to amend their return. If the IRS owes you a refund, then they will send you a second refund for the difference.

Working from home

Individuals who made the transition from working in the office to working from home during 2020 may be wondering what they can deduct from their tax return.

For regular employees of companies, they are unable to deduct any expenses incurred from their work-from-home office. This is due to the Tax Cut and Jobs Act which eliminated the unreimbursed business expenses deduction. There are several states that do offer a deduction for unreimbursed employee business expenses on their state returns:

  • Alabama
  • Arkansas
  • California
  • Hawaii
  • Minnesota
  • New York
  • Pennsylvania

Self-employed workers have the option to deduct expenses that are related to their business from self-employment income on Schedule C or Schedule F. Self-employed workers have the ability to take a home office dedication for a space that is used exclusively for 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.

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How the IRS Taxes Cryptocurrency

If you invest in cryptocurrencies like Bitcoin, be aware that there may be certain tax implications you may face when filing your tax return. Here is everything you need to be aware of before you invest in crypto and how to make sure you avoid any tax time surprises.

Crypto can be used to purchase practically anything. If you choose to convert your currency to cash rather than pay in the crypto form, you could potentially be liable for capital gains tax. Another determinant that could affect the outcome of your taxes is whether you earn money on the transaction. This will also determine whether you must pay capital gains or declare a loss. Declaring a loss could reduce your tax bill by offsetting other gains of up to $3,000 in your adjustable gross income.

How to track your crypto transactions

Individuals should track the following activity when investing in crypto:

  • The market value of your Bitcoin.
  • When it was earned, mined, or purchased.
  • When it was used, sold, or cashed out.

Cryptocurrency exchanges that are used to make payments of more than $20,000 or for more than 200 transactions may lead to a form 1099-K being generated. This form will reflect any exchanges made using a cryptocurrency. If you do not reach these minimums, you will need to keep track of transactions and report any gains or losses on your tax forms.

Using crypto as income

Investing in crypto means that you must declare it as a source of income if you received a profit. Crypto will be considered taxable income if an individual mined their crypto or earned it as a form of income from their employer or someone who hired them as an independent contractor.

If you received Bitcoin in exchange for services in January 2020, you would declare that income as the currency’s value in January 2020. For those who continue to hold Bitcoin, you do not have to pay taxes in its current value until you convert it to cash.

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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Live Here, Work There. Where do I pay state income taxes?

After weeks or months of job seeking, you land the position of your dreams–but the job is in a different state. The location of the job is close enough so that you can commute every day rather than move, but you are still faced with the dilemma of where and how to pay state income taxes. Here’s what you should know if you live in one state but work in another.

Do I Pay State Income Taxes Where I Live Or Work?

The easy rule is that you must pay non-resident income taxes for the state in which you work and resident income taxes for the state in which you live, while filing income tax returns for both states.

However, this general rule has several exceptions. One exception occurs when one state does not impose income taxes. The other exception occurs when a reciprocal agreement exists between the two states.

States with No State Income Tax

There are currently seven states in the USA that have no state income tax:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Two more states, New Hampshire and Tennessee, tax only dividend and interest income. If you work in one of these nine states but live in one of the 41 states (plus the District of Columbia) that do impose state income taxes, you will generally pay only resident state income taxes for the state where you live. Similarly, if you live in one of these nine states but work in a state that imposes state income tax, you would only pay nonresident taxes for the state where you work.

For instance, if you live in Bristol, Virginia but work in Bristol, Tennessee, you would pay Virginia resident state income taxes. Likewise, if you worked in Bristol, Virginia and lived in Bristol, Tennessee, you would pay Virginia nonresident state income taxes. In both cases, you would only file a single state income tax return.

States with Reciprocal Tax Agreements

What if you live in Milwaukee but you commute every day by Amtrak to Chicago? It just so happens that Wisconsin and Illinois share what is known as a reciprocal tax agreement. Reciprocal agreements allow residents of one state to work in neighboring states without having to file nonresident state tax returns in the state where they work. As a result, your employer would deduct only Wisconsin state taxes from your paycheck, and none for Illinois. Likewise, if you live in Chicago but work in Wisconsin, your employer would only deduct Illinois resident state income taxes from your paycheck. In both instances, you would only be required to file one state income tax return.

States without Reciprocal Tax Agreements

If you are unlucky enough to work across state lines in a state with no reciprocal agreement with your resident state, (for instance, Illinois and Indiana), then you will need to file income tax returns for both states. However, you should also be able to claim a credit on your resident state income tax return for the state income tax that you paid for the nonresident state. The result is that you actually pay taxes for one state, even though you must deal with the hassle of filing returns in both states.

Please note that reciprocity is not automatic. You must file a request with your employer to deduct income taxes based on your state of residence rather than where you work. Unless you make a formal request, with your employer, you will continue to be taxed by both states and you will continue to be obliged to file two state income tax returns.

Filing Multi-State Income Tax Returns

Many people are faced with the dilemma of working in one state and living in another, meaning they need to file a nonresident state tax return. People living and working in two different states often delegate the task of filing state income tax returns to a tax preparation expert, an accountant, or a tax attorney. Still, know that many online and home-based tax preparation software programs include state income tax forms with detailed instructions on how to file multi-state tax returns. If your tax situation is otherwise straightforward, you can save yourself a considerable amount of money by using a software program that includes both state and federal income tax forms and filing your own income tax returns.

If your career move was international there are other tax considerations, you should be aware of. Read our article on reporting foreign income to learn about your tax obligations when working overseas.

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What is IRS Notice 1444 and will you need it for filing your 2021 taxes?

With the pandemic still ongoing and many Americans out of a job, the distribution of two stimulus checks has helped many individuals pay their bills. Now that it is tax filing time, tax filers should have received Notice 1444 in the mail from the IRS. This notice will be required when filing your taxes in order to notify the IRS you have received the stimulus check.

Understanding Notice 1444

If you were sent Notice 1444, you probably received an economic impact payment (EIP), also known as the stimulus payment. Notice 1444 was sent out to each stimulus recipient within 15 days of the IRS issuing out the payment. The notice should indicate the following:

  • The amount of the payment.
  • A phone number to call if a recipient has any questions.
  • Where a recipient can find information about their payment.
  • How the payment was made i.e. direct deposit, check, or debit card.
  • A reminder to keep the notice with your taxpayer records for your 2020 tax return.

Why Notice 1444 was mailed out

Notice 1444 was issued by the IRS to recipients of the economic impact payment. It should be kept with other important tax documents to be used for when it comes time to filing your 2020 taxes. For those who did not receive the full amount for the stimulus payment but qualified for the full amount, having Notice 1444 will come in handy. The notice will reflect the total amount you received and can be used when filing your taxes in order to get the rest of your payment.

Is there a deadline for IRS Notice 1444?
There is no deadline for Notice 1444. It is important that taxpayers hold on to their notice and file it away with their other tax documents for end of year tax preparation.

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 Renew Your ITIN

Taxpayers need to act quickly to renew their Individual Taxpayer Identification Number (ITIN). An ITIN is a tax ID number used by those who aren’t able to obtain a Social Security number. Individuals can get their ITIN renewed quickly in order to avoid any processing issues by submitting their application as soon as possible.

ITINs with the middle digits 88 expired at the end of 2020 including any ITIN that was not used on a tax return within the past three years. ITINS assigned in 2013 with the middle digits 90, 91, 92, 94, 95, 96, 97, 98 or 99 that have yet to be renewed will also expire at the end of the 2021 year.

Renewing your ITIN

Taxpayers can submit Form W-7 along with all required forms of ID and residency documents to the IRS. If you’re submitting a Form W-7 to renew your ITIN, you’re not required to attach a federal tax return. For spouses and dependents, they will only need to renew their ITIN if they are filing an individual tax return or if they qualify for an allowable tax benefit.

Families have the ability to renew their ITINS together

If you have other family members that need to renew their ITIN too, the IRS will accept W-7 forms from everyone in the family if a minimum of one family member listed on a tax return has an ITIN that is expiring.

Alternative ways to submit an ITIN Application Form

Some taxpayers may be eligible to use an IRS authorized Certifying Acceptance Agent to make an appointment at a designated IRS Taxpayer Assistance Center. This allows you to hand-deliver your documents to the IRS.

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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3 Tax Mistakes to Avoid making this Year

Tax season is here again and that means it’s time to collect all tax filing documents and contact your CPA or use a tax software in order to prepare and file your taxes on time. Taxpayers also need to prepare to pay off any tax bill they may receive after filing their taxes if they want to stay in good standing with the IRS.

In order to get the most out of this tax season, here are some tax filing tips taxpayers should follow before filing in their tax return.

Avoid filing your taxes late

This year’s tax filing deadline is currently April 15th. Last year the IRS extended the deadline by three months in order to allow taxpayers additional time to cope with the ongoing pandemic. As we’re entering another year into the pandemic, the IRS seems to not be as lenient and expects taxpayers to go back to abiding by the previous tax filing deadlines.

Being late on filing your taxes could be costly in penalties. If you expect to receive a refund this tax year, it will be delayed until your taxes are filed.

Failing to include unemployment income on your return

Millions of Americans have lost their job due to the COVID-19 pandemic and if you were one of them, you may have received unemployment benefits. If you didn’t have any taxes withheld from the benefits you received, be prepared to pay up when you file your taxes. Also, failing to report any type of income you received could result in serious consequences with the IRS and cause you to deal with expensive penalties and a tax bill.

Selling investments too soon

If you have benefited from the stock market and have investments in your portfolio that you are able to sell at a gain, be careful! If you take capital gains before holding your investments for at least a year, you’ll be taxed at the short-term rate. This means that you will end up paying a lot more in 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.

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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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