Taxes & Your Savings

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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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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