Taxes & Your Savings

Tax moves to consider before paying for College

Individuals who have children going to school very soon or who recently had children and are looking to prepare for their college in advance, need to find strategic ways that they can reduce their taxes and also help with the college costs.

Parents should consider opening up a 529 plan and also review tax credits as well as other strategies they can use in order to ease the burden of high education costs. Here is what taxpayers need to know before opening a 529 plan.

  • Families that invest in a 529 college savings plan could have the option to utilize their tax-deferred funds. In order to avoid any levies, they will need to use these funds for qualified education expenses such as tuition fees, books, room and board, computers and much more.
  • Those investing in a 529 family plan should first start off by adding up their qualified expenses and subtracting tax-free education assistance. Families should also see if they qualify for the American Opportunity Tax Credit or the Lifetime Learning Credit (both are subject to income limits).
  • The American Opportunity Tax Credit applies to the first four years of higher education, the Lifetime Learning Credit typically pays for undergraduate, graduate, or professional degrees.
  • There is one downside to the non-parental 529 plan that taxpayers should be aware of. The withdrawals from this plan may be counted as a student’s income on the next year’s Free Application for Federal Student Aid, or FASFA, which may affect any financial aid that a student is receiving.

 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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Common Myths about Federal Tax Refunds

With the tax deadline now in the past, the IRS reminds taxpayers that there is no faster way to get a refund and to be patient while they process recently filed returns. Taxpayers who have already filed their federal tax return should have received their tax refund. Those who have yet to receive their refund should be aware that there is no faster way to get it. When it comes to tax refunds, here are a few common myths that individuals should know.

Before looking at common myths about refunds, taxpayers will need to understand a few key facts about the refund process:

  • Taxpayers who choose to file electronically and use direct deposit can expect their refund faster than those who mail a paper return.
  • Taxpayers who file a paper tax return are likely to face processing and refund delays.
  • The best and easiest way to check on a refund is Where’s My Refund?
  • The Where’s My Refund? tool available on IRS.gov and the IRS2Go mobile app.
  • A tax refund’s status can be checked within 24 hours after the taxpayer receives the e-file acceptance notification.

Here are a few common myths taxpayers should be on the lookout for:

Individuals who received a refund will most likely not need to adjust their withholding. However, if a taxpayer has experienced a change in income, they should review their current withholding and adjust it accordingly to ensure that they do not have to experience any tax time surprises for the next tax season.

Attempting to call the IRS or tax professional

Taxpayers should be aware that contacting an IRS agent or tax professional will not expedite their refund process and they will not receive any “special” information.

Utilize the Where’s my Refund? tool to track your refund

The Where’s My Refund? tool on the IRS website allows individuals to track the status of their refund. The tool will allow people to review whether or not their return is processing. Taxpayers should be aware that some tax returns may take longer to process if it requires further review. This includes:

  • Errors.
  • The return is incomplete.
  • Is affected by identity theft or fraud.
  • Includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process.

Your tax refund is less than expected

There are many reasons as to why a tax refund may be different than expected including:

  • Includes errors.
  • Is incomplete.
  • Is affected by identity theft or fraud.
  • Includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process.

If your refund amount is less than expected, the IRS will mail a notice explaining why the adjustments were made. Some taxpayers may even receive a letter from the Department of Treasury’s Bureau of the Fiscal Service if their refund was reduced to offset certain financial obligations.

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 long can the IRS Audit my Taxes?

For most taxpayers, the worst thing that can happen after filing their taxes is having the IRS notify them that their tax return is being audited. What most people do not realize is that there is a time frame for how long the IRS can audit an individual and that taxpayers have a right to dispute an audit if they have proper substantiation. Here is everything you need to know if you are going through an audit.

Typically, the IRS has about three years from the date that a tax return was filed to charge you or assess additional taxes. The three-year timeframe is called the assessment statute of limitations. Tax returns that are flagged typically end up going into audit or the individual will receive notification from the IRS stating that some information on their return was underreported. This notice is called a CP2000.

The IRS procedural policy states that an IRS agent will be required to open and close an audit within 26 months after a tax return has been filed. The IRS strictly adheres to its guidelines to ensure that the audit and other processing needs are complete within the three-year timeframe.

For audits that start a few months after a return is filed, the IRS will typically freeze any refunds. The IRS will have to pay interest on refunds that are sent out late, which is why the IRS will attempt to resolve its audit quickly. Once a taxpayer answers the questions regarding their tax return with accuracy, then their refund will be released and sent out.

Audits that happen immediately after filing a tax return typically contain tax credits, earned income tax credits and the child tax credit. The IRS usually wants to verify the filing status, dependents, and other return items before sending your 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.

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What is an Offer in Compromise?

An offer in compromise allows taxpayers to settle their tax debt for less than the full amount that they owe. This option should be considered for taxpayers who are unable to pay their full tax liability. The IRS will look over the following when determining whether or not an individual is a candidate for an offer: 

  • Ability to pay 
  • Income 
  • Expenses 
  • Asset equity 

When reviewing an Offer in Compromise (OIC) application, the IRS will typically approve an offer if they feel that it will be the most that they can collect from someone within a reasonable period of time. Taxpayers should also look into all other options that the IRS provides when it comes to paying back their tax balance just in case they may not be eligible for an OIC. 

How to find out if you are eligible 

Taxpayers are required to have all their tax years filed and have attempted to make estimated tax payments before being considered for an offer in compromise. If your application is rejected for these reasons, the fee included with an OIC application will be returned. Any initial payment required with the returned application will be applied to reduce your balance due. Taxpayers that are in an open bankruptcy will automatically be disqualified. 

How to submit your application 

Individuals that are considering submitting an application should utilize instructions in Form 656-B, Offer in Compromise Booklet. A completed OIC package should include: 

  • Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms. 
  • Form 656(s) – individual and business tax debt (Corporation/ LLC/ Partnership) must be submitted on separate Form 656. 
  • $205 application fee (non-refundable). 
  • Initial payment (non-refundable) for each Form 656. 

Payment options 

Payment options will vary based on the offer the IRS provides and the payment option you choose: 

  • Lump Sum Cash: Taxpayers will be required to submit an initial payment of 20 percent of the total offer amount with their application. If the offer is accepted, taxpayers will receive a written confirmation from the IRS. The remaining balance due on the offer will need to be paid in five or fewer payments. 
  • Periodic payment: An initial payment will need to be submitted with an application. A taxpayer will be required to continue to pay the remaining balance in monthly installments while the IRS considers their offer. If the offer is accepted, a taxpayer will be required to pay monthly until it is paid in full.  

Accepted OIC 

  • You must meet all the Offer Terms listed in Section 7 of Form 656, including filing all required tax returns and making all payments. 
  • Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt. 
  • Federal tax liens are not released until your offer terms are satisfied. 
  • Certain offer information is available for public review by requesting a copy of a public inspection file. 

Rejected OIC 

  • You may appeal a rejection within 30 days using Request for Appeal of Offer in Compromise. 
  • The IRS Independent Office of Appeals provides additional assistance on appealing your rejected offer. 

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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Taxpayers are reminded that Filing an Extension is not an Extension to Pay Taxes

Taxpayers are reminded that if they have yet to file their federal income tax return, they still have a variety of options that are available to them. Not only is the IRS website accessible to taxpayers, but also provides a customer help line where IRS agents are able to assist individuals who are seeking options to pay back their tax balance.

Individuals are encouraged to file their taxes electronically in order to receive their refund much quicker. In addition to this, e-filing greatly reduces tax return errors since the tax software does the calculations, flags common errors and prompts taxpayers for missing information.

Taxpayers have the option to request more time

Anyone who may need additional time to file has the option to file an extension. One of the easiest ways to do so is for taxpayers to request an extension on Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

It is important that tax filers understand that an extension to file is not an extension to pay back their tax balance that is due. In order to obtain an extension, taxpayers will need to estimate their tax liability on the form and pay any amount due. Tax payments are typically due by the initial tax deadline, and it is recommended that taxpayers try to pay as much as possible before the tax deadline. If a tax balance does carry over after the deadline, it is recommended that the tax filer continue to make payments or work with the IRS to set up a payment agreement to pay off the rest of their balance.

Taxpayers are reminded that they have the option to utilize IRS Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or a credit or debit card and get an automatic extension to file for the next tax year. Payments that are made with an extension request will reduce or, if the balance is paid in full, eliminate interest and late-payment penalties that apply to payments that are made after the tax filing deadline.

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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Working from Home could mean You will face a Double Tax Hit this Tax Season

Coronavirus has caused millions of Americans to move from working in the office to working at home. Meaning, if you worked your office job in one state and resided in another state, but now work and reside in the same state, you may need to file your taxes differently from prior years.

Previously, individual’s income taxes were assessed based on the state where they lived. Commuters who came from neighboring states were typically covered by agreements that allowed them to avoid double taxations. However, with so many people telecommuting and moving further and further away, they may be at risk for having to pay extra taxes.

Six states are known to have something called the convenience rule. This rule allows companies located in their jurisdictions to issue an income tax on their employees even if they no longer reside in the state where they once commuted to work.

While there are some states that have agreements that help provide tax relief to individuals, telecommuters who moved elsewhere during the pandemic, may be hit with additional income taxes from the state where their company is based.

There are many states that have rules in place to prevent individuals from being hit with double taxation if they do have to commute out of state for work. States like Vermont, Connecticut and Virginia provide tax credits up to a certain limit to their residents who work in bordering states.

Because of the pandemic, telecommuting has become far more prevalent and could eventually change the way both businesses and employees are taxed in the future. Many companies may eventually make the shift from having a physical work location to a virtual one meaning that many taxpayers may be able to work from the comfort of their own homes.

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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You could face a Marriage Tax Penalty

Planning for a wedding can be time consuming and expensive. With newlyweds having so much to think about, they may neglect the tax preparation process and new tax decisions they will need to make as a married couple.

Here are a few tax filing tips couples should consider before filing their taxes.

A new filing status could come with a new tax rate

Getting married means that your filing status will change completely. Couples will need to decide whether they want to file married filing jointly or married filing separately. In most cases, it would be far more beneficial to file married filing jointly because of all the credits and deductions a couple could qualify for:

  • Child Tax Credit
  • Child and Dependent Care Credit
  • Adoption Tax Credit
  • American Opportunity Tax Credit
  • Lifetime Learning Credit
  • Tuition and Fees Deduction

If a spouse has a tax bill that could potentially impact your finances, it may be in your best interest to file separately to avoid being attached to your partners tax liability. Most couples choose to file together so that they can maximize the benefits they qualify for.

The marriage tax penalty

High earning couples need to be aware that they may be more likely to receive a marriage penalty because they are now subject to an increased tax rate. In order to get a better understanding of how combining income with your spouse can impact your taxes, review the 2020 and 2021 federal tax brackets and rates on the IRS’s website.  

Itemized deductions

Married couples typically qualify for the double standard deduction amounts which lower their total taxable income. Taxpayers need to be aware that there are limits on certain itemized deductions. For example, taxpayers are limited to $10,000 on state and local tax deductions and interest on up to $750,000 on their first loan on a mortgage interest deduction.

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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Rolling over your 401(k) to an IRA could Cost you

If you have changed jobs and are looking for a way to move your assets from your previous workplace’s savings plan to an individual retirement account, you may want to do your research first before committing to the rollover. This will help individuals avoid making costly errors and stop them from locking themselves into a move that can’t easily be undone.

Both 401(k) plans and IRAs were implemented as ways to let individuals put away tax-advantaged savings for retirement. Here are several rules that differ between both options and what to be aware of before initiating a rollover.

Rolling over your 401(k) or IRA

If you have determined that you are going to move your retirement into an IRA, taxpayers should avoid having a check sent directly over to them from their previous 401(k) plan. If your rollover account is set up and ready to receive the funds from your 401(k), the check should be made out directly to the IRA custodian for the benefit of you.

If the check has been made payable to you, it will be considered a distribution meaning that your 401(k) plan is required to withhold 20% for taxes.

If you have company stock

There are some retirement investors that hold company stock in their 401(k) in addition to their other investments. Should you choose to roll over all your assets into an IRA, you may lose the potential to receive much more favorable tax treatment on any additional growth those shares had when they were in your 401(k).

If you choose to sell the shares from your brokerage account, any growth the stock has experienced from your 401(k) would be taxed at long-term capital gains rates based off your income.

The rule of 55

For those who left their job in or after the year you turned 55 but before the age of 59 ½, you have the ability to take penalty-free distributions from your 401(k). If you decide to move your money into an IRA, you will lose the ability to have immediate access to your money.

If you have already rolled your money over from your 401(k) into an IRA but need access to it right away, you will end up paying the 10% penalty unless you can qualify under another reason for an early withdrawal.

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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Did you Win the Lottery? Here’s how to Report it on Your Tax Return.

money pile

Winning the lottery is a dream come true for most Americans so it may come as a shock to many that lottery winners may face tax implications when filing their taxes. Here are some tax tips individuals should be aware of if they have won the lottery.

Consult with a tax professional. The first thing you should do after winning the lottery is to reach out to a tax professional to discuss any tax problems on both a state and federal level you may have to deal with down the road. A tax professional can help a taxpayer make the right tax choices in advance in order to avoid any tax time surprises.

Understand how your lottery winnings are taxed by your state. When tax time comes around, individuals who won the lotto need to be aware of what to expect when it comes to owing state taxes. Income tax differs per state and can span from about 2.9% to 8.82%. There are nine states that don’t levy state income tax:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Decide what to do with the money you won. Depending on where a taxpayer lives, it may take some time before the money is actually received. Taxpayers will have to decide whether they want to take a lump sum or 30 annuity payments over 29 years.

Although most individuals would prefer to take the lump sum of cash, they will have to pay on the entire tax amount right away. Those who prefer annuity payments, will only be taxed on the amount that they are receiving.

Invest in a team of financial and legal advisors. Regardless of how you choose to take your winnings, you will most likely be placed in the highest tax bracket. Having a team of accountants and investment advisors behind you can help you make the best financial decisions.

If you’re in the top bracket, you don’t actually pay 37% on all your income. Federal income tax is progressive. As a single filer and after deductions, you pay:

  • 10% on the first $9,700 you earn
  • 12% on the next $29,775
  • 22% on the next $44,725
  • 24% on the next $76,525
  • 32% on the next $43,375
  • 35% on the next $306,200
  • 37% on any amount more than $510,300

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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Working from Home? Here’s what You need to know about the Home Office Deduction.

With so many Americans having to make the transition from working in the office to working remotely, one question individuals may have before filing their taxes is if working from home could yield any tax breaks. Certain small businesses may qualify for a home office tax deduction, but they need to be cautious of triggering an audit with the IRS if they are unsure of what they should be placing on their tax return.

Does working from home qualify you for a home office tax deduction?

Employees who are currently working remotely for an employer unfortunately do not qualify for the home office tax deduction. Employees should note that this deduction may be available to them as a state deduction depending on where they live. Prior to the Tax Cuts and Job Acts (TCJA) tax reform that was passed in 2017, employees did have the ability to deduct unreimbursed employee business expenses, which also included the home office deduction. For tax years 2018 through 2025, the itemized deduction for employee business expenses has been eliminated.

Should self-employed individuals take the home office deduction?

Those who are self-employed and are working out of their home do qualify for these write-offs and should take advantage of them when filing their tax return.

How do you know if you qualify for the home office deduction?

In order to qualify for the home office deduction, you must meet the following criteria:

  • Exclusive and regular use: A portion of your house, apartment, condominium, mobile home, boat, or similar structure must be used for your business on a regular basis. This also applies to structures on your property such as an unattached studio, barn, greenhouse, or garage. This deduction does not apply to any part of a taxpayer’s property used exclusively as a hotel, motel, inn, or similar business.
  • Principal place of business: A home office is required to be either the principal location of your business or a place where you regularly meet with customers or clients.

What is exclusive use?

One problem individuals may have when attempting to qualify for these deductions is that a portion of a home must be exclusively and regularly used for business.

The IRS is very strict about the exclusive-use requirement. If a taxpayer violates the exclusive-use requirement then they forfeit their chance for a home office deduction.

What to do if you have a home office for your business but do your work elsewhere

It is important for taxpayers to know that their home office needs to be their principal place of business, not their principal workplace. A home office should be used to conduct administrative or management tasks and if you don’t make substantial use of any other location to conduct those tasks, then you qualify.

Those who are employees for another company but also have their own part-time business based out of their home, also qualify.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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