Optima Newsletter – September

Optima Newsletter - September

Real Estate Investments & Tax Implications

Real estate investments can be very complex, especially when it comes to tax reporting. However, there are general tax implications for common scenarios. Here, we will discuss some of these benefits:

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What is Payroll Tax?

Who is responsible for payroll taxes? CEO David King and Lead Tax Attorney Philip Hwang discuss everything you need to know regarding payroll taxes, including tips on what to do if you find yourself in trouble with the IRS.

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Is My Side Business a Hobby or a Small Business?

The desire or need for extra income has become increasingly prevalent. Side gigs have been a popular method of supplementing earnings but with this comes more reporting during tax time. When is a side business treated as a business in the tax world, and when is it treated as a hobby?

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Converting Your Home to a Rental Property

Real estate has long been considered one of the greatest long-term investments. Further, with the trend of minimalist living, many are turning their primary residences into rental properties. While turning your home to a rental property comes with passive income and tax benefits, it’s important to note the tax implications as well.

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Optima Newsletter – August: What is the Inflation Reduction Act?

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What is the Inflation Reduction Act?

From a pandemic to inflation, American taxpayers haven’t been able to catch a break since 2020. To combat the current state of the economy, Senate has passed a new bill with a ten-year plan called the Inflation Reduction Act.

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How Filing an Extension Affects Your Taxes

With a massive increase in taxpayers filing for an extension, what does this mean for people who owe? How does the extension deadline work? Hosts CEO David King and Lead Tax Attorney Philip Hwang discuss these details and more in this week’s episode.

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Tax Rules for an Airbnb or Vacation Rental

Renting out your property as an Airbnb can be a good way to secure residual income. While Airbnb may send you a tax form at the end of the year, it’s important to understand your tax responsibilities to check for errors and in the event you aren’t issued a form.

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Filing Taxes as Head of Household

Do you provide over half the cost of living for your household? You may want to consider filing your taxes as head of household, which could qualify you for a higher standard deduction. Head-of-household filing status also provides lower tax rates than filing as single or married and filing separately.

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Inflation Reduction Act Part II: IRS Spending

Inflation

Between the inflation, the pandemic, and the Inflation Reduction Act, now is a scary time to owe back taxes. The bill has passed, granting the IRS $80 billion dollars in funds for their activity. We’re expecting a massive increase in the agency’s enforcement.

How will $80 billion impact the IRS?

The funds from the Inflation Reduction Act will be added on to the annual money the IRS receives from Congress, which was about $12.6 billion for 2022. The 50% increase will be paid across four departments over the next ten years.

More than half of the funds are specifically going toward enforcement activity. IRS enforcement includes collecting back taxes, conducting criminal investigations, legal support, and monitoring digital assets.The other three areas that will be supported include:

  • IRS operations- $25 billion for expenses such as rent, printing, postage, and telecommunications.
  • Customer service- $4.8 billion would be used for updating service technology. A callback service is in the talks.
  • Taxpayer assistance- $3 billion would go toward filing and account services, or other taxpayer needs.

What to expect from IRS collection activity

With a large budget provided by the Inflation Reduction Act, the IRS is expected to collect roughly $203 billion in federal tax revenue over the span of a decade. The net federal revenue would be raised by more than $124 billion.

Government officials are also expecting the tax gap to close. Meaning, the difference between the amount of taxes being collected and what taxpayers actually owe will be closer.

Are you prepared for increased collection activity?

If you haven’t started the process of tax debt relief, it’s not too late. Being prepared with a team of professionals that are already working on your compliance could spare you from more penalties, stress, and possibly help you save some money. Give Optima a call for a free consultation at 800-536-0734.

Download the Optima Tax App to analyze your IRS notice in the palm of your hand.

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Inflation Reduction Act Part I: What is it?

Inflation

From a pandemic to inflation, American taxpayers haven’t been able to catch a break since 2020. To combat the current state of the economy, Senate has passed a new bill with a ten-year plan. The Inflation Reduction Act is being sent to President Biden’s desk, requesting nearly $80 billion to the IRS.

What is the purpose of the Inflation Reduction Act?

While the funding will support the IRS, this will hopefully bring in more federal tax revenue to offset the cost of lowering prescription medicine and combating climate change. There are plans in motion to accomplish these goals, but federal funding to do so is lacking.

How will the IRS use these funds?

The IRS has been waiting for additional funding for years. In the last ten years, their activities have dwindled, and the agency’s budget decreased more than 15%. While IRS Commissioner Rettig has previously stated that the backlog will be complete by the end of 2022, there are still 11 million unprocessed tax returns.

The IRS will hire more staff and have access to more resources, such as legal representation for larger cases.

Cons of the Inflation Reduction Act

Naturally, more staff and resources for the IRS means more IRS enforcement. This act could trigger more audits for middle class businesses and individuals.

Outcome of the Inflation Reduction Act

Government officials have also stated that the goal is not to go after small businesses, but rather the large corporations and high net-worth individuals with high-end noncompliance.

Senior Fellow at the Urban-Brookings Tax Policy Center Janet Holzblatt was quoted as saying, “The goal should not only be to increase audits, but improve the productivity of audits. You want the IRS to select the businesses and people for audits who really have not been compliant.”

How the Inflation Reduction Act affects people who owe

With more IRS enforcement on the way, it’s better to be safe and get in compliance as soon as possible. Give Optima a call today for a free consultation at 800-536-0734.

Received a notice from the IRS? Use Optima’s Tax App to analyze it instantly!

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Tax Rules for an Airbnb or Vacation Rental

Tax rules

Renting out your property as an Airbnb can be a good way to secure residual income. While Airbnb may send you a tax form at the end of the year, it’s important to understand your tax responsibilities to check for errors and in the event you aren’t issued a form.

Reporting your Airbnb or vacation rental as income

The IRS requires that all payment processing companies (including Venmo, PayPal, and Airbnb) report gross earnings for all users within the US. If you earn $600 or more, and/or have 200 or more transactions for the year, Airbnb will issue Form 1099-K.

If you are not a US citizen but earned money from a vacation rental in the US, you will be provided Form W-8.

Withholding taxes from Airbnb payouts

You do have the option to withhold taxes from your Airbnb earnings, which is always recommended to avoid a large tax bill at the end of the year. You can also use a tax calculator to get an estimate of your earnings to save money for taxes.

Vacation home, rental, or personal use

To determine if your vacation property is a rental residence or being used for personal gain, you must identify how often the property is rented versus how often you reside there. Renting your property to someone that pays the fair market value while using the home as their primary residence would make it a rental property.

If you do not reside in the home and rent it frequently for short-term periods, it would be considered a vacation rental.

Should you find yourself residing in the home more frequently than you rent it, then you are using the home for personal use. The IRS requires that you still pay taxes on the money you earn from renting your property for 15 days or more out of the year.

Tax debt relief and filing assistance for Airbnb hosts

As a host, you may qualify for tax debt relief. Our tax professionals will review your case to determine the best course of action for your compliance. For a free consultation, you can call Optima at 800-536-0734.

Received a notice from the IRS? Try Optima’s Tax App to analyze your notice instantly!

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How Filing for an Extension Affects Your Taxes

With a massive increase in taxpayers filing for an extension, what does this mean for people who owe? How does the extension deadline work? Hosts CEO David King and Lead Tax Attorney Philip Hwang discuss these details and more in this week’s episode.

Got an IRS Notice? Get a FREE Risk Review with our Optima® TAX APP with Notice Analyzer.

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Filing Taxes as Head of Household: A Guide

head of household

Do you provide over half the cost of living for your household? You may want to consider filing your taxes as head of household, which could qualify you for a higher standard deduction. Head of household filing status also provides lower tax rates than filing as single or married and filing separately.

How can you qualify as Head of Household?

There are a few qualifying criteria to meet in order to file under head of household status:

  1. You must be single, divorced, or separated by the last day of the tax year.
  2. You are responsible for over half of your household’s living expenses.
  3. You have a child or qualifying dependent.

What are dependent qualifications?

Your dependent will be one of the following: a qualifying child or a qualifying relative.

Qualifying Child

To claim a qualifying child, the child must be part of your family. Some qualifying relationships include:

  • Your biological child
  • Your stepchild
  • Your foster child
  • Your sibling or half sibling
  • Step sibling
  • A descendent of either of the above (which includes grandchildren, nieces, and nephews)

The child must also be of a certain age. The IRS states that one of the following must be true of the child’s age:

  • They’re 18 or younger at the end of the year and younger than you or your spouse.
  • They’re 23 or younger at the end of the year, was a student and younger than you or your spouse. To qualify as a student, the child must be full-time for at least five months of the year in question.
  • The child can be over the age limit if they are diagnosed by a doctor as permanently disabled.

Another important key factor to claiming a dependent is that the child must live with you for more than half of the tax year. The IRS provides particular exceptions for temporary absences (such as extended hospital stay, college, or juvenile detention). Other exceptions include children of divorced or separated parents and children that were kidnapped.

Should the child in question get a job and provide at least half of their own financial support, you cannot claim them as a dependent.

The child can’t file a joint tax return with someone and be claimed as a dependent. The exception to this rule is if the child and their spouse file a joint return only to claim an income tax or estimated tax refund.

Last, but not least, the child must be a U.S. citizen, resident alien, U.S. national or a resident of Canada or Mexico.

Qualifying Relative

A second, broader category of dependents falls under the “qualifying relative” category. Although it is implied by the name, no familial relationship is actually required under this provision. In fact, a qualifying relative can be anyone who:

1) lives with the taxpayer all year,

2) made less than the exemption amount ($3,950 for 2014),

3) relied on the taxpayer for more than half their support and

4) is not a qualifying child of another taxpayer.

An important distinction between the qualifying child and qualifying relative categories are that the qualifying relative has no “age test”, but does have a “gross income test”.

Gross Income Test

Applying the gross income test correctly requires you to identify the type of dependent and the type of income received by that person. When applicable, the gross income test uses an income threshold that matches the exemption amount for the applicable year. In 2014 for example, that threshold (exemption) is $3,950.

First, the gross income test is primarily a concern for a qualifying relative, as the qualifying child dependent does not have to satisfy a gross income test. The following example is illustrative of this distinction:

In 2014, Junior (age 17) worked part-time for his father’s landscaping business and earned $5,000 for the year. Even though Junior’s income exceeded the $3,950 threshold amount, because he is under 19 years old and meets both the residency and support tests, his income does not disqualify him from being a qualifying child. However, if Junior was 22 years old in 2014 and not a full-time student, he would not qualify as a dependent under either category because he fails both the age test for a qualifying child and the income test for the qualifying relative.

Second, the type of income derived must be considered in the gross income test. Tax-exempt income, such as social security benefits or municipal bond interest, is not considered income for the gross income test. So for example, if a taxpayer provides more than half the support for her aged parent and the parent receives $15,000/yr in untaxed social security benefits, the parent would still qualify under the income test as a qualifying relative.

What kind of expenses are you responsible for as the Head of Household?

Taking responsibility for living expenses includes, but is not limited to:

  • Rent or mortgage
  • Utility bills
  • Insurance
  • Property taxes
  • Groceries
  • Repairs
  • Other household bills (internet, phone, etc.)

As head of household, you are required to be responsible for the listed expenses for over half of the tax year.

If your dependent is a parent, they are not required to live in the same household as you. The stipulation is that you maintain their cost of living. It’s important to note that if you are married and living in separate households, this does not qualify you for Head of Household status. You must be unmarried.

What does the IRS mean by “unmarried?”

Unmarried means that you’re filing a separate return and your spouse didn’t live with you for the last half of the year. Two people cannot file as head of household on the same return.

If you share a child (biological, stepchild, or foster) with your former spouse, your home should be the primary residence of the child to qualify for head of household status. If you are unable to claim the child as a dependent, this could make qualifying a bit more difficult.

Pros of filing as Head of Household

This filing status offers a better standard deduction amount than most others, even with a lower tax bracket. The deduction may not be as favorable as joint filing, but it’s a considerably larger deduction than filing single by roughly 50%. The standard deduction for 2021 head of household status was $18,800.

Tax debt and filing assistance for Head of Household status

Tax debt with the weight of other financial burdens can be a stressful ordeal. As a head of household filer, you may qualify for relief. Give Optima a call for a free consultation today at 800-536-0734.

Received an IRS notice? Try out the Optima Tax App to analyze your notice in the palm of your hand.

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Tax Tips for Remote Workers

remote workers

There has been a surge in remote work since 2020, qualifying employees for certain tax deductions.

Tax Deductions for Remote Workers

Generally, your home office must be used for the sole purpose of your work to qualify for deductions on your tax return. Expenses such as internet, phone bills, and similar items could also be for personal use. Items you might consider deducting would be a computer purchase for the sole use of your job, a special phone line, other equipment and materials required for your work, or maintenance for the upkeep of said equipment.

Another qualifying factor for a home office would be a space that is utilized specifically for meeting with clients. If your work requires you to have a physical space to host meetings, store inventory, or to conduct business that is not virtual, you may qualify for deductions when you file.

Leased Office Space for Remote Workers

As a self-employed or remote worker, you may have a separate space for your work. However, a leased office, or a workstation located on premises that is not your home would not qualify as a home office. The IRS will see this as an optional work environment.

Records and Receipts for Remote Workers

No matter your work location, it is imperative that you document and keep track of all records pertaining to work-related purchases. Receipts and records are the only tangible evidence of your expenses that can qualify you for deductions. You must know the exact dollar amount of your expenses; estimations of round, even numbers will often flag your return.

Too many round numbers for your expenses could trigger an audit.

Simplified and Direct Deductions: What’s the difference?

The simplified method for home office deductions is done by expensing $5 per square foot of your office, up to 300 square feet max. This method can qualify up to $1,500 in deductions.

The direct method requires you to track all your expenses and maintenance costs for your home office. This method allows you to qualify for a bigger deduction.

Tax Debt Relief for Remote Workers

Whether you work from home or in an office, Optima assists self-employed and W-2 workers with tax liabilities. Give us a call at 800-536-0734 for a free consultation today.

Download the Optima Tax App to analyze your IRS notice instantly.

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Optima Newsletter – July: How the Economy Affects Your Taxes

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How the Economy and Inflation Affect Your Taxes

The IRS updates certain tax provisions annually to account for inflation, so your tax and investment plans should change accordingly.

How to Avoid Having Your Tax Refund Garnished

CEO David King and Lead Tax Attorney Phil Hwang discuss these circumstances and what you should do if you’re thinking your refund could be at risk for IRS seizure. 

Trading Stocks and What it Means for Your Taxes

While stocks may seem like an effortless path toward financial stability, they do affect your taxes. Understanding what’s expected when you file can keep you out of trouble with the IRS.

Tax Reduction Strategies

While taxes are inevitable, you want to make sure that you’re not paying more than you have to. You can legally reduce your taxes by using strategies that you may not be aware of.

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The Fair Debt Collection Practices Act: What is it and how does is protect taxpayers?

fair debt collection

Being in debt is a stressful circumstance that collectors can often intensify with unfair practices. Therefore, the Fair Debt Collection Practices Act (FDCPA) prohibits companies from using such practices to collect debts from you.

What Does the FDCPA Cover?

Mortgages, credit cards, medical, and personal debts are all covered by the FDCPA. The collectors that are prohibited by this act include the following:

  • Collection agencies
  • Debt buyers
  • Lawyers who regularly collect debts as part of their business
  • Other entities that buy past-due debts from creditors to collect them

Business debts are not covered by the FDCPA. It also doesn’t cover collection by the original creditor that you’re indebted to.

FDCPA Communication Restrictions

Debt collectors are not allowed to contact you under certain circumstances.

  • Harassment: Debt collectors cannot harass you over the phone or by any other form of contact
  • Inconvenient Times: Debt collectors may not contact you at inappropriate hours or places. This includes before 8:00 a.m. and after 9:00 p.m. Contacting your place of work is also not allowed under the FDCPA.
  • Power of Attorney: Once you have attorney representation, the collector must cease contact with you. The attorney is now responsible as the main point of contact regarding your case. If you are contacted by a collector, you should inform them that you’re represented by an attorney and give them the attorney’s name.

Once you tell a collector to stop contacting you, they can only contact you to inform you that there will be no further contact, or to notify you that legal action (such as a lawsuit) is taking place.

Debt Information

The collector calling you for a payment is required by law to inform you about the debt. Things they should share include:

  • Identify the creditor (name and address of current or former creditor)
  • Amount owed
  • That you can dispute the debt

FDCPA and Tax Debt

The IRS must also abide by the Fair Debt Collection Practices Act. You have rights as a taxpayer that restricts their communication and enforcement practices. If you have unaffordable tax debt and need assistance with your case, give Optima a call for a free consultation at 800-536-0734.

Received a notice from the IRS? Download the Optima Tax App to analyze your notice instantly!

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