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How Tax Relief Works

how tax relief works

Owing the IRS can be one of the most stressful situations a taxpayer can face. Recent data shows that American taxpayers owed over $316 billion in back taxes, penalties, and interest as of the end of 2022. Much of this debt can be attributed to late filing, mathematical errors, and underreported income. Whatever the reason for owing taxes, many taxpayers may find themselves considering tax relief when their tax bills get too large to pay. Here’s an overview of what tax relief is and how it works.  

What Is Tax Relief? 

The phrase “tax relief” can mean many things. When speaking of tax debt, tax relief is when your tax debt is managed, settled through negotiations, or paid down with payment plans. Tax relief programs were created for taxpayers who cannot afford to pay their tax bills, as well as those who have overwhelming and overdue tax bills.  

How Does Tax Relief Work? 

Tax relief is not a “one-size-fits-all” program. Every tax relief program works differently, and the process will also differ depending on the individual taxpayer’s situation. Here we will review the most common tax relief policies and programs.  

Offer in Compromise (OIC) 

An OIC is the most popular form of tax relief as well as the least likely option for taxpayers since most OICs are denied by the IRS. An OIC allows you to settle your tax debt for less than what you owe. When selecting OIC candidates, the IRS will examine your ability to pay your tax bill, your income and expenses, and the value of your assets. 

Applying for an Offer in Compromise involves a detailed process, beginning with completing IRS Form 656, “Offer in Compromise.” Alongside this form, taxpayers must submit a comprehensive financial statement detailing income, expenses, assets, and liabilities. There are some basic requirements for an offer in compromise including:  

  • Must pay a $205 nonrefundable application fee  
  • Must make a nonrefundable initial payment  
  • Must be current on all tax returns  
  • Must not be in an open bankruptcy proceeding  

If the IRS deems that you cannot afford to pay your tax debt, or that paying your tax debt will result in financial hardship, then it may accept your offer in compromise. If this happens, they will cease collections.  

Currently-Not-Collectible (CNC) Status  

In some cases, you cannot afford both your tax bill and your expenses. If this happens, you can request a Currently Not Collectible status on your account, which delays collections. The IRS will request information regarding your income and expenses to determine your eligibility. If approved, the CNC status will temporarily cease collections on your account. However, they will continue to assess interest and penalties to your account. They will continue to review your income each year to determine if you are still eligible for CNC status. They can also still file a tax lien against you during this time and keep your tax refunds to apply them to your tax bill.  

IRS Installment Agreement 

An IRS installment agreement lets you pay your tax bill, plus accrued interest and penalties, over a set period. There are two types of IRS installment agreements: short-term and long-term. A short-term payment plan must be paid in 180 days or less. To qualify for a short-term installment agreement, you cannot owe more than $100,000 in combined tax, penalties and interest. A long-term payment plan can be paid over 180+ days. To qualify for a long-term installment agreement, you must not owe more than $50,000 in combined tax, penalties and interest. While an IRS installment agreement does not reduce your tax bill, or exclude you from penalties and interest, it might be your next best option to pay off your tax debt.   

Penalty Abatement 

Sometimes life gets in the way of responsibility. Maybe you didn’t file your taxes for one year, or you forgot to pay your tax bill. If you have an otherwise clean record with the IRS, you can request a first-time penalty abatement, which waives a tax penalty or refunds you for one already paid for. Typically, if you meet three requirements, you should qualify for this tax relief option. 

  1. You are current on your tax return filing. Tax extensions are fine.  
  2. You are current on your tax bill or have a payment plan in place. 
  3. You have a clean record with the IRS. This means no penalties during the three tax years before the year you received a penalty.  

If interest accrued from a failure-to-pay or a failure-to-file penalty, and you receive penalty abatement, then the interest associated with the penalty abatement will also be forgiven.   

How Do I Proceed with Tax Relief? 

If one of these tax relief options sounds like they can be of help to your tax situation, you should consider pursuing it. Most of these options require nothing to lose, financially speaking. Dealing with the IRS on your own can be intimidating, time-consuming, and stressful. Working with a tax professional offers several advantages over handling IRS matters independently. For one, tax professionals have expertise that goes beyond basic tax knowledge. This can help you minimize errors, save time and money, and optimize your tax planning. Perhaps the greatest benefit is knowing that a professional is handling the IRS on your behalf. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Hoping for the Child Tax Credit? Don’t Wait to File

Hoping for the Child Tax Credit? Don’t Wait to File

In a recent update, the U.S. House of Representatives has approved a bill that has the potential to grant families significant tax benefits. The aim is to strengthen tax breaks, offering substantial financial support to American households and leading to significant savings. Among the many items addressed in the bill is the expansion of the Child Tax Credit (CTC), a tax benefit designed to assist families with the cost of raising children. In this article, we’ll review the details of the CTC expansion and the next steps needed to pass the bill. 

What is the Child Tax Credit? 

The Child Tax Credit is a tax benefit provided to eligible families for each qualifying child under 17. It’s designed to help families with the cost of raising children by reducing their federal income tax liability. Eligible families can receive a credit of up to a certain amount per child. The amount may vary depending on factors such as income level and number of children. In some cases, the credit is partially refundable, meaning that families may receive a refund even if they owe no taxes. 

Eligibility Criteria  

The eligibility requirements for the Child Tax Credit (CTC) typically include the following criteria: 

  1. Age of Child: The child must be under the age of 17 at the end of the tax year for which the credit is being claimed. 
  1. Relationship: The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (such as a grandchild, niece, or nephew). 
  1. Dependent Status: The child must qualify as a dependent on the taxpayer’s federal income tax return. 
  1. Residency: The child must have lived with the taxpayer for more than half of the tax year. Certain exceptions apply for temporary absences, such as for school, vacation, medical care, or military service. 
  1. Citizenship: The child must be a U.S. citizen, U.S. national, or resident alien. 
  1. Support: The child must not provide more than half of their own support during the tax year. 
  1. Filing Status: The taxpayer must file as Single, Head of Household, Married Filing Jointly, or Qualifying Widow(er) with Dependent Child. 
  1. Income Limits: The taxpayer must have earned at least $2,500 but not more than $200,000 ($400,000 if filing jointly) to claim the full tax credit. Income over this amount will result in a partial credit. 

Proposed Expansion 

Under the proposed changes, the tax credit would remain fixed at $2,000 per child. However, the portion of the credit that is refundable would see an increase, potentially benefiting numerous families nationwide. The maximum refundable portion per child would rise from $1,600 to $1,800 in 2023, then to $1,900 in 2024, ultimately becoming fully refundable by 2025. Furthermore, the credit would be adjusted annually to account for inflation. When the House of Representatives voted on the bill in January 2023, it passed with overwhelming support from both Democrats and Republicans. The bill is waiting to see a vote from the Senate, which has yet to be scheduled.  

Don’t Wait to File Your 2024 Taxes 

The 2024 tax season is underway. However, the IRS has reported reduced tax filing activity compared to this time last year. That said, there are suspicions that this is because taxpayers are waiting to see what happens with the Child Tax Credit. Taxpayers are urged to file anyway. The IRS has publicly stated that if the Senate does pass the bipartisan bill, it could take anywhere from six to 12 weeks to implement the changes for the 2023 tax year. This means waiting could result in a late tax return, which means penalties and possible interest. Taxpayers can find relief in knowing that the IRS plans to issue additional refunds later for those who have filed if the bill is passed. No additional actions will be needed on the taxpayer’s end.  

Tax Help with the Child Tax Credit 

Taxpayers should not delay filing their taxes while waiting for the Child Tax Credit bill to be passed. It’s crucial to file taxes in a timely manner to avoid potential penalties or late fees. Additionally, the tax filing process can take time. Waiting until the last minute could lead to rushed or incomplete submissions. Furthermore, if the CTC bill is passed, the IRS will make sure eligible taxpayers receive their due refunds. Therefore, taxpayers should proceed with filing their taxes promptly, ensuring accuracy and compliance with current tax regulations, while remaining vigilant for any updates or changes in tax laws that may affect their eligibility for credits or deductions. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Tax Tips and Updates for the 2024 Filing Season

Tax season is in full swing. With several filing options and a potentially larger Child Tax Credit to claim, there’s a lot to know before you file. Optima CEO David King and Lead Tax Attorney Philip Hwang provide a comprehensive guide for the 2024 tax filing season and show you how you can get the most when filing your tax return. 

If You Need Tax Help in 2024, Contact Us Today for a Free Consultation 

Pensions: The General Rule vs. The Simplified Method

Pensions: The General Rule vs. The Simplified Method

Planning for retirement involves making crucial decisions about your finances, one of which includes understanding how to manage your pension. Pension plans often come with various options and methods for distribution, each with its own set of rules and implications. In this article, we’ll delve into taxable income for retirees. We’ll also compare two common methods for calculating pension and annuity taxable income: the General Rule and the Simplified Method. 

Taxes for Retirees 

When taxpayers reach retirement, most of their income will likely be from retirement distributions. While some distributions, like those from a Roth account, are not taxable, others are. For example, any contributions that your employer made to your retirement plan, or pre-tax contributions, are taxable. This means you pay taxes when you take the money from your retirement account as a distribution. If some contributions made to your pension or annuity plans were included in your gross income, you can exclude part of the distribution from your retirement income. How much will be determined using one of two methods: the General Rule or the Simplified Method. 

The General Rule 

The General Rule is a method used to calculate the taxable portion of pension or annuity payments. Under this rule, the taxpayer divides their investment in the contract by the expected return. This is calculated based on the taxpayer’s life expectancy. The resulting quotient represents the tax-free portion of each payment, while the remainder is considered taxable income. Taxpayers can use IRS Publication 939 to calculate the taxed portion of their pension.  

Advantages 

One of the key advantages of the General Rule is its flexibility. It allows retirees to customize their tax treatment based on their individual circumstances. These include age, life expectancy, and investment in the contract. This method is particularly beneficial for those with longer life expectancies or higher investment amounts. This is because it can result in a larger tax-free portion of their pension payments

Disadvantages 

The General Rule can be complex to calculate and may require assistance from financial advisors or tax professionals. Additionally, it may not always yield the most tax-efficient outcome, especially for retirees with shorter life expectancies or smaller investment amounts. 

The Simplified Method 

The Simplified Method offers a more straightforward approach to determining the taxable portion of pension or annuity payments. This method involves using a predetermined formula provided by the IRS. The formula considers the taxpayer’s age at the time of the first payment, the total expected return, and the length of the payout period. 

Advantages 

The Simplified Method is designed to make the tax calculation process easier for retirees by eliminating the need for complex calculations. It provides a standardized formula that applies to most pension plans. This makes it accessible to a broader range of individuals without requiring extensive financial expertise. 

Disadvantages 

While the Simplified Method offers simplicity and ease of use, it may not always result in the most tax-efficient outcome. This method does not account for individual factors such as life expectancy or investment in the contract, which could lead to a higher taxable portion of pension payments for some retirees

Limitations 

Some taxpayers will be restricted to only using the General Rule. If one of the following scenarios applies to you, you will need to use the General Rule to calculate the taxable portion of your pension.  

  • Your annuity or pension payments began on or before November 18, 1996 
  • Your annuity or pension payments began between July 1, 1986, and November 18, 1996, and you do not qualify for the Simplified Method 
  • Your annuity or pension payments began after November 18, 1996, you were 75 years or older on that date, and your payments were guaranteed for 5 years or more. 
  • You have received payments from a nonqualified plan 

In addition, you must use the Simplified Method if your plan meets all of the following requirements: 

  • Your annuity or pension payments began after November 18, 1998 
  • Your annuity or pension payments were from a qualified employee plan or annuity, or a tax-sheltered annuity plan, such as a 403(b) plan 
  • You must be under 75 years old when the payments begin. If you are 75 or older, your guaranteed payments cannot last 5 or more years. 

Comparison 

When comparing the General Rule and the Simplified Method, it’s essential for retirees to consider their unique financial circumstances. The General Rule offers flexibility and customization but may require more effort to calculate accurately. In contrast, the Simplified Method provides simplicity and ease of use but may not always optimize tax efficiency. 

Ultimately, the choice between these two methods depends on factors such as age, life expectancy, investment amount, and personal preferences. Retirees are encouraged to consult with financial advisors or tax professionals to determine which method aligns best with their individual needs and objectives. 

Tax Help for Those with Pensions and Annuities 

Managing pension distributions is a critical aspect of retirement planning, and understanding the differences between the General Rule and the Simplified Method is essential for making informed decisions. While both methods offer their own advantages and limitations, retirees must carefully evaluate their options to ensure they maximize their retirement income while minimizing tax liabilities. By seeking guidance from financial experts and considering their unique circumstances, retirees can navigate the complexities of pension distributions with confidence and peace of mind. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation 

Power of Attorney Explained

Power of Attorney Explained

Tax management can be a complex and difficult task. This is especially true when faced with unexpected circumstances such as illness, travel, or other personal challenges. In such situations, having a trusted representative to handle tax-related matters can provide invaluable support. A power of attorney (POA) is a legal instrument that empowers an appointed individual to act on behalf of another person. It grants them authority over various financial and legal affairs. This article explores the ways in which a power of attorney can be leveraged to facilitate tax management and ensure compliance while offering peace of mind to individuals facing challenging circumstances. 

Who Can Represent Me Before the IRS? 

Your representative must be eligible to practice before the IRS. These individuals include enrolled agents, CPAs, or attorneys. You can also have enrolled retirement plan agents, enrolled actuaries, unenrolled tax preparers, family members, employees, or even Low Income Taxpayer Clinic (LITC) representatives.  

It’s crucial to choose a representative who is knowledgeable about tax matters and capable of effectively advocating on your behalf. Whether you’re facing an audit, tax dispute, or other IRS proceedings, having a competent representative can help navigate the process and ensure your rights are protected. 

What Privileges Does My POA Give? 

With a POA, your chosen representative can deal with your tax matters before the IRS. Here are a few ways they can do this. 

Handling Tax Filings and Correspondence 

One of the primary benefits of a POA in tax matters is the ability to delegate the responsibility of filing tax returns and corresponding with tax authorities. By appointing a trusted agent through a power of attorney, individuals can ensure that their tax obligations are met accurately and on time. This is critical if they are unable to manage these tasks themselves due to illness, travel, or other reasons. 

Representing the Taxpayer Before Tax Authorities 

A power of attorney authorizes the appointed agent to represent the taxpayer before the IRS or state revenue agencies. This representation includes the ability to communicate with tax authorities, respond to inquiries, provide information, and negotiate on behalf of the taxpayer in various tax matters, including audits, appeals, and collections. 

Making Tax-Related Decisions 

A power of attorney can grant the agent the authority to make certain tax-related decisions on behalf of the taxpayer. This may include decisions related to tax planning. These may include the timing of asset sales or deductions, and decisions regarding tax disputes or settlements

Accessing Tax Information 

With a power of attorney in place, the appointed agent can access the taxpayer’s tax information, including tax returns, transcripts, and other relevant documents. This access allows the agent to effectively manage the taxpayer’s tax affairs, gather necessary information for tax filings, and address any issues that may arise. 

Ensuring Continuity of Tax Management 

A POA provides continuity in tax management. This ensures that tax obligations are fulfilled even if the taxpayer is incapacitated or absent. By appointing a trusted agent through a power of attorney, individuals can have confidence that their tax affairs will be managed according to their wishes and in their best interests. 

Keep in mind, however, that having a POA does not mean you’re off the hook for your tax obligations. It just means you have someone else to help you tackle the IRS.  

How Do I Authorize a POA? 

The easiest way to authorize someone to represent you before the IRS is to submit a POA authorization in your IRS online account. Alternatively, you can complete and submit Form 2848, Power of Attorney and Declaration of Representative. This form grants your chosen representative the authority to handle your tax affairs, including discussing your tax matters with the IRS, receiving confidential information, and signing documents on your behalf. 

When designating a representative through a power of attorney, it’s essential to provide accurate information and specify the scope of their authority. The IRS typically requires specific information. You’ll need the representative’s name, address, and taxpayer identification number (usually a Social Security number or an Employer Identification Number). You’ll also need details about the tax matters they are authorized to address. 

How Long is a POA Valid? 

A power of attorney will stay in effect until you revoke the authorization. Your representative can also withdraw it on their own. This can be done by authorizing a new representative or by sending a revocation to the IRS. This basically involves writing “REVOKE” on the top of the first page of Form 2848 with your signature and date below it. You must then mail or fax a copy of this form to the IRS. If your representative is the one withdrawing the POA, they would follow the same instructions but instead write “WITHDRAW” on the top of the first page of Form 2848. 

Tax Help for Those Looking for Tax Representation 

In summary, a power of attorney can be a valuable tool for tax management. It provides individuals with the flexibility to delegate tax-related responsibilities to a trusted representative. Whatever challenges, having a designated agent to handle tax matters can offer peace of mind and ensure tax compliance. By understanding the benefits of a power of attorney in tax management and leveraging this legal instrument effectively, individuals can navigate tax-related challenges with confidence and ease. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.  

If You Need Tax Help, Contact Us Today for a Free Consultation