Taxes & Your Savings

Tax Deductions Taxpayers can Qualify for when they Refinance their Mortgage

One of the biggest tax deductions a taxpayer can have is the interest that they pay on their mortgage loan. Typically, the mortgage interest is tax deductible, meaning that it reduces the total amount of earned income for the tax year. This is only true if the following applies:

  • The loan must be for your primary residence or a second home that is not rented out.
  • The loan must be secured by your home meaning that your home serves as collateral for the loan. If you fail to make payments, the lender can foreclose on the home.
  • You itemize deductions on your tax return. This means that you list all deductible expenses, add them up and deduct them from the total amount of your income.

Mortgage Points

If you paid points when refinancing your mortgage, it may be possible for you to deduct them. Points are prepaid interest that is paid upfront in order to get a lower interest rate during the period when you’re repaying the loan. Points can also go by the following names:

  • Loan origination fee
  • Maximum loan charge
  • Discount points
  • Loan discount

Points are paid as part of a mortgage refinance and usually must be deducted over the life of the loan.

Settlement fees

A mortgage refinancing is settled when a taxpayer signs all their paperwork to officially take out a new loan and pay off the old one. There are a number of fees and charges that may be applied at settlement. Closing costs can also add up or hundreds or thousands of dollars and could include the following:

  • Appraisal fees
  • Attorney fees
  • Inspection cots
  • Legal and recording fees

It is important to know that these costs are typically not deductible in a mortgage refinance if they are for your residence.

Rental Properties

Rent received from tenants on your rental property is considered taxable income and must be reported when you file your taxes. Money that is spent to generate your income from these rental properties can typically be deducted from your rental income. Interest and points paid on a mortgage on rental property, closing costs and fees can also be deducted on your 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.

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Can you Report a Foreclosed Rental House on Your Tax Return?

For rental properties that have been foreclosed on, the IRS will view it as a sale. It is required to report any gain or loss you incur on your tax return. If the foreclosure increases the complexity of the transaction for tax reporting purposes, other factors must be considered such as who would be responsible for any remaining mortgage debt after the bank takes possession of the rental house.

How to calculate the tax basis on a rental house

The tax basis represents the total cost of the home in order to calculate your taxable gain or loss. It will also include the price that was paid for the rental house in addition to the cost of the permanent improvements that are made to it.

Calculating the amount on the foreclosure

In a typical sales transaction, the amount a taxpayer can realize is also known as the sales price. In a foreclosure, the amount will depend on if you are considered responsible for paying the mortgage debt or not. Should you be held responsible for the remaining mortgage balance, then the amount that you realize is equal to the fair market value of the house when it’s foreclosed on.

If the bank chooses to cancel any debt that is left on the mortgage, meaning you will no longer be liable for paying any of the debt back, then any amount in excess of the fair market value of the house is part of the ordinary taxable income. The ordinary income is considered separate from the gain or loss that is calculated on the foreclosure of a home.

Calculating the gain or loss

Once the realize amount is determined on the foreclosure, a taxpayer will need to subtract their tax basis from the amount to arrive at a gain or loss. If you’ve owned a rental house for more than a year, all losses will be considered ordinary. This means that it is fully deductible form the other income you report on a personal tax return.

Reporting the transactions to the IRS

It is required to report any foreclosures as well as the resulting gain or loss to the IRS by filling out Form 4797. If the foreclosure results in a long-term capital gain, then this amount will also need to be included on a Schedule D attachment with your return.

If a loss has incurred, then Form 4797 will be sufficient. Any cancelled debt that is taxable as ordinary income will also need to be reported on Form 1040.

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 Deduct Medical Expenses for an Illness or Injury

Deductions for Medical Expenses

It’s common knowledge for many taxpayers that medical expenses can be deducted on their tax return but very few actually benefit from the deduction. In order to claim a medical expense deduction, a taxpayer must qualify for the following:

  1. You must itemize deductions in order to write off medical expenses. Only one-third of taxpayers have itemized in the past.
  2. Medical costs are deductible only after they exceed 7.5% of your Adjusted Gross Income (AGI) in 2020.

For many taxpayers, it can seem stressful when attempting to claim these types of medical deductions. There are certain situations when it actually works out:

  • If your medical expenses are high due to a serious illness or injury or you need dental work done for you or your family.
  • Your AGI is low due to low taxable retirement income or being out of work for part of the year.

HSA, MSA and FSA Distributions

These types of distributions allow you to make tax-free withdrawals for medical purchases. The following plans include:

  • Health Savings Accounts
  • Archer Medical Savings Accounts
  • Flexible Spending Accounts

In order to qualify for HSAs and MSAs, it’s required that you have a high deductible health plan and are established in making medical payments.

  • You can establish these types of plans and nearly anyone can contribute to them on behalf of the account beneficiary.
  • Money can grow tax-free in these accounts.
  • Withdrawals for medical expenses are not subject to tax.

FSAs are established by employers and don’t need to be paired with a high deductible health plan.

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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Can Working Remotely Lead to Additional 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.

Working remotely during the coronavirus pandemic could potentially cause some tax problems for employees when they file their 2020 tax return next year. One issue they may face is being taxed twice.

Taxpayers may have to face numerous difficult tax situations when attempting to file their tax return and could potentially owe a balance they weren’t prepared for. In a few instances, a state may not provide a credit for taxes assessed in the employer’s state because the income was earned in the state of residence. Under certain circumstances states are required to offer credits for taxes paid in non-resident states. 

Additional tax situations employees could potentially face working from home include, having to file multiple state income tax returns which could lead to a taxpayer owing a balance for the first time or owing more than usual even if given a credit in a state of residence. The same scenario can also happen in a nonresident state too. 

If your working situation has changed due to the pandemic, employees are recommended to contact their human resources or payroll department to see what changes have been made. The state where your employer is having your taxes withheld may need to be adjusted– a situation that could pose a problem for both you and your employer if it is not corrected by next year.

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

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Going Green can get You a Bigger 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.

Going green has tax benefits that could potentially reduce your total tax bill when filing your taxes. More taxpayers are taking advantage of these tax incentives by buying alternative vehicles, using Energy Star products or installing energy equipment in their home. Here are the top green tax credits you should be claiming.

  1. Clean energy vehicle savings

Although tax credits for most hybrid vehicles have expired, there are still ways that taxpayers can take advantage of having an alternative vehicle. 

There are certain vehicles that could qualify under the Alternative Motor Vehicle Tax Credit. The amount of the credits vary based on the make, model and year of the vehicle that a taxpayer is attempting to claim. Additional requirements to be aware of before claiming the tax credit are:

  • The car was purchased before 2017.
  • You are the original owner of the vehicle.
  • You drive your car primarily in the U.S.

For those who purchased a plug-in electric vehicle, you could be eligible for the Qualified Plug-In Electric Drive Motor Vehicle Credit. The credit applies to new electric vehicles bought after December 31, 2009. In order to qualify for the credit you will need the following:

  • The vehicle must have been purchased new.
  • The vehicle must have been made by an eligible manufacturer under the Clean Air Act.
  • Have at least four wheels.
  • Have the ability to be driven on highways and public streets.
  • Have a weight rating of less than 14,000 pounds.
  • Purchased an electric motor that uses a rechargeable battery to generate at least 5 kilowatt hours of capacity.

Tax credits for both of these can range from $2,500 to $7,500 based on the vehicle’s battery capacity and the overall size of the vehicle.

  • Make a donation for a smaller tax bill

Taxpayers who make charitable contributions such as cellphones, game consoles, computers or any other qualifying electronic donation, can write it off based on the fair market value. In order to be eligible for the tax credit, you must have the following:

  • A donation that is valued at less than $500, no forms will be required to be filled out.
  • Charitable deductions exceeding $500 must be submitted with Form 8283, which lists the name of the organizations and types of donations made with your tax return. 
  • Keep a receipt for your files.
  • Use Energy Star products

The Energy Star program of the U.S. Environment Protection Agency and the U.S. Department of Energy helps taxpayers save money when they go green. Taxpayers should be advised that not all Energy Star products qualify for the incentive and some tax breaks for energy expired in 2011. There are still a few credits available through 2021 for certain energy programs that have been mentioned above.

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

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Tax Implications for Having a Nanny or Housekeeper

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.

For families that juggle working and family obligations, it can be overwhelming and sometimes even feel impossible to manage. As a result, some families may require hiring a nanny or housekeeper to help assist around the house.

Families that are thinking about hiring a nanny or housekeeper may enjoy the extra assistance but also need to think about what the typical pay for hiring the extra help. Will you have to pay additional taxes? Will the nanny or housekeeper be considered 1099 or W-2? 

Here are some answers to questions taxpayers may have when filing their taxes:

Will my nanny or housekeeper qualify as a household employee?

Taxpayers will need to review whether or not a housekeeper qualifies as a household employee and how to place it on their tax return.

If a housekeeper or nanny earns more than $2,100 in a calendar year, the IRS will consider this person to be a household employee. This means that you will be expected to pay employment taxes.

What forms are required in order to pay a nanny or housekeeper?

Taxpayers who choose to hire additional help around the house are not required to withhold federal income tax from their employee’s wages. However, if your employee asks you to withhold taxes from their income, you must agree to do so. You will need to have your employee fill out the W-4 Employee’s Withholding Certificate so the proper amount of taxes from your employee’s paycheck. 

When tax time comes around, you will be required to file a Form W-2 reporting household employee’s income that was earned as well as any withholdings. You will also need to file Form W-3 Transmittal of Wage and Tax Statements with the Social Security Administration. 

When filing your taxes, you will also need to file a Schedule H where total household employment taxes will be reported.

Are there any taxes that I will need to pay for my nanny or housekeeper?

As an employer, you will be expected to pay a portion of your employee’s social security and Medicare taxes, which is 7.65% of their gross wages.

When issuing your employee’s paycheck, you will be responsible for deduction of your employee’s share of their gross pay. In some cases, you may also be accountable to pay federal unemployment taxes.

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What is a Backup Withholding?

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.

If you are a taxpayer that’s receiving multiple forms of income, specifically receiving income payments, the IRS will require that the payments be reported as taxable income. Typically, if you are a 1099 earner, the person or business that is paying you generally won’t be withholding taxes on the payment they give to you.

Here is everything you need to know about a backup withholding (BWH).

  1. What is a backup withholding? Certain situations will require that a taxpayer withholds at the current rate of 24 percent. This percentage will be taken from any future payments and applied as taxes to ensure that a taxpayer does not owe at the end of the tax year.
  2. Payments you receive can be subject to backup withholding. BWH can be applied to most kinds of payments including:
  • Interest payments (Form 1099-INT) 
  • Dividends (Form 1099-DIV) 
  • Payment Card and Third Party Network Transactions (Form 1099-K) 
  • Patronage dividends, but only if at least half the payment is in money (Form 1099-PATR) 
  • Rents, profits, or other gains (Form 1099-MISC) 
  • Commissions, fees, or other payments for work you do as an independent contractor (Form 1099-MISC) 
  • Payments by brokers/barter exchanges (Form 1099-B) 
  • Payments by fishing boat operators, but only the part that is in money and that represents a share of the proceeds of the catch (Form 1099-MISC) 
  • Royalty payments (Form 1099-MISC) 
  • Gambling winnings (Form W-2G) may also be subject to backup withholding. 
  • Original issue discount reportable on (Form 1099-OID), Original Issue Discount, if the payment is in cash 
  • Certain Government Payments, Form 1099-G

3. How to prevent or stop a backup withholding. In order to stop a backup withholding, a taxpayer will need to correct the reason as to why they became subject to a backup withholding. This could include providing the correct tax identification number belonging to the payer, resolving any underreported income and paying off any balance that is owed, and filing any unfiled past tax years. 

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

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U.S. Armed Forces Receive Special Tax Benefits when Filing 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.

If you have served in the U.S. Armed Forces, you could qualify for certain tax breaks and certain rules may also apply such as deductions or credits that can be claimed at a lower rate. If you have served in the U.S. Armed Forces, here is what you could qualify for when filing your taxes:

  1. Deadline Extensions. For members of the military and those who serve in combat zones, the government will allow you to postpone tax deadlines and, in some cases, you can receive an automatic extension so you have more time to file your taxes. 
  2. Combat Pay Exclusion. If you serve in a combat zone, your pay will either be partially or fully tax-free. If you serve in a support area for a combat zone, you may also qualify for this exclusion. 
  3. Signing Joint Returns. If you are married and choosing to file jointly, it is required that both you and your spouse sign your tax return. If you are unable to be present to sign your portion of the tax return, you may need a power of attorney to file a joint return.
  4. Uniform Deduction. You can deduct the cost of certain uniforms that you can’t wear while off duty. This also included the costs of purchase and upkeep. 
  5. ROTC Allowances. This applies to allowances for education and subsistence. Active ROTC pay is also considered taxable.
  6. Civilian Life. If you leave the armed forces, you may qualify for deductions on certain job search expenses. This could include, the cost of travel, preparing a resume and job placement agency fees. Moving expenses may also qualify for a tax deduction.
  7. Tax Help. Most military bases offer free tax preparation and filing assistance during the tax filing season. Some may also provide free tax help after the tax deadline.

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

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Is there a Deduction Limit on Charitable Donations?

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.

If you’re debating whether or not to donate to charity, it’s important to understand the tax benefits and tax-saving opportunities that could be available to you. Here’s a breakdown of what you need to know when understanding what you could qualify for when it comes to charitable donations.

Some donations may not be eligible for deductions. In order to make a donation, it must be to a charity with a tax-exempt status determined by the IRS. This means that charitable donations cannot be made to friends, relatives, or groups that do not fall under the tax exempt status. The list of approved organizations are the following:

  1. A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.
  2. A church, synagogue, or other religious organization.
  3. A war veterans’ organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions.
  4. A nonprofit volunteer fire company.
  5. A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services).
  6. A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes.
  7. A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.

Some contributions may lead to only a partial credit. For particular donations, a taxpayer will only receive a portion of a credit. For example, if you purchase a shirt that is a part of a charitable cause, the entire price of the shirt is not deductible. The fair market value must be determined and subtracted from the cost of your purchase in order to determine the amount of your donation.

When determining how much of a charitable donation you would like to make, it is important to know there is a limit on all donations you make throughout the tax year. Total charitable contributions are generally limited to no more than 50% of your adjusted gross income. 

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

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Can I Claim an Education 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.

  • Taxpayers who have been to or are currently in college may qualify for education expense credit.
  • The American Opportunity Tax Credit can be used towards required course materials as well as tuition and fees.
  • Up to $2,000 of the first $10,000 in qualifying educational expenses can be claimed with the Lifetime Learning Credit.

It is important for taxpayers who have been to or are currently in college to review what possible education expense credits or deductions they could qualify for.

The American Opportunity Tax Credit has replaced the Hope Credit and offers more perks to those looking to either reduce their tax balance or increase their refund. Here are some of the benefits you can receive from the American Opportunity credit:

  • Up to $2,500 can be claimed per student.
  • It can be used towards required course materials (books, supplies, equipment) as well as tuition and fees.
  • It can be applied against four years of higher education, compared to the Hope credit which only covered two years of higher education.

Taxpayers can qualify for this credit as long as their adjusted gross income does not exceed $80,000 for single taxpayers and $160,000 for married taxpayers filing jointly. As a taxpayer’s income increases, the credit will gradually be reduced. For those earning a lower income, they will also benefit because up to 40% of the credit is refundable. This means that taxpayers can expect a check from the IRS if they owe no taxes.

The Lifetime Learning Credit allows qualifying taxpayers to earn an annual credit up to $2,000 of the first $10,000 in qualifying educational expenses. Because there is no limit in place on the number of years of higher education that you can claim, this credit yields a higher credit amount. Taxpayers can receive up to $2,500 per student as long as their income does not exceed more than $58,000 for single filers and $116,000 for those that are married and filing jointly. 

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

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