Tax

What is a 529 Plan?

A 529 plan is considered a tax-advantage savings plan that was named after Section 529 of the Internal Revenue Code. 529 plans are meant to encourage college savings with every state backing the plan to ensure money is put aside for college. There are two types of 529 plans that taxpayers can use, a college savings plan and pre-paid tuition plans. Here’s everything you need to know:

Pre-paid tuition plan

Contributions that are made to a college saving plan are very similar to an Individual Retirement Account. A college saving plan allows a taxpayer to choose their investments and are subject to market risk with no guarantee that it will increase in value.

Students who are ready to use their funds for school are able to make tax free withdrawals up to the amount of the qualified education expense. College savings plans usually have fewer limitations when it comes to their age, residency or beneficiary. It also does not restrict the use of the funds to schools within states.

K-12 School Tuition

Up to $10,000 per year of a 529 plan funds can be uses for private, public, or religious elementary, middle and high school tuition.

Benefits of a 529 Plan

Both 529 plans require contributions that are not tax deductible for your federal taxes. Some states provide a state tax deduction for contributions. As long as withdrawals are made only for qualified higher education expenses, income taxes won’t be required to be paid when the money you withdrew is put to use. Qualifying expenses include books, tuition, mandatory fees, room and board as well as any necessary equipment.

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 Taxpayers need to be Aware of when Reporting Virtual Currency to the IRS

Individuals who have invested in Bitcoin have watched the value of it increase exponentially within the last few years. Taxpayers who are considering selling it or keeping any gains they’ve earned from it should be aware that virtual currency is still considered taxable and may get them into trouble should they fail to report it to the IRS.

Over the course of 2020, the value of Bitcoin has gone up by more than 150%. Whether you have sold or kept your Bitcoin shares, be prepared to place it on your upcoming tax return in order to ensure the IRS does not come after you.

One question taxpayers should ask themselves before filing, is if at any time during 2020, did they receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency? If the answer is yes, then the IRS will require you to report it on your taxes.

Tax filers will also need to double-check their return when filing through a CPA to ensure that transactions have been reported properly and that all boxes that apply to them have been checked off.

Not only does the IRS want to know about any virtual currency that you bought or sold, they also expect taxpayers to check the “Yes” box on the front of your tax return if you have received any crypto for free. This also will apply if you have received your Bitcoin in exchange for goods or services or if you have traded it for other property, including other virtual currency.

Individuals will need to keep meticulous records of their transactions over the course of the year in order to have the most accurate information when providing this information over to their CPA or if they are filing on their own.

If major cryptocurrency exchanges have occurred, you may be provided with a Form 1099-K. This form is typically sent to people who have had gross payments exceeding $20,000 and if they have made more than 200 transactions.

If you received a virtual currency from an employer, then it will be treated as wages and both federal income taxes and FICA taxes will apply. It will also be reported on your Form W-2, which should be given to you by your employer at the beginning of the year.

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 is Income Tax?

Governments require money as a way to operate which is why income taxes were put into place and are generally based off the amount of money an individual earns in a year. Most money that is received is subject to being taxed such as salary, interest, dividends, rents, royalties, lottery winnings, unemployment compensation and the earnings from a business you own.

Where does income tax come from?

Income tax is typically paid for by workers and people with income. Corporations, trusts, estates and many other types of entities also pay income tax on the profits they receive.

Many states also impose a similar form of taxation on individuals and entities that have a significant connection to the state. As of 2020, there are several states that don’t charge income tax. For those living in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, you are most likely responsible only for federal income tax.

Voluntary reporting of income tax

The U.S. income tax system is a voluntary system. Although it is a voluntary system it does not mean that paying your taxes is optional. The federal government relies on taxpayers to voluntarily report all income that is earned on their tax return and calculate the appropriate tax using the current tax laws.

The IRS has ways to ensure that income taxes are paid and receives copies of taxpayer’s W-2 every year should a taxpayer not file their taxes. The IRS can also calculate your taxes and send you a bill based off the tax forms the IRS has received. Additionally, the IRS charge interest and penalties against those who owe a tax balance.

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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Reducing Taxes on Your Holiday Bonus

As the spirit of generosity is in the air, companies and employees need to know that holiday bonuses are considered supplemental wages and subject to taxes. Holiday bonuses are viewed by the IRS as compensation, just like paychecks, so taxes need to be withheld from your holiday bonus.

How Much are Holiday Bonuses Taxed?

Some of the taxes you will need to pay on your holiday bonus include:

Social security tax:

You pay social security tax on all compensation up to $132,900 in 2019. If you haven’t passed this threshold, then you can expect your employer to deduct 6.20% from your bonus for social security.

Medicare tax:

You can expect another 1.45% to be deducted from your holiday bonus for Medicare tax.

Federal income tax:

The IRS requires a set percentage of your bonus to be withheld when you receive it. This is because your holiday bonus is considered a supplemental income. Under tax reform, the federal tax rate for withholding on a bonus was lowered to 22%. This is lower than the federal income tax rate of 25%.

State income tax:

depending on which state you live in, state income tax will be withheld at the rate the state requires by law.

Retirement Plans (401k):

If you have requested that your employer contribute a portion of your wages to your retirement plan, then the rate at which you have set will be the same rate that will be taken out of your holiday bonus.

Ultimately, you should check with your employer about your holiday bonus and taxes. Your employer has the option to combine your regular paycheck and holiday bonus and withhold taxes on the whole amount. If your employer does this, it may result in a higher withholding than 22%.

If this is the case, don’t worry as you will eventually get some of the money back as part of your federal tax refund when you file your taxes.

How to Avoid Holiday Bonus Tax

Are there any ways to avoid paying tax on the bonus? No. And failing to report and pay taxes could lead to problems down the road. But there are ways to minimize or delay the impact. Here are three options:

Give a little more:

Employers can estimate the taxes an employee would have to pay on the bonus and add that to the total amount. That way, after taxes, the employee would get to keep the intended bonus amount. Obviously, this requires the employer to be more generous, which is not always possible.

Invest in the future:

Another option – that would avoid both payroll and income taxes – is to put the bonus into the employee’s 401K retirement plan. While employees would not actually receive a check during the holidays, they would also not have to pay taxes on that money until they withdraw it. In the meantime, that bonus could continue to grow.

Kick Off a Healthy New Year:

Employers can decide to award holiday bonuses in January and offer the option of placing the money in a Flexible Spending Account for healthcare. None of that money would be taxed, but the employee would have to use it on qualifying health or dependent care expenses.

If you’re an employee and your company will not offer any of the options above, then do your best to plan ahead and factor the taxes into your holiday budget. And if it makes you feel any better, giving is always better than receiving.

Looking for assistance with tax relief? Optima Tax Relief’s licensed professionals offer a range of tax services to help you. Reach out for a consultation today.

Reporting Foreign Income To The IRS: What You Need To Know

You may live or work abroad, but if you are an American citizen or legal permanent resident, Uncle Sam still wants his rightful share of your income. Even if you reside outside the United States and receive earnings from a source located outside the United States, you must report that income.

Depending on your circumstances, you may have to pay taxes both to the government where the company from which you earned your income is located and to the Internal Revenue Service. However, in some cases you may receive tax credits or tax exclusions for some or all of your foreign income.

The details of reporting foreign income vary according to individual circumstances. Nonetheless, there are general guidelines for nearly everyone who receives foreign income.

Foreign Income Tax Credit

If you are taxed by the country from which your income is earned and that country has established a tax treaty with the U.S., you may be able to claim the Foreign Income Tax Credit. This credit was designed to help you avoid double taxation and allows you to claim a credit for income tax that you have paid to a foreign government. The intended net result of the tax credit is to ensure that the total income tax that you pay is no more than the highest result that you would have paid to a single government.

If you hire an accountant or a tax attorney to figure your taxes, he or she will undoubtedly apply the Foreign Income Tax Credit on your income tax return. Some tax preparation software programs also include provisions to calculate the Foreign Income Tax Credit if it applies to you. If not, choose a different tax preparation program.

Foreign Earned Income Exclusion

Do not confuse the Foreign Earned Income Exclusion with the Foreign Income Tax Credit. The Foreign Earned Income Exclusion is designed to allow American citizens and legal residents who reside outside the country to exclude most or all of the income earned from foreign sources from their federal income tax liability. The amount of the exclusion varies each year; for 2013 the maximum exclusion was $97,600 per individual taxpayer. Married couples could conceivably claim a larger exclusion.

The Internal Revenue Service has established strict guidelines for taxpayers who wish to claim the Foreign Earned Income Exclusion for a given tax year. Taxpayers must meet all the guidelines listed below to qualify for the exclusion.

  • Must have foreign earned income
  • Must have established a tax home in a foreign country
  • Must pass either the bona fide residence test or the physical presence test

The bona fide residence test requires that you are a bona fide resident in a foreign country for a period that includes at least a full tax year. The physical presence test requires you to be physically present in that foreign country for at least 330 days during a single 12-month period. You need not be present for 330 consecutive days, however.

foreign money

U.S. Government Employees Living Overseas

Income earned by employees of the United States government, including military personnel on active duty, does not qualify for the Foreign Income Credit or for the Foreign Earned Income Tax Exclusion, even if the income was earned overseas. However, spouses of government employees who earn income from foreign sources may be eligible for either the Credit or the Income Exclusion. It is necessary to consult with an attorney or accountant who specializes in this subject with specific questions about your particular circumstances.

Foreign Income Earned While Living in the United States

If you reside within the United States full time, in most instances, you must report income earned from foreign sources on your federal income tax return, even if you are taxed on that income by the foreign government. This requirement pertains to earned and unearned income. Self-employed workers who earn income from foreign clients must also report their foreign earnings on their federal income tax returns.

No W2 or Form 1099? No Excuse

The requirement to report foreign income applies even if you do not receive a W2 Form, Form 1099 or equivalent form from the foreign income source. It is your responsibility to provide an accurate calculation of your income by calculating payments from pay stubs, wire transfer records, dividend reports, bank statements or PayPal monthly statements.

Once you calculate your foreign income, you must combine it with any domestic income you have earned in order to calculate the adjusted gross income to be included on your federal income tax return. Failure to report foreign income is considered tax evasion, and if you are caught, the consequences could be dire. You could be hit with hefty fines or even face jail time.

Need to speak with a licensed tax professional? Optima Tax Relief offers a comprehensive range of tax relief services. Schedule a consultation with one of our professionals today.

Commonly Asked Tax Questions

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.

Even though the initial tax deadline has already passed, there are still plenty of taxpayers that need to file and those that are preparing for next tax season.

To help make the filing process a little easier, here are some commonly asked tax questions answered for you.

Does health care reform still impact my taxes?

Under the health care tax reform which was made effective the tax year 2019, the tax penalty for not having health insurance was eliminated. For tax years before 2019, individuals that had income over the federal poverty threshold were still required to have health coverage or they could be subject to tax penalties.

Are there tax implications for withdrawing money early from a retirement account?

If a taxpayer chooses to withdraw funds from their retirement account early, they will automatically receive a 10 percent tax penalty when funds are taken out before the age of 59-½. Taxpayers need to be careful when withdrawing funds from their retirement because it could bump them into a higher tax bracket which could cause a taxpayer to be taxed at a higher rate.

For those impacted by Coronavirus and need to take money out of their retirement account, the IRS may waive the 10 percent early withdrawal penalty on up to $100k of retirement funds that are withdrawn. 

What tax breaks are available to those impacted by a natural disaster?

If you have suffered a casualty or theft loss due to a natural disaster such as a flood, fire or unforeseen event, the IRS will allow you to deduct the loss if the casualty is federally declared a disaster area. 

The IRS may provide tax provisions to assist taxpayers financially recover from the impact of the disaster. Depending on the disaster, there may be additional time to file tax returns and pay any taxes that are due. 

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

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Deducting Your Gambling Income & Losses

 

We all know the thrill of winning from gambling whether you’re an avid gambler or the occasional one. But did you know that all winnings are fully taxable? No matter how small your winnings, they must be reported on your tax return. Gambling income includes but not limited to winnings from lotteries, keno, slot machines, table games (i.e. poker, craps, roulette, blackjack, etc.), racing or sports betting, and bingo.

Can you deduct gambling losses?

Yes, and here’s where the deductions on your gambling losses come in – you may be entitled to a deduction if you had any gambling losses come tax filing season, but only up to the extent of your winnings for the year. For example, if you won $3,000 from gambling for 2016, the most you can deduct on your 2016 tax return is $3,000, no matter how much you lost. Losses must be reported on Schedule A as an Itemized Deduction, which are separate from winnings. Continue reading for important facts about claiming your gambling losses on your tax return.

Five important facts about deducting gambling income and losses:

  1. You must report the full amount or your winnings as income and claim your losses (up to the amount of your winnings) as an itemized deduction.
  2. You cannot reduce your gambling winnings by your gambling losses and then report the difference.
  3. Claim your gambling losses on Schedule A, Itemized Deductions, under ‘Other Miscellaneous Deductions’.
  4. The IRS recommends that you keep a written documentation, like a notebook or a diary, for proof in case of an audit and to keep winnings and losses separate and organized. According to the IRS Publication 529 Miscellaneous Deductions, your notebook should contain at least the following:
    • The date and type of your specific wager or wagering activity.
    • The name and address or location of the gambling establishment.
    • The names of other persons present with you at the gambling establishment.
    • The amount(s) you won or lost.
  5. According to the IRS, you should also have other documentation for additional proof through the following:

Form W-2G (if given), certain winnings; Form 5754, statement by person(s) receiving gambling winnings; wagering tickets; canceled checks; substitute checks; credit records; bank withdrawals; and statements of actual winnings or payment slips provided to you by the gambling establishment. Learn more about how gambling impacts your taxes with Optima Tax Relief. To keep up to date with gambling tax laws and your responsibilities as a taxpayer, please refer to the IRS Help & Resource page or consult your local CPA or tax attorney.

What it Really Means to Get a Tax Refund

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 of the main reasons why you don’t want to receive a refund is because it means you’ve essentially loaned the government money that you will never receive interest on. This money could have potentially been applied to other debt that you’ve been carrying around such as student loan or credit card debt instead of loaning it out to the government to use. Rather than overpaying in taxes, here is where you could put your money instead:

  1. Open a retirement account. The average taxpayer will receive a tax refund upwards of $3,000. Instead of overpaying in taxes which could cause you to miss out on huge savings opportunities, you could invest it in a retirement fund or increase the amount you are contributing to your current plan. By the time you are able to retire, you could have a large lump sum of cash waiting for you.
  1. Start an emergency fund. If something unexpected ever happens that may impact your financial wellbeing, you may want to consider placing your money in an emergency account. The money that you place into this account doesn’t just accrue overnight, it requires that you set funds aside little by little. The refund that you receive after filing your taxes could be preventing you from placing more money into a back-up account and you may need to consider adjusting your withholding or estimated tax payments you are making to the IRS.
  1. Look into paying down your debt. If you receive a tax refund of about $3,000, that means that you are missing out on pocketing an extra $250 a month. This money could be used to pay down any loans or negative balances you have to ensure that you remain in good standing on all your debts. 

If you’re still unsure about how much you should be withholding from your paycheck, consider using the IRS’s withholding calculator. It will require information such as how much you pay in taxes and how much you have already withheld. This will help you make a determination on how much you should be withholding in order to get the most out of each paycheck. 

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

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What Does Voluntary Compliance Mean in Regard to Taxes?

The United States federal income tax system is operated under a system of voluntary compliance. This innocuous sounding term actually packs quite a potent punch –  there is little that is voluntary about the federal tax system, at least where paying taxes is concerned. Many celebrities and ordinary citizens alike have learned this lesson the hard way, almost always at great financial cost.

Voluntary Compliance and Audits

The “voluntary” nature of taxation relates to the method of submitting and paying income tax obligations. The Treasury department places the burden of figuring, reporting and paying income taxes in the hands of its citizens, rather than automatically collecting the revenue. In contrast, sales taxes and other use taxes are involuntary. Whenever you buy an item or service that carries sales tax, you not only pay the price of the merchandise or service, but the tax as well.

Although the IRS collects taxes under a voluntary compliance system, the assumption is that most of the population will fail to pay its full tax burden, either by mistake or by deliberate attempts at tax evasion. To remedy the resulting shortfall, the IRS has instituted a system of tax audits. A majority of audits are triggered by suspicious items included or omitted from tax returns. Other tax audits are generated because taxpayers who should file tax returns fail to do so or file so-called frivolous returns. An unfortunate minority of taxpayers are flagged for audits by random selection – just plain bad luck.

Celebrity Tax Evasion & Frivolous Tax Returns

Throughout history, famous and infamous figures have been caught in the net of failure to comply with the “voluntary” system. Notorious gangster Al Capone died in prison as a result of a conviction of income tax evasion. More recently, celebrities like Martha Stewart, Wesley Snipes and Marc Anthony have been snared by convictions for federal income tax evasion. One persistent but thoroughly discredited strain of tax protest arguments claim that federal income taxes are unconstitutional, or that taxpayers can eliminate their federal income obligations by filing “zero” tax returns. Snipes was one of the more famous figures taken in by this line of reasoning, and as a result was convicted of misdemeanor tax evasion in 2008 and sentenced to 3 years in prison. As of 2014, the movie star was back on the silver screen, headlining in the action feature Expendables 3. Presumably, Snipes will pay a rightful proportion of his earnings from the film, marketed as a summer blockbuster, to the IRS. The IRS exercises little patience with taxpayers filing what it concludes to be frivolous returns. It imposes an array of civil penalties, listed below:

  • Accuracy-related penalty under section 6662 (20 percent of the underpayment attributable to negligence or disregard of rules or regulations)
  • Civil fraud penalty under section 6663 (seventy-five percent of the underpayment attributable to fraud)
  • Erroneous claim for refund penalty under section 6676 (twenty percent of the excessive amount)
  • Fraudulent failure to timely file income tax return (triple the amount of the standard failure to file addition to tax under section 6651(a)(1))
  • Frivolous submissions other than tax returns under the Tax Relief Health Care Law of 2006 ($5,000 penalty)

Is Tax Evasion a Felony?

Criminal penalties for tax evasion based on frivolous tax returns can be severe. Both fines and jail time may be imposed upon conviction. Specific penalties are listed below.

  • Felony for attempting to evade or defeat tax under Section 7201 provides as a penalty a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 5 years with optional additional fine up to $250,000
  • Felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter under section 7206 is a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years with optional additional fine up to $250,000
  • Felony for promoting frivolous arguments and assisting taxpayers in claiming tax benefits based on frivolous arguments under section 7206(2) may be fined up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years with optional additional fine up to $250,000

How Do Corporations Avoid Paying Taxes?

Individual taxpayers are far from alone in their attempts to minimize their tax burdens. Complex accounting maneuvers with names like the Double Irish or Dutch Sandwich allow major corporations like Apple and Google to evade the 35 percent US corporate tax. But unlike tax evasion or frivolous tax returns, corporate tax dodges are largely perfectly legal – for now. Governments around the world have begun to put measures in place designed to curb offshore tax havens and other corporate tax evasion strategies.

Fair Tax System

The voluntary compliance system is far from the only viable system of income taxation. The so-called fair tax system is based on imposing use taxes – the more goods and services a person uses, the more taxes he or she pays. But fair use systems often impose a heavier burden on low-income taxpayers because they pay a higher proportion of their income use taxes. For this reason, fair use taxes are often labeled as regressive — and aggressively unfair.

Simple Tax System

Supporters of a so-called simple tax system include tax expert Austan Goolsbee and policy wonk Ezra Klein. Under a simple tax system the IRS would calculate taxes, credits and deductions and provide taxpayers with a copy of the completed return. Taxpayers who agree with the IRS’s calculations could simply accept the return, while taxpayers who disagree could file their own returns.

The simple tax system has obvious advantages. The IRS has a good idea of what many taxpayers earn and owe anyway, thanks to Form W-2 and various versions of Form 1099. The simple tax system would also ensure nearly 100 percent compliance, since the IRS would be supplying tax returns rather than individual citizens.

As one might expect, the tax preparation industry (including TurboTax) largely disfavors the simple tax return system. Approximately 60 percent of all Americans contract with outside tax preparers to file their federal and state income tax returns. Implementing something like the simple tax system would cut deeply into that percentage.

While the simple tax return system is indeed simple, there are potential pitfalls. First, many taxpayers may accept the IRS’s version of their returns whether it is accurate or not from inertia, laziness or fear of reprisal. Second, even if the IRS and its agents were totally diligent in calculating the maximum credits and deductions, human error must still be considered.

Death and Taxes

Given the present financial and political climate, it is unlikely that the voluntary compliance tax system will change in the foreseeable future. It’s also a safe bet that attempts to evade taxes will continue, including extreme cases such as Facebook co-founder Eduardo Savarin, who renounced his American citizenship in 2012 shortly before the social media giant launched its IPO. In the face of such tax evasion attempts, the IRS will also undoubtedly continue its enforcement strategies, including the dreaded audit.

Considering a tax consultation? Optima Tax Relief offers a range of services discussed in our free consultation. Our award winning staff of tax professionals provide comprehensive tax relief services to help you resolve any tax issue. Speak to us today.

Can I File My Taxes Separately from My Spouse?

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.

Filing a joint tax return with your spouse has many advantages, like receiving one of the largest standard deductions every year and providing several tax breaks for those who choose to file jointly. When deciding whether or not you want to file jointly, it is important to consider both the positive and negative aspects and how you can be directly affected. 

Married Filed Joint

The advantages of filing jointly with your spouse can allow you to deduct a significant amount of your income. Couples who file together will typically qualify for the following tax credits:

  • Earned Income Tax Credit
  • American Opportunity and Lifetime Learning Education Tax Credits
  • Exclusion or credit for adoption expenses 
  • Child and Dependent Care Tax Credit

Those who file jointly receive higher income thresholds for certain taxes and deductions. If you and your spouse earn a higher amount of income, you could potentially qualify for tax breaks.

Married Filed Separate

If a couple chooses to file separately they will receive fewer tax benefits compared to those who file jointly. Those who file separately from their spouse will only receive a standard deduction of $12,200 compared to those who file jointly and receive a deduction of $24,400.

  • Filing a separate return will automatically disqualify from several tax credits and deductions.
  • Separate filers are limited to smaller IRA contribution deductions.
  • You cannot take a deduction for student loan interest.
  • The capital loss deduction limit is $1,500 each when filing separately, instead of $3,000 on a joint return.

If you are unsure of how you want to file this tax season, consider filing both separately and jointly to see which way will be beneficial for both you and your spouse. Always be sure to double check your calculations as well as the amount of income you are placing on your return and review if you have a net refund or a tax liability. This should help you decide how you should file moving forward in order to receive the most out of filing your taxes. 

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

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