Taxes & Your Savings

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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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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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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Tax Withholding: How to get it Right

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.

As a W2 earner, you have the option to change your withholdings on your paycheck to either earn more or less. As a taxpayer, it is important to understand the repercussions you could potentially face for you adjusting your withholding and how it could affect you when it comes time to file your taxes. 

Here is everything you need to know about withholding and what you need to be aware of:

Your withholding is determined by several factors:

  1. The amount of income that you have earned.
  2. Your filing status – either the single or married rate.
  3. Number of withholding allowances claimed. With each claim you add on, it reduces your withholding amount.
  4. Additional withholding – an employee can request through their employer to withhold an additional amount from their paycheck. 

How your withholding could affect you:

  1. Withholding too little on your paycheck could lead to you owing a tax balance.
  2. You could be withholding too much. If this is the case, you will receive a refund once you file your tax return.
  3. Your income increased but your withholding stayed the same. You could potentially owe come tax time, make sure to see if your income bracket has changed and consult with a tax professional to see what you can do to avoid owing money or having your refund reduced when you file your taxes.

What you can do to avoid running into tax trouble:

  1. Use a tax withholding estimator to check if you are withholding the most accurate amount. The IRS provides a calculator for taxpayers to use.
  2. Consult with a tax professional to discuss what your withholding options are and what you can do moving forward to ensure you won’t run into any issues come tax time.

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

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Do You Qualify for the Child Care Credit?

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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.

Raising children can lead to unexpected expenses that seem to come out of nowhere. As a parent, you may be wondering what tax benefits are available when you file your tax return. You may just find you qualify for the Child Tax Credit.  This tax credit was put into place not just to help taxpayers get the most out of their tax refund, but to also supply some relief for amongst all the expenses that pile up from having children. 

Since the passing of the Tax Cuts and Jobs Act of 2017 (TCJA), parents can now take advantage of the perks that come with the TCJA for child care expenses – this also includes adult kids that are still living under your household. 

If you’re not expecting a refund this year, the Child Tax Credit can help reduce a possible tax liability that you may owe, with a savings of up to $2,000 per child.  Even if you’re expecting a refund, you could still receive up to $1,400 back on your return. The Child Tax Credit is considered one of the most valuable credits to apply when filing your taxes. 

Some of the criteria you would need to meet in order to qualify for the Child Care Credit is:

  • Your child needs to be a U.S. citizen or legal resident
  • Children must be 16 years or younger 
  • The taxpayer’s child must be claimed on their tax return.
  • The child should have lived with you for more than half the year

Make sure that you take advantage of the Child Tax Credit this tax season in order to get the most out of your refund or help reduce your tax bill. Remember that there are a few qualifying factors to consider before utilizing the Child Tax Credit: age, relationship, support, dependent status, citizenship, length of residency as well as family income. 

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

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Should Taxpayers Consider Using Direct Deposit for Tax Refunds?

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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 looking to receive a tax refund this season and want it expedited, consider direct deposit.
  • It’s completely free to request direct deposit on your tax return
  • You’ll receive your refund through your bank instead of via check
  • It costs the IRS more to cut a check compared to transferring the money directly to your bank account. 

It’s tax time and everyone is scrambling to get their last-minute tax appointments scheduled before the deadline. If you’re expecting a refund this year, choosing the direct deposit option may be the more viable choice. Let’s explore the benefits:

It doesn’t cost you anything 

Whether you have a tax preparer file for you or you’re filing your tax return yourself, adding your bank information is free to include on your tax return. 

Get your refund faster

When you e-file with your direct debit information on your tax return, you’ll receive your refund much quicker compared to mailing off the return and having the IRS process it.

It’s secure

Using direct deposit information prevents the risk of having a paper check lost or stolen since the funds will be transferred directly to your bank.

You don’t have to e-file

If you prefer to mail out your tax return instead of e-filing, don’t worry, you’re still able to include your direct deposit information and receive your refund through your requested bank of choice.

It will save you money

It costs the IRS more than $1 for every paper refund check issued, but only a dime for each direct deposit made.

Tax season is a busy enough time to get through without having to worry about how you’re going to receive your refund or when it’s going to come. Having your refund deposited directly into your bank account is the ideal way to receive your money because it’s secure, quick, free, and saves taxpayers money. 

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

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10 Travel Hacks when You’re on a Budget

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.

  • There are ways to travel and go on vacation without having to go broke. 
  • If you’re looking to travel but don’t want to spend the high prices, consider planning around off-peak travel times. 
  • Find a hotel that has additional amenities, saving you more money in the long run.
  • Staying at a hostel is probably one of the most cost-effective ways to travel. 
  • Try doing some sightseeing and look for iconic landscapes that you can’t find back home. 

As the season gets warmer, and with summer looming just around the corner, it’s time to start planning on where you want to go on vacation – and, inevitably, spend more money than usual. Typically, flight costs go up as the temperature does and hotels start to upcharge a bit more than they usually do. So what do you do if you’re on a budget but still want to vacation? Believe it or not, there are ways to travel and go on vacation without having to go broke. 

1. Plan Around Travel Time

Certain times of the year can cause flight and hotel prices to go up because of the surge in tourists that are visiting their location. If you’re looking to travel but don’t want to spend the high prices, consider planning around off-peak travel times. 

If you’re looking to get more bang for your buck, start looking at countries that fit into your budget based on the price of their merchandise and how affordable the country is overall.

2. Check to see if your hotel offers free breakfast

Traveling can become expensive very quickly.  If you’re looking to take a more economical route, consider looking for a hotel that serves their guests’ breakfast. Some hotels provide a few morning snacks while others have a full continental breakfast served to guests every morning. In the end, it might benefit you to find a hotel that has additional amenities, saving you more money in the long run.

3. Hostels may be the cheaper option

Staying at a hostel is probably one of the most cost-effective ways to travel. Not only are you getting the lowest price compared to hotels or rentals, but you’ll also be able to have the opportunity to connect with many other travelers from all around the world. No matter where you travel to, there is usually a hostel that can accommodate you.

4. Explore the town

Believe it or not, the best experiences are typically free. Try doing some sightseeing, like looking for iconic landscapes that you can’t find back home. You could also try looking for hiking trails that may lead to hidden treasures or views you never dreamed of. 

If you’re planning to travel, try to get the most out of your experience without having to hurt your wallet. Always make sure that you compare prices against other hotels and prepare an itinerary ahead of time to project what possible costs you may have to incur. Traveling doesn’t have to be expensive, and you can still have an enjoyable trip without breaking the bank.

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

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