Should I File a Tax Extension?

should i file a tax extension

The tax filing deadline is just around the corner. If you need more time to prepare your tax return, you can file a tax extension. While a tax extension won’t give you more time to pay your taxes, it will allow a few more months to file your tax return without receiving a failure-to-file penalty. Here’s an overview of how tax extensions work and how to file one.  

What is a Tax Extension? 

The IRS allows taxpayers to file for a tax extension, which gives them more time to prepare their tax returns. If approved for a tax extension, the new tax deadline would be October 16, 2023. You can file for a tax extension for any reason and the IRS will approve it as long as you submit Form 4868 by the April 18th tax deadline. While some states accept federal tax extension forms, others have their own requirements for obtaining an extension. Some states like California, Wisconsin, and Alabama offer automatic extensions, which means you don’t have to file a form. Other states require you to request an extension. You can check with your own state tax authority for more information on this. 

Does a Tax Extension Delay My Tax Payments? 

While a tax extension won’t delay the deadline to pay taxes, it will allow a few more months to file your tax return without receiving a failure-to-file penalty. That said, you might be wondering how much tax to pay if you aren’t sure how much you will owe, if any at all. In this case, you’ll need to estimate the amount of tax you will owe and pay that amount by April 18. If you do not, the IRS will begin to charge you interest on the balance owed, plus penalties. The failure-to-pay penalty is 0.5% of the tax owed after April 18, for every month or part of a month the tax remains unpaid, up to 25%.  

To calculate your estimated tax payment, you’ll need to first calculate your taxable income and then subtract tax deductions, or the standard deduction. The amount leftover should be an estimate of your taxable income for the year. Then you can apply your tax rate determined by your tax bracket, which is based on your taxable income and filing status. This should help you find the amount of tax owed for the year. Tax withholding should cover most, if not all, of this amount. If it does not, you can offset this amount by claiming tax credits you are eligible for. The tax remaining should be paid at the April tax deadline. If you overpay, you will receive a tax refund when you file before the October extension deadline. If you underpay, you will owe the balance, plus an underpayment penalty. The IRS advises taxpayers to pay either 90% of the current year’s tax or 100% of last year’s tax, whichever is less. Doing so should help you avoid the underpayment penalty. 

Should I File a Tax Extension? 

If you are certain that you cannot file your tax return by the April 18 deadline this year, then you should at the very least file a tax extension before the tax deadline. This can immediately save you the trouble of dealing with a failure-to-file penalty. The current failure-to-file penalty can be up to 25% of the tax due. This penalty will not be charged if you file an extension, but it will be if you do not file a return by the extension deadline of October 16. Additionally, you should make sure you pay estimated taxes by the April 18 deadline to avoid the failure-to-pay penalty. Filing a tax extension can be very helpful if you are still awaiting important tax documents, need some documents corrected, or just simply do not have time to file before the deadline. If you are wondering if you should file an extension because you owe taxes and you are unable to pay, filing an extension may not be a good idea. Instead, you might consider getting a payment plan or installment agreement set up with the IRS. We know dealing with the IRS on your own can be intimidating. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt. If you need tax help, we can assist.  

Contact Us Today for a Free Consultation 

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Why is My Refund Smaller This Year?

why is my refund smaller this year

The average tax refund so far in 2023 has been just over $1,960, which is about 11% lower than last year. Tax professionals are warning taxpayers of potential “tax refund shock” and urge them to prepare for smaller tax refunds in 2023. Here’s a breakdown of what caused the decrease in the average tax refund amount. 

Tax Credits Are Back to Pre-Pandemic Level 

According to IRS data, American taxpayers saw an increase in their tax refunds in 2021, from an average of $2,549 to an average of $2,815. 2022 saw an even larger increase with an average tax refund of $3,252. These amounts can be credited to the COVID-era tax credits related to children, dependents, charitable deductions, and more. However, the IRS issued a statement urging taxpayers to prepare for lower refunds in 2023 due to the end of stimulus payments and changes to charitable contribution deductions. 

The Child Tax Credit (CTC) provided up to $3,600 per qualifying child in 2021 for working parents with certain qualifications. In 2022, the credit was reduced to $2,000 per qualifying child but still helped American families. However, the payments only went to families that earned enough income to owe taxes, so only the poorest U.S. households benefitted from the credit. This could be devastating to families relying on the credit, especially after data showed the CTC lifted nearly 3 million children out of poverty in 2021 at its peak level. 

In addition, the Child and Dependent Care Expenses Tax Credit (CDCTC) returned to a maximum of $2,100 in 2022, a huge decrease from 2021 levels of $8,000. This credit was especially helpful to parents and guardians who had daycare, babysitting, or other care provider expenses. 

The Earned Income Tax Credit (EITC) dropped from 2021 levels of $1,500 to just $560, but up to $6,935. Certain charitable donations are also no longer deductible up to $600 as it was in previous years. 

The United States saw a massive trend of layoffs in 2022. However, severance payments were taxable this year, unlike during the pandemic-era layoffs. Finally, the end to COVID-19 stimulus payments also meant no way to claim credits for stimulus payments. 

The issue here is that the end of these helpful tax breaks comes during a time of the highest inflation the U.S. has seen in four decades, making it difficult for taxpayers to rely on their tax refunds for financial relief as they normally do. Nearly one third of Americans rely on their tax refunds to make ends meet. 

How Can I Increase My Tax Refund Next Year? 

While some people prefer to keep more of their paychecks during the year, others prefer to have a greater tax refund once a year. One way to do this is to have more taxes withheld from your paycheck. You can submit a new W-4 to your employer at any time during the year. It’s important to note that your W-4 should be reviewed and resubmitted when you have a personal or financial change in life. Other than this adjustment, you can take advantage of traditional IRA contribution deductions or max out your Health Savings Account (HSA) contributions. With just a short amount of time before the April 18th tax filing deadline, you’ll want to ensure that you file a complete and accurate return as soon as possible. If you need tax help, Optima is here to assist. Contact us for a free, no-obligation consultation with one of our knowledgeable tax professionals today. 

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What is the IRS Collection Statute of Limitations?

What is the IRS Collection Statute of Limitations?

They say that death and taxes are the only two certainties in life. However, taxes are only collectible for so long. Did you know there is a statute of limitations for IRS collections? Here’s an overview of how the IRS statute of limitations works. 

How Long is the IRS Collection Statute of Limitations? 

The IRS has a 10-year statute of limitations for tax collections, beginning when the IRS first assesses your tax liabilities. In other words, the IRS cannot collect tax debt that is older than 10 years. You should keep in mind that the first IRS notice you receive is not necessarily when your liabilities are assessed. Specifically, there is a Collection Statute Expiration Date (CSED), which marks the last day the IRS can collect tax debt. After the CSED, the IRS cannot legally collect your tax debt, which means that your tax debt essentially disappears. 

If you want to find your CSED, you can count 10 years from the date on your Notice of Federal Tax Lien. You can also request a transcript of your IRS account to find the date your liability was assessed and filed. Keep in mind that there are several actions that can delay the statute of limitations, thus pushing out your CSED.  

Which Actions Extend a CSED? 

There are several qualifying events that can extend a CSED, including: 

  • Filing for bankruptcy: The IRS will pause the statute of limitations while your bankruptcy filing is pending, beginning from the filing date until the court makes a decision. The CSED will remain suspended for an additional six months.  
  • Living abroad: The IRS will pause the statute of limitations while you live abroad for six consecutive months or longer. The CSED will remain suspended for six months after you return to the United States. 
  • IRS installment agreement: The IRS will pause the statute of limitations while it reviews your installment agreement application. If the agreement is rejected, the CSED will remain suspended for 30 more days. This is also the case if your installment agreement defaults. If you appeal your rejection, the CSED will remain suspended until a decision is final. 
  • Offer in compromise: The IRS will pause the statute of limitations while it reviews your OIC application. Once a decision is made, the suspension ends. If your offer is rejected, your CSED will remain suspended for 30 more days. 
  • Innocent spouse relief: The IRS will extend the CSED until the 90-day petition expires. If you appeal the tax court decision, the statute of limitations will be suspended until a final decision is made, plus an additional 60 days. 
  • Taxpayer assistance order: The IRS will pause the statute of limitations while it reviews your submitted Form 911, Request for Taxpayer Advocate Service Assistance and Application for Taxpayer Assistance Order.  
  • Collection Due Process (CDP) hearing: The IRS will pause the statute of limitations while it reviews your request to stop a levy or remove a lien until a determination is made or until you withdraw your request.  
  • Military deferment: The IRS will pause the statute of limitations during military service and for an additional 270 days afterward. If you serve in a combat zone the CSED will be suspended for up to 180 days after military service. 
  • Being sued by the IRS: While this event rarely happens, the IRS will pause the statute of limitations during the court proceedings. 

Can I Ignore My Tax Debt Until the IRS Collection Statute Expires? 

You might be enticed to just wait out the IRS collection statute of limitations. However, this strategy is generally not recommended since it would mean ignoring your growing tax bill and IRS notices. Under these circumstances, simple actions like getting a job, purchasing a home, registering a vehicle, and operating a business would be very difficult. Working with the IRS will typically be your best option, but doing so alone can be tedious, intimidating, and stressful. Working with a credible and experienced tax relief company can help save time, money, and stress. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt. If you need tax help, contact us for a free, no-obligation tax consultation today. 

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How IRS Installment Agreements Work

how irs installment agreements work

When most people first examine tax relief options, they might have their hopes set on an offer in compromise – or their tax debt settled for less than what they owe. Unfortunately, OICs are more often denied by the IRS than they are accepted. When tax debt becomes too much to manage, an IRS installment agreement might be your best option. Here’s an overview of how IRS installment agreements work. 

What Is an IRS Installment Agreement? 

An installment agreement is a payment plan set up with the IRS to pay your tax bill over a set period of time. The installment agreement will bundle all taxes owed if you owe tax for more than a year. That said, you cannot have two installment agreements with the IRS. During this time, the IRS will generally stop levying. Collections are typically ceased or prolonged while the installment agreement is pending until it can be approved or rejected. However, the IRS will typically keep any tax refunds you receive and apply them to your tax bill. If the installment agreement request is rejected, collections will be suspended for 30 days. Every taxpayer has the right to appeal a rejection, in which case collections will be suspended until a decision is made on the appeal.  

What IRS Installment Agreements Are Available? 

The IRS offers both short-term and long-term installment agreements. Let’s review the eligibility criteria, terms, and costs for both. 

Short-Term Installment Agreement 

With a short-term installment agreement, you will need to pay your full tax bill within 180 days or less. This option is available to taxpayers who owe less than $100,000 in combined tax, penalties and interest. To qualify, you must be current on all tax returns. Individual taxpayers, including sole proprietors and independent contractors, can apply online, over the phone, via mail or in person for free. It’s important to note that interest will continue to accrue while you’re making payments. The current interest rate is 7% per year, compounded daily. Some penalties will also still apply. 

In general, the IRS will ask how much you can afford to pay each month. Once a monthly payment is finalized, payments can be made through automatic bank account withdrawals, also known as a Direct Debit installment agreement. You can also make non-automated payments online or by phone, or via check, money order, or a debit or credit card. Payments made with debit or credit cards will also be charged with a processing fee. Debit card processing fees are about $2-4 per payment while credit card processing fees can be up to 2% of the payment. You can review your installment agreement details through your online IRS account. You can also make some changes to your agreement online including your monthly payment, monthly due date, bank information, and more.  

Long-Term Installment Agreement 

With a long-term installment agreement, you can pay your full tax bill in over 180 days. This option is available to taxpayers who owe less than $50,000 in combined tax, penalties and interest. To qualify, you must be current on all tax returns. Individual taxpayers, including sole proprietors and independent contractors, can apply online, over the phone, via mail or in person for free. It’s important to note that interest will continue to accrue while you’re making payments. The current interest rate is 7% per year, compounded daily. Some penalties will also still apply. 

The fees for a long-term installment agreement are more substantial. If you want to pay monthly through automatic withdrawals, there is a $31 online setup fee, or a $107 setup fee to apply by phone, mail or in person. If you are considered low-income, you might be able to get this fee waived. If you want to make monthly non-automated payments, you will need to pay a $130 online set up ($43 for low-income taxpayers), or $225 to apply by phone, mail or in person. There is also a $10 fee to revise an existing installment plan or to reinstate after defaulting. This fee may be reimbursed for low-income taxpayers.  

Businesses are also eligible for long-term installment agreements if they are current on all tax returns and owe $25,000 or less in combined tax, interest and penalties. The same setup fees apply to businesses. 

For debt less than $50,000, you will typically have a maximum of 72 months to pay off your tax bill. Your minimum payment can be found by taking your tax balance and dividing it by 72 months. If you find that you won’t be able to pay this calculated amount each month, you’ll need to complete Form 433-F, Collection Information Statement, which obtains your current financial information to determine how to pay your tax bill. 

For debt greater than $50,000, you will usually need to submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, which obtains your current financial information to determine how to pay your tax bill. The IRS will also examine any meaningful assets you have that can be sold to pay down your balance and then set up an installment agreement. 

Tax Help for Those Seeking an Installment Agreement 

If you know you won’t qualify for tax debt settlement, an IRS installment agreement may be your best option to help manage your tax debt. An IRS installment agreement can truly be helpful to many taxpayers struggling with their tax debt. The most important thing to remember is to always make your installment agreement payment. If you default on your agreement, it may be terminated, and the IRS may begin enforcement actions. Be sure the installment agreement terms are viable for your own financial situation. Optima Tax Relief has over a decade of experience helping taxpayers get back on track with their tax debt. If you need tax help, contact us for a free, no-obligation tax consultation today. 

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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 $114 billion in back taxes, penalties, and interest in 2020. 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. 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 CNC 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 allows you to pay your tax bill, plus accrued interest and penalties, over a set period of time. 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 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.  
  1. You are current on your tax bill or have a payment plan in place. 
  1. 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. 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 for a free, no-obligation tax consultation today. 

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Optima Continues its Winning Run of Customer Service Team of the Year in Financial Services

2023 stevie award winners optima tax reliefThe company’s exemplary customer service team was recognized for the fourth straight year. 

Optima Tax Relief, the leading nationwide tax resolution firm, is proud to announce that it has won four Stevie® Awards for excellence in customer service and technology. The Stevie Awards for Sales & Customer Service are one of the world’s top honors for sales, customer service, and call center professionals. This year’s awards include: 

  • Frontline Customer Service Team of the Year (Gold) 
  • Customer Service Department of the Year – 100+ employees (first-time finalist) (Gold) 
  • Innovation in Customer Service – Financial Services (Silver) 
  • Best Use of Technology – Customer Service (Silver) 

Optima Tax Relief’s Customer Service Team was recognized for its outstanding performance in handling customer inquiries, providing timely and accurate information, and resolving customer issues with the utmost professionalism and care. It is Optima’s fourth year in a row receiving the gold Frontline Customer Service Team of the Year award for the financial services industry, and their first time winning the gold award for Customer Service Department of the Year (100+ employees). The team’s commitment to excellence has helped to establish Optima Tax Relief as a trusted name in tax resolution among clients.  

David King, CEO of Optima Tax Relief, expressed his gratitude for the honors stating, “We are thrilled to continue our remarkable streak of success in the area that matters most to us, service. We recognize that most customers would prefer not to need Optima’s services, so we take great pride ensuring they are taken care of when they do.  It will be difficult to continue this unprecedented run amongst some of the best brands in the world, but we will have fun taking a run at it.” 

Chief Customer Officer, Christine Bui added, “These awards are a testament to not only the innovative ways our team delivers exceptional customer service but also the high level of care our team provides for each of our clients.  Regardless of what may be going on in their personal lives, our staff consistently shows up for our clients and helps them navigate through a very challenging time in their lives.  I am proud of our team and their dedication to providing our clients with the best possible experience.”   

Optima’s use of technology also helped them lead their industry in innovation. The Innovation in Customer Service – Financial Services silver award was given to Optima Tax Relief for its innovative approach to customer service, which includes the use of cutting-edge technology to provide clients with fast and efficient service. The company has developed a range of tools and platforms that enable its customer service representatives to deliver exceptional service to clients, including intelligent call routing, an enhanced client portal, and improved systems. 

More than 2,300 nominations from organizations of all sizes and in virtually every industry were evaluated in this year’s competition. Finalists were determined by the average scores of more than 170 professionals worldwide in seven specialized judging committees. Entries were considered in more than 60 categories for customer service and contact center achievements, including Contact Center of the Year, Award for Innovation in Customer Service, and Customer Service Department of the Year; 60 categories for sales and business development achievements, ranging from Senior Sales Executive of the Year to Sales Training or Business Development Executive of the Year to Sales Department of the Year; and categories to recognize new products and services and solution providers, among others. Winners were announced at the awards gala held on Friday, March 3 at Caesars Palace in Las Vegas. 

Details about the Stevie Awards for Sales & Customer Service and the list of Stevie winners in all categories are available at https://stevieawards.com/Sales.

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How to Avoid Tax Scams & Fraud

how to avoid tax scams and fraud

Tax scams have become one of the most popular ways criminals steal money and identities. The IRS flagged over $5.7 billion in tax fraud last year and 2023 is not looking any better with so many tax scams circulating. Luckily, there are ways to help avoid tax scams and fraud. Here are the most common tax scams in 2023 and how you can avoid them. 

What Are Tax Scams & Fraud? 

Tax scams are when criminals use stolen information, like your name, address, birthdate or Social Security Number (SSN), to file a phony tax return. The criminals then steal your refund and leave you with the burden of dealing with the IRS. Tax scams happen all year long but especially during tax season. 

Most Common Tax Scams in 2023 

According to the IRS, there are a handful of popular scams that you should be wary of in 2023.  

IRS Impersonation Scams: Criminals will ask for personal or financial information through unsolicited emails, phone calls, or text messages. Sometimes, scammers will send malicious links via email that entices you to click on it. This action prompts a download of identity-stealing malware onto your computer. 

Ghost Tax Preparer Scams: Scammers pose as tax preparers and file your tax returns but do not sign the return or include a preparer tax ID number (PTIN). During the process, they can steal your identity and/or your tax refund. 

Social Media Tax Scams: Criminals use your social media information to get other personal information. They might pose as a friend or relative to ask for money or donations. Alternatively, they can send messages that contain malware to steal your identity. 

Fraudulent Unemployment Claim Scams: Scammers attempt to steal personal information to claim unemployment benefits on your behalf. You may not realize you were scammed until you receive a Form 1099-G at the end of the year. 

Phony Charity Request Scams: Thieves set up phony charities to steal personal information or donations. These fake charities will not have an actual employer identification number (EIN), which is required to verify the existence of a charity. 

Economic Impact Payment Scams: COVID-19 stimulus checks have stopped being sent out, but scammers are still sending malicious text messages, phone calls, and emails to request bank account information. They lead you to believe you will receive a new stimulus check, when really they are stealing your personal and financial information. 

How to Avoid Tax Scams & Fraud 

Knowing how the IRS operates can be the best way to protect yourself against tax scams and fraud. For example, the IRS will reach out to you initially through regular mail through the U.S. Postal Service. If your IRS notice looks suspicious, you can go on the IRS website to search for the letter or notice and confirm its authenticity. The IRS does make phone calls to taxpayers but never threatens legal action or requests payment information over the phone. If you receive a suspicious email or text claiming to be from the IRS, do not reply, click on any links, or open any attachments. If in doubt, you can call the IRS yourself to communicate your concerns. 

Most importantly, you should report all tax scams. Just because you might recognize the scam immediately, it does not mean everyone else will. Reporting the scams can potentially help thousands of other taxpayers. Here’s a breakdown of what to do if you think you are being scammed. 

If you receive a suspicious email about your taxes, forward the email to phishing@irs.gov. 

If you receive a phony call, email a summary of the occurrence to phishing@irs.gov. 

If you clicked on a link within a suspicious email, or entered personal information, report the incident on the IRS Identity Theft Central webpage. 

If you receive a suspicious text message about your taxes, you can forward it to 202-552-1226. 

If you were scammed by your tax preparer, or believe your tax preparer is not following IRS rules, you can report them with Form 3949-A, Information Referral. 

If you receive a bogus form from a financial institution, you should report the incident to the financial institution directly.  

It’s better to be safe than sorry in these scenarios, so always report when in doubt. Not doing so can lead to several issues with the IRS that can take months to correct. Dealing with the IRS under any circumstances can be tough. If you need tax help, Optima and our team of experts are here. Contact us for a free consultation. 

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An Overview of Estate & Inheritance Taxes

an overview of estate and inheritance taxes

Sometimes after the death of a loved one, we are left to deal with grief, funeral planning, and an estate. In some cases, we inherit assets from a deceased loved one. Unfortunately, not much in this life comes for free, and even the things we inherit can cost us. In this article, we will take a closer look at estate and inheritance taxes, including who is affected by them and how they work. 

What Are Estate Taxes? 

Estate taxes are federal taxes levied on the entire taxable estate of a deceased individual. The tax is calculated based on the asset’s current market value. The IRS exempts estates worth less than $12.06 million in 2022 and $12.92 million in 2023. The amounts are per person. Estates worth more than these amounts are taxed according to the following rates: 

  • 18% tax rate: $0 to $10,000 
  • 20% tax rate: $10,001 to $20,000 
  • 22% tax rate: $20,001 to $40,000 
  • 24% tax rate: $40,001 to $60,000 
  • 26% tax rate: $60,001 to $80,000 
  • 28% tax rate: $80,001 to $100,000 
  • 30% tax rate: $100,001 to $150,000 
  • 32% tax rate: $150,001 to $250,000 
  • 34% tax rate: $250,001 to $500,000 
  • 37% tax rate: $500,001 to $7500,000 
  • 39% tax rate: $750,001 to $1,000,000 
  • 40% tax rate: $1,000,001 and up 

Some states impose their own estate taxes, but in general, your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS. The states that impose an estate tax are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. 

Federal and state taxes are paid from the assets of the estate before they can be distributed to beneficiaries. Typically, the executor of the estate will ensure all taxes are paid from the estate, confirm there are no other liabilities needed to be paid, and then distribute the remaining assets.  

What Are Inheritance Taxes? 

Inheritance taxes are state taxes that are levied on the assets of a deceased individual. These taxes are typically paid by the heirs or beneficiaries of the estate, and the amount owed is calculated based on the total value of the estate.  The assets can be anything from money to stocks to property. Currently, six states impose an inheritance tax:  

  • Iowa: 0% – 15%  
  • Kentucky: 0% – 16% 
  • Maryland: 0% – 10% 
  • Nebraska: 0% – 18% 
  • New Jersey: 0% – 16% 
  • Pennsylvania: 0% – 15% 

Iowa is preparing to eliminate its inheritance tax for deaths on or after January 1, 2025. The tax rate you pay is typically determined by your relationship to the decedent. Surviving spouses are almost always exempt from this tax, and in some states, so are sons, daughters, and parents of the deceased. Usually, you will pay a higher rate if you had no familial relationship to the decedent. 

Inheritance taxes come into effect after the estate has been divided and distributed to the appropriate beneficiaries. Typically, each state will have their own exemption rules, meaning that the assets inherited are taxed after they reach a certain value. For example, if your state imposes a 5% tax on inheritances larger than $3 million, and you inherited $5 million in assets, you will pay tax on $2 million. 

How Can I Reduce Estate and Inheritance Taxes? 

We know taxes are the furthest thing from your mind when grieving the death of a loved one. Alternatively, preparing a will should not have to result in worry over your loved ones paying taxes once you’re gone. If you are planning to leave behind assets for your loved ones after death, you can reduce estate taxes using a few methods. You can pay for educational or medical expenses from your estate and the payments will be exempt from taxes as long as the funds go directly to the provider. Also, setting up an irrevocable trust or life insurance trust (ILIT) can help ensure that assets are not used to pay taxes. A team of expert tax professionals can help. Contact us for a free, no-obligation tax consultation today.  

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What is Supplemental Income?

what is supplemental income

These days it is very common for individuals to have regular income, as well as supplemental income. While regular income earned through an employer typically has taxes withheld, some supplemental income does not. If you earn supplemental income, it’s important to learn how it is taxed and when. Here is a brief overview of supplemental income tax.  

What Is Supplemental Income? 

Supplemental income is any money earned on top of your regular income. Even if you only work a regular 9 to 5 job, you may still earn supplemental income through any of the following sources: 

  • Bonuses 
  • Overtime pay 
  • Commissions 
  • Tips 
  • Prizes or awards 
  • Severance pay 
  • Back pay 
  • Payments for paid time off 
  • Taxable fringe benefits 

Some taxpayers do not have regular income through an employer. Some may earn supplemental income through contract work or through a business. Some examples of supplemental income for these groups are: 

  • Schedule E income  
  • Ridesharing service 
  • Sales made through an online shop 
  • Direct sales 

How Is Supplemental Income Taxed? 

How supplemental income is taxed depends on how the income is classified. Income reported on Schedule E will usually consist of estates, trust, real estate rental income, royalties, partnership and S corporation income, and residual interests in real estate mortgage investment conduits (REMICs). Many of these income sources are taxed differently. 

Estates and Trusts 

Beneficiaries pay tax on the income of the estate or trust they inherit at their regular income tax rates and at capital gains rates for any capital gains they receive. In addition, if the estate or trust does not distribute all the income to the beneficiaries it will pay tax on any undistributed income. 

Royalties 

If you are paid royalties for the use of any of your intangible assets, you will receive a Form 1099-MISC that tells you the amount of royalties to report on Schedule E. These royalties are taxed at your regular income tax rate. 

Business Income from Partnerships and S-Corps 

Taxes for S-Corps are passed through to shareholders, while taxes for partnerships are passed through to the partner’s personal income. The tax rate will depend on personal income rates.  

Real Estate Rental Income 

The tax rate for rental real estate varies from 10% to 37%, depending on your filing status and taxable income.  

Supplemental income for employees is based on personal income tax rates. However, the amount withheld will vary depending on whether your employer pays it out with your regular wages or separately. If it’s combined with your wages, the amount withheld will typically be like the way your wages are withheld. If they are paid out separately, employers can withhold at the IRS’s flat rate of 22%. If you are fortunate enough to earn $1 million in supplemental income, it will be taxed at 37%.  

Supplemental income earned through gig, contract, or freelance work should be reported on your individual tax return using Schedule C. If you receive any 1099 Forms, you should use these to calculate your total income through independent work.  

Tax Help for Supplemental Income Earners 

Tax policy can change every now and then. If you earn any type of supplemental income, you should stay up to date on all the most recent changes in taxation rules. For example, in 2024 the rules for reporting income earned through Form 1099 are changing drastically. Being unprepared for a change in policy could lead to all sorts of issues, from a large tax bill to an IRS audit. When in doubt, your best bet is to speak to a trusted tax professional to avoid a stressful tax issue. If you need tax help, Optima and our team of experts are here. Contact us for a free consultation. 

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What You Need to Know About Severance Packages & Taxes

what you need to know about severance packages and taxes

Losing your job is stressful enough as it is. If you are offered a severance package when let go, your first thought might not be on taxes. However, even severance pay is considered income which means it is taxable. Here we will discuss what you need to know about severance packages and how they affect your taxes. 

What Is a Severance Package? 

A severance package is a combination of pay and benefits offered to employees after being laid off from an employer. To receive the package, an employee will typically need to sign a severance agreement that details the amount of pay to be received, as well as any benefits that will be offered. The agreement may also list terms that the employee must abide by to receive the package. For example, accepting a severance package could mean that you are not eligible to file a wrongful termination lawsuit or collect unemployment benefits. Severance packages are offered at the employer’s discretion. In other words, employers are not legally obligated to offer a laid off employee any severance pay.  

Is Severance Pay Taxable? 

Severance pay is taxable, similar to any regular wages or salary income you earned prior to being laid off. Severance pay is taxed in the year of payment and most employers will include your severance pay on your W-2, along with any unused accrued vacation or sick time. Employers will typically withhold federal and state taxes for you, including: 

  • Social Security tax 
  • Medicare tax 
  • Federal income tax withholding 
  • State income tax withholding (if applicable) 
  • Federal unemployment tax (FUTA) 

Are There Any Tax Deductions for Job Hunting? 

As of the 2017 Tax Cuts and Jobs Act, taxpayers may no longer write off job hunting or moving expenses. 

How Does Severance Pay Affect My Taxes? 

In some cases, not enough taxes are withheld from severance pay. If this happens, you might owe during tax time. To avoid this, you can confirm your withholding is correct or make an estimated tax payment on the IRS website.  

Another scenario can involve a large severance package bumping you up into a higher tax bracket. This could happen because your income is taxed the year it is received. For example, if you receive six months of severance pay at the end of the year, you will essentially receive 18 months’ worth of pay, which could be a drastic increase in income compared to the previous year. This could cause a change in your tax rate and disqualify you from certain credits and deductions.  

If you find yourself in the above scenario, there are ways to minimize your tax bill. For example, you can contribute to a tax-deferred retirement account, add funds to a health savings account (HSA), or open a 529 plan for your child’s college fund. You can also ask your employer to have the severance payments spread out to avoid a large tax bill. 

Tax Help for Those Who Received Severance Pay 

If you were recently laid off and received a severance package, you should make sure enough taxes were withheld. If it’s clear that is not the case, you can still avoid a large tax bill. Your best bet is to speak to a trusted tax professional to avoid a stressful tax issue. If you need tax help, call Optima at 800-536-0734 for a free consultation. 

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