Since its enactment in 2017, the Tax Cuts and Jobs Act (TCJA) has significantly impacted the American tax landscape, introducing a slew of changes aimed at reducing tax burdens for individuals. However, many of these provisions were designed to sunset after a set period. Most are slated to expire in 2025. As this deadline approaches, it’s essential to examine the implications of these expiring provisions and how they might affect taxpayers across the nation.
Expiration of Individual Tax Provisions
Several key provisions of the TCJA affecting individual taxpayers are set to expire at the end of 2025.
Tax Brackets
The Tax Cuts and Jobs Act reduced the marginal tax rates across most individual tax brackets. But, once the sunset clause takes effect, these rates could revert to their prior levels.
Taxable Income (Single filer in 2023)
TCJA Marginal Rate
Pre-TCJA Marginal Rate
$11,000 or less
10%
10%
$11,001 to $44,725
12%
15%
$44,726 to $95,375
22%
25%
$95,376 to $182,100
24%
28%
$182,101 to $231,250
32%
33%
$231,251 to $578,125
35%
35%
$578,126 or more
37%
39.6%
Standard Deductions
The TCJA nearly doubled the standard deduction, making it more advantageous for many taxpayers to take the standard deduction rather than itemizing deductions.
2017 (Pre-TCJA)
2018
2024
2026 (Post-TCJA)
Single Filer
$6,350
$12,000
$14,600
Reverts Back
Married Filing Jointly
$12,700
$24,000
$29,200
Reverts Back
Head of Household
$9,350
$18,000
$21,900
Reverts Back
Tax Credits
Certain tax credits changed after the TCJA was enacted. Here are some tax credit provisions that could expire in 2025.
Child Tax Credit: Current at $2,000 per child. Prior to the TCJA, the credit was $1,000 per child. Single parents who earned more than $75,000 could only partially claim it. For married couples, this amount was $110,000. The TCJA increased these amounts to $200,000 and $400,000 respectively.
Credit for Other Dependents: Taxpayers can claim $500 for each dependent that doesn’t qualify for the child tax credit.
Tax Deductions
If the TCJA is not extended or made permanent, there are several tax deductions that will revert to pre-TCJA figures.
SALT Deduction: Currently capped at $10,000. However, a new proposal is aiming to raise this limit to $20,000 for married couples filing jointly who earn less than $500,000 for tax year 2023. Prior to the TCJA, there was no limit for the SALT deduction.
Mortgage Interest Deduction: Prior to the TCJA, homeowners could deduct interest paid on mortgages of up to $1,000,000, or $500,000 for married couples filing separately. Under the TCJA, anyone who takes out a mortgage between December 15, 2017, and December 31, 2025, can only deduct interest paid on the first $750,000. This amount reduces to $375,000 for married taxpayers filing separately.
Charitable Giving Deduction: You can currently deduct charitable contributions, up to 60% of your adjusted gross income. Once the TCJA sunsets, the cap will be 50% of your AGI.
Medical Expense Deduction: Currently capped at 7.5% of adjusted gross income. Prior to the TCJA, the cap was 10% of AGI.
Miscellaneous Deductions: The Tax Cuts and Jobs Act eliminated several miscellaneous deductions that were previously available. These include the cost of tax preparation, unreimbursed work expenses, moving expenses, and others.
Other Provisions
Estate and Gift Tax Exemptions: Currently capped at $13.61 million per lifetime for individual filers and $27.22 million for married couples filing jointly. The projected amounts after the TCJA sunsets in 2026 are $7 million for single filers and $14 million for married couples filing jointly.
529 Plan Gifts: Under the TCJA, 529 Plans now cover up to $10,000 per year for K-12 tuition. Funds can also be used to pay student loan debt.
Personal Exemptions: Prior to the TCJA, taxpayers could claim $4,050 for each personal exemption in addition to the standard deduction or their itemized deductions. The amount is now $0.
Uncertainty and Planning for the Future
The looming expiration of these TCJA provisions introduces uncertainty into the tax planning landscape for individuals. Taxpayers must consider the potential impact of these changes on their finances and prepare accordingly. For example, individuals may need to reassess their withholding allowances or adjust their financial strategies to mitigate any potential tax increases in the future.
Congressional Action and Potential Reforms
As the expiration date approaches, there is likely to be increased debate over the fate of the TCJA provisions. Lawmakers may consider various options, including extending certain provisions, making them permanent, or implementing alternative reforms to the tax code.
However, reaching consensus on tax policy can be challenging, particularly in a politically divided environment. Consequently, taxpayers should stay informed about developments in tax legislation and be prepared to adapt their plans accordingly.
Tax Help for Those Affected by the TCJA
The impending expiration of Tax Cuts and Jobs Act provisions in 2025 has significant implications for taxpayers across the United States. As these provisions sunset, individuals must navigate potential tax increases and plan accordingly. While the future of these provisions remains uncertain, staying informed and proactive can help taxpayers mitigate any adverse effects and optimize their financial strategies in the years to come. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Tax season often brings a sense of confusion and anxiety for many individuals, especially when faced with understanding complex tax forms. One such form, the W-2, plays a crucial role in the tax-filing process for employees. Understanding the W-2 form is essential for accurately reporting income and ensuring compliance with tax laws. In this article, we’ll break down the W-2 form, explaining its purpose, components, and how to interpret the information it contains.
What is a W-2 Form?
The W-2 form, also known as the Wage and Tax Statement, is a document provided by employers to their employees at the end of each calendar year. Its primary function is to report your annual wages and the amount of taxes withheld from your paychecks throughout the year. Employers are required by law to issue W-2 forms to all employees who earned wages during the tax year, regardless of whether taxes were withheld
Components of the W-2 Form
Understanding the W-2 form begins with knowing each component of it.
Employee Information
The W-2 form begins with the employee’s personal information, including their name, address, and Social Security number. It’s crucial to review this information for accuracy, as any discrepancies could lead to processing delays or errors in tax filing.
Employer Information
Next, the W-2 includes details about the employer, such as the company’s name, address, and Employer Identification Number (EIN). This section identifies the employer responsible for withholding and remitting taxes on behalf of the employee.
Wage and Salary Information
One of the most critical sections of the W-2 form is the breakdown of wages and salaries earned by the employee during the tax year. This includes wages, tips, bonuses, and other compensation received from the employer. Here is a closer look at each individual box that reports income.
Box 1
Box 1 shows what is probably the bulk of your income. It includes wages, tips, prizes, and other means of compensation for the year. The amount in box 1 should be directly transferred to line 1 of your 1040 tax return. However, if you have multiple jobs, then you’d include the sum of all box 1 figures and list that on line 1 of Form 1040.
Box 3
Box 3 on Form W-2 shows how much of your wages are subject to Social Security tax. The Social Security tax is 12.4%, but you and your employer split the cost of the tax. There is also a limit to how much will be taxed. This amount in 2024 is $168,600. This basically means that earnings that exceed this limit will not be subject to this tax.
Box 5
Box 5 shows how much of your wages are subject to Medicare tax. The total Medicare tax is 2.9% with you paying half and your employer paying half. Unlike Social Security tax, all your wages are subject to it. However, if you receive over $200,000 for the year, you’ll be required to pay an additional 0.9% Medicare tax. The amount increases to $250,000 for married couples filing jointly.
Box 7
The 7th box on Form W-2 shows how much tip income you reported to your employer for the year.
Box 8
Box 8 shows how much your employer paid you in tips.
Tax Withholding
The W-2 form also provides information on the taxes withheld from the employees’ paychecks throughout the year. This includes federal income tax, Social Security tax, Medicare tax, and any state and local income taxes withheld, if applicable. Here’s a closer look at each box.
Box 2
Box 2 on Form W-2 shows the total amount of federal income tax withheld from your pay throughout the year. The amount withheld is based on the information provided by you on your Form W-4.
Box 4
Box 4 shows the amount of Social Security tax withheld from your paychecks. Remember, only the first $168,600 will be taxed in 2024.
Box 6
Box 6 shows the amount of Medicare tax withheld from your pay. Remember, all your income is subject to this tax. If you are a higher earner, you’ll be taxed even more.
Other Compensation and Benefits
Additionally, the W-2 may include other forms of compensation and benefits provided to the employee, such as contributions to retirement plans, health insurance premiums, and other fringe benefits. Here are some examples referenced on Form W-2.
Box 10
Box 10 on Form W-2 shows the total amount of dependent care benefits that your employer either paid directly to you or incurred on your behalf. Any amounts over $5,000, or $2,500 for someone married filing separately, will also be included as wages in box 1. If you received this benefit, you’ll need to calculate the amount you can exclude from your income with Part III of Form 2441, Child and Dependent Care Expenses.
Box 11
Box 11 on Form W-2 shows any distributions from a nonqualified deferred compensation plan (NQDC) or other types of deferred compensation. Nonqualified deferred compensation refers to compensation that has been earned by an employee but has not yet received. This could include bonuses, commissions, or other types of income that are deferred for tax purposes.
Box 12
Various codes are shown in box 12 for reporting specific types of compensation or benefits, such as retirement plan contributions (code D) or health insurance premiums (code DD).
Box 13
The 13th box on Form W-2 shows whether you were classified as a statutory employee, exempt from federal income tax withholding, participated in an employer-sponsored retirement plan like a 401(k) or 403(b), or received sick pay from a third-party source, such as an insurance policy.
Box 14
Box 14 on Form W-2 is a catch-all box where employers can report additional information that may not fit into the other designated boxes on the form. Some examples of Box 14 contents include state disability insurance taxes withheld, uniform payments, union dues, and educational assistance.
Interpreting the W-2 Form
Understanding how to interpret the information on the W-2 form is essential for accurately filing taxes. Here are some key points to consider:
Verify the accuracy of all information, including personal details and wage amounts.
Pay close attention to the amounts withheld for federal and state income taxes, as well as Social Security and Medicare taxes.
Note any additional compensation or benefits reported on the form, as these may have tax implications.
Keep the W-2 form safe and accessible for tax filing purposes, as it is a vital document for completing tax returns accurately.
Filing Requirements
Employers must provide W-2 forms to their employees by January 31st of the following year. Employees must use the information on their W-2 forms to complete their individual tax returns, which are typically due by April 15th.
Tax Help for W-2 Employees
The W-2 form is a critical document for both employees and employers, providing essential information about wages, taxes withheld, and other compensation. By understanding the components of the W-2 form and how to interpret its contents, individuals can ensure compliance with tax laws and accurately report their income come tax season. If you have any questions or concerns about your W-2 form, it’s advisable to consult with a tax professional for guidance and assistance. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Tax season is officially here. As you prepare to file your tax return, it might be helpful to research ways to decrease your tax liability. A popular way to do this is to claim tax credits and tax deductions. While both can help reduce your overall tax liability, they operate in distinct ways. In this article, we’ll break down the fundamental differences between tax credits and tax deductions, helping you understand how each can impact your financial situation.
What is a tax credit?
A tax credit is a dollar-for-dollar reduction of your income. They are created by the federal and state governments to encourage certain behaviors that benefit the economy or environment. For example, there is a solar tax credit available to taxpayers who purchase solar panels for their home. In 2024, it’s worth 30% of your total solar installation cost through 2032. There is also a federal adoption tax credit that helps offset 50% of your adoption costs. These credits reward behaviors that the government deems beneficial to society. The most popular tax credits in 2024 are the Child Tax Credit, Earned Income Tax Credit, American Opportunity Tax Credit, and Premium Tax Credit.
How do tax credits reduce my tax bill?
As mentioned, a tax credit is a dollar-for-dollar reduction of your income. Let’s say your tax liability is $1,000 but you are eligible for a $750 tax credit. This would reduce your tax liability to $250. There are two main types of credits: refundable and nonrefundable. Refundable credits allow you to receive the full amount of the credit, even if it exceeds your tax liability. For example, if your tax bill is $1,000 and you claim $1,200 in refundable tax credits, you will receive a $200 refund. Nonrefundable credits do not have the same perk. If those same tax credits are nonrefundable, you would simply owe $0 and would not receive the additional $200 in your tax refund.
However, there is also a partially refundable tax credit that offers a sort of middle ground. This type of tax credit allows taxpayers to receive a refund for a portion of the credit amount even if the credit exceeds their tax liability. For example, the American Opportunity Tax Credit allows you to claim up to $2,500 for qualified education expenses. However, only $1,000 of the credit is refundable. This means you can either reduce your tax liability by $2,500 or receive up to $1,000 in a tax refund if your total liability is less than the credit amount.
What is a tax deduction?
A tax deduction is a reduction of taxable income to lower your tax bill. You can lower your tax bill through deductions using one of two methods: claiming the standard deduction or itemizing your deductions. The standard deduction is a fixed dollar amount determined by the IRS each year that can be subtracted from your taxable income. Itemizing your deductions is more work and requires substantiation. However, it allows you to deduct expenses like student loan interest, mortgage interest, retirement contributions, medical expenses, investment losses and more.
How do tax deductions reduce my tax bill?
Any taxpayer can claim the standard deduction. In fact, most taxpayers do because it results in a lower tax liability. The standard deduction for single filers is $13,850 for the 2023 tax year. This means that if you are a single filer with a taxable income of $50,000, you can take the $13,850 standard deduction. Doing so would reduce your taxable income to $36,150. If you itemize deductions, you will need to tally up all your eligible expenses on Schedule A of Form 1040. This typically only makes sense to do if you have enough expenses to exceed the standard deduction.
For example, if last year you had a lot of medical expenses, paid a lot of mortgage interest, or incurred disaster losses that were not insured, itemizing might be the best option for you. Finally, there is something called an above-the-line deduction, which is essentially a deduction that you can take to decrease your tax bill even further after taking the standard deduction. You can calculate these using Schedule 1 on Form 1040. Some examples are retirement contributions, HSA contributions, self-employment tax, health insurance premiums for self-employed, business expenses, and student loan interest.
Tax Relief During Tax Season
The bottom line is that both tax credits and deductions can help lower your tax bill. Many taxpayers may wonder which is better. Tax credits have a slight edge since they directly reduce taxes dollar-for-dollar whereas tax deductions will depend on your marginal tax bracket. Understanding these differences is crucial for effective tax planning and optimizing your financial situation. Figuring out how to file your return yourself can be tricky and intimidating. Consider consulting with a tax professional to ensure you take full advantage of available deductions and credits based on your unique circumstances. Our team of qualified and dedicated tax professionals can help.
Every tax season, many of us are exposed to just how much of our income goes to the government. Many often wonder where tax dollars go. Taxes play a crucial role in sustaining a nation’s infrastructure, services, and public welfare. However, understanding where your tax money go can be a complex and often misunderstood aspect of government finance. In this article, we will explore the allocation of tax dollars, shedding light on the various sectors and services funded by taxpayer contributions.
Social Programs
A significant portion of tax dollars is directed towards social programs aimed at improving the quality of life for citizens. This includes funding for healthcare, education, and social assistance programs. Subsidies for low-income individuals and families, as well as financial aid for students, are vital components of this category. In 2023, 21% of the national budget, or $1.4 trillion, went to Social Security alone. Another $1.5 trillion went to health insurance programs and $477 billion funded veteran and government retiree programs.
National Defense
Ensuring national safety and security is a top priority, and a considerable portion of taxes pays for national defense. This includes funding for the military, intelligence agencies, and defense research. In 2023, an estimated $806 billion was expected to be spent on defense, which equated to 13% of the $6.3 trillion budget. The costs associated with maintaining a robust defense infrastructure, including personnel salaries, equipment, and technological advancements, contribute to this significant expenditure.
Infrastructure Development
Investing in infrastructure is essential for economic growth and the well-being of a society. In short, tax dollars go towards building and maintaining roads, bridges, public transportation, and other critical infrastructure projects. This allocation aims to enhance connectivity, facilitate trade, and improve overall living standards.
Public Safety and Law Enforcement
Maintaining law and order is another key area of government spending. Taxes fund police departments, fire services, emergency response units, and the judicial system. This allocation ensures the safety of citizens and the enforcement of laws that contribute to a stable and secure society.
Debt Servicing
Governments may accumulate debt over time to fund various projects or cover budget shortfalls. A portion of tax dollars is allocated to servicing the national deficit. Managing debt is crucial to maintaining a stable economy and preventing excessive financial burdens on future generations. At this point, the United States’ national deficit is at $34 trillion and our tax dollars help cover the interest payments.
Foreign Aid
Some tax dollars fund foreign aid programs, aiming to address global issues such as poverty, disease, and humanitarian crises. Foreign aid can also support diplomatic efforts and foster international cooperation.
Tax Help for the 2024 Filing Season
Understanding where tax dollars go is essential for citizens to make informed decisions and participate in the democratic process. In fact, by recognizing the diverse areas of government spending, individuals can engage in discussions about fiscal policies and advocate for the allocation of resources that align with their priorities. Transparent communication from governments regarding budgetary decisions is crucial in building trust and ensuring that tax dollars are used efficiently and effectively to benefit society. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
In the world of business, the use of vehicles is a crucial decision that directly impacts both operational efficiency and financial considerations. Whether it’s delivering products, attending client meetings, or managing on-site projects, vehicles are indispensable assets for businesses aiming for success. This article delves into the essentials of utilizing vehicles for business purposes, exploring the types of vehicles that qualify, understanding the standard mileage rate, and the process of deducting actual expenses.
Which Vehicles Qualify for Business Use?
Businesses must carefully consider the types of vehicles that align with their operational needs. While cars, trucks, and vans are common choices, some industries may require specialized vehicles such as delivery trucks, service vans, or utility vehicles. Understanding the specific needs of the business is essential in selecting vehicles that qualify for both practical use and tax benefits. Cars, SUVs and trucks used for business activities qualify for tax deductions. However, if the vehicle is used as equipment, it is not eligible. This can include dump trucks and cranes. Additionally, the vehicle is also ineligible if it used for hire, like taxis or airport transport vans.
Standard Mileage Rate: A Simplified Approach
There are two methods for calculating your deductible car expenses: using the standard mileage rate or calculating the actual expenses incurred. The IRS provides a standard mileage rate that businesses can use to calculate the deductible costs associated with using a vehicle for business purposes. This simplified method considers mileage driven for business and can be a straightforward way to claim deductions.
The standard mileage rate allows employees and self-employed individuals to deduct 67 cents per mile in 2024. These miles should only be counted if it they was were driven for business use only. To calculate your deduction, you would multiply the number of miles by the IRS standard mileage rate. For example, let’s say you drove 6,000 miles for business use.
6,000 miles x 67 cents (2024 rate) = $4,020
Deducting Actual Expenses: Detailed but Potentially Rewarding
While the standard mileage rate offers simplicity, some businesses may find it more advantageous to deduct actual expenses incurred during vehicle use. This method involves tracking various costs, including fuel, maintenance, insurance, and depreciation. While it requires more detailed record-keeping, it allows for a potentially higher deduction, making it a preferred choice for businesses with significant vehicle-related expenses. Using this method, you may also deduct lease payments, auto loan interest, registration fees, garage rent, and parking and toll fees.
Calculating actual expenses for a business vehicle involves tracking and accounting for various costs associated with the vehicle’s use. Only expenses related to business use are eligible for deduction. Keep a mileage log or use tracking tools to record the purpose and mileage of each trip. You would then calculate your business-use percentage of the vehicle to find the amount you can deduct.
Using the same example, let’s say your total mileage for the year was 10,000 miles and 6,000 of those miles were for business use. Your eligible vehicle expenses for the year totaled $8,000. If you calculated actual vehicle expenses, you could deduct $4,800.
6,000 miles / 10,000 miles = 60% business use
60% x $8,000 = $4,800
When comparing the two methods, it would be more beneficial to use the actual expenses method rather than using the standard mileage rate. A good rule of thumb is to use the actual expenses method when you have vehicles with high operating costs and the standard mileage rate when you use vehicles with lower operating costs.
Record-Keeping Best Practices
Regardless of the chosen method, meticulous record-keeping is paramount when it comes to business vehicle deductions. Maintaining a comprehensive log of mileage, expenses, and the purpose of each trip is crucial for compliance with IRS regulations. Various apps and tools are available to simplify this process, ensuring that businesses can substantiate their claims in the event of an audit.
Considerations for Electric and Hybrid Vehicles
As businesses increasingly focus on sustainability, the choice of electric or hybrid vehicles deserves attention. The IRS provides incentives and credits for businesses that incorporate eco-friendly vehicles into their fleets. Understanding the tax advantages associated with these choices can further enhance the overall financial benefits of business vehicle use.
Strategic Fleet Management for Business Growth
Beyond tax considerations, strategically managing a fleet of vehicles is integral to business growth. Regular maintenance, efficient routing, and optimizing vehicle use contribute to cost savings and enhanced operational efficiency. Businesses should adopt a holistic approach to fleet management that aligns with their long-term goals and sustainability objectives.
Tax Relief for Businesses
The rules for taking the standard mileage rate or calculating actual vehicle expenses are mostly straightforward. Choosing the right vehicles, understanding the standard mileage rate, and navigating the process of deducting actual expenses are critical elements that businesses should master to maximize both efficiency and financial benefits. By strategically managing their vehicle use, businesses can drive not only towards their destinations but also towards sustainable growth and success. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
The desire or need for extra income has become increasingly prevalent. Running a small business can be a rewarding venture, allowing individuals to turn their passion into a source of income. However, it’s crucial to be aware of the Internal Revenue Service’s (IRS) perspective on small businesses, especially when they may be classified as hobbies. This distinction holds significant implications for tax treatment and deductions. In this article, we’ll explore the criteria the IRS uses to differentiate between a legitimate small business and a hobby.
What Does the IRS Consider a Small Business?
The IRS considers an activity a business if it’s “carried on with the reasonable expectation of earning a profit.” If you consider your activity a business, then you can deduct certain expenses on Schedule C. During the beginning stages of your activity, you may incur several “startup” costs like tools, materials, equipment, etc. that you can deduct during tax season. You may even be able to deduct the loss against your regular income. Some expenses are also limited in how they can be deducted, so it’s best to check with a tax preparer for clarification.
The Hobby Loss Rule
If your side activity doesn’t qualify as a business, it can be treated as a hobby. For example, if the activity is pursued for personal enjoyment or recreation, the IRS may classify it as a hobby. As of 2018, the IRS does not allow hobby expenses to be deducted from hobby income.
Internal Revenue Code Section 183: Activities Not Engaged in for Profit officially lays out a guide to determine if you are running a business or engaging in a hobby.
Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?
If you answer yes to several of these questions, it’s likely the IRS will view your activity as a business. You can also use the profitability test to determine if your activity is a business. Typically, the IRS will determine this by looking at your business activity to see if you earned a profit in three of the last five years, including the current tax year. If you did in fact earn a profit, the IRS will consider it a for-profit business.
History of Business Losses
A consistent history of losses in the business may raise concerns. Legitimate businesses are expected to show a potential for profitability over time. If there is a pattern of sustained losses, the IRS may question the true intent behind the business. If the IRS deems your business is a hobby, you will lose the privilege of deducting related expenses.
Tax Relief for Hobbyists and Business Owners
It is the responsibility of the taxpayer to know if they are operating a business or engaging in a hobby. Claiming ignorance will not be an acceptable excuse for underreporting income with the IRS. Keeping detailed records of income and expenses related to hobbies and businesses is essential to remaining compliant with tax law. Seeking professional advice can also be beneficial to navigate the complexities of IRS regulations. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
