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What is Backup Withholding?

What is Backup Withholding?

In the complex world of taxes and financial regulations, backup withholding is a concept that often raises questions for taxpayers. While it might sound intimidating, it serves a crucial purpose in ensuring tax compliance and preventing underreporting of income. Let’s delve into what backup withholding entails, why it’s implemented, and how it can impact individuals and businesses. 

What is Backup Withholding? 

Backup withholding is a precautionary measure enforced by the IRS to guarantee that income tax is collected on certain payments. It serves as a safeguard against underreporting of income by taxpayers. It’s commonly used for those who fail to provide accurate taxpayer identification numbers (TINs) or those who have been flagged for potential underreporting or non-compliance. Backup withholding requires payers, such as employers or financial institutions, to withhold a specified percentage of certain payments to individuals. These payments typically include interest, dividends, and other types of income.  

Who is Subject to Backup Withholding? 

Several scenarios may trigger backup withholding: 

  • Incorrect TIN: A taxpayer fails to provide their correct TIN to a payer. This often occurs when individuals provide incorrect Social Security numbers or employer identification numbers on tax documents. 
  • Underreporting or Non-compliance: An individual or entity has previously underreported income, failed to file tax returns, or been subject to penalties for non-compliance. This helps ensure that taxes are collected on the correct amount of income. 
  • Interest and Dividend Payments: Backup withholding may apply to certain types of income, including interest, dividends, and other investment earnings. It also applies to rents, royalties, gambling winnings, and other sources of income. 
  • Failure to Certify Exemption: Certain individuals or entities may be exempt from backup withholding if they meet specific criteria outlined by the IRS. If a taxpayer fails to certify their exemption status when required, withholding may be enforced. 

Exemptions 

Most U.S. citizens are exempt from backup withholding if they provide their TIN or SSN with financial institutions. Certain types of income are also exempt. Common examples include: 

  • Cancelled debts 
  • Unemployment 
  • State or local tax refunds 
  • Qualified tuition program income 
  • Real estate transactions 
  • Retirement distributions 
  • Employee stock ownership distributions 

How Does Backup Withholding Work? 

When a payer is required to initiate backup withholding, they are mandated to withhold a specified percentage of the payment before issuing it to the payee. The current backup withholding rate is typically 24% of the payment. This withheld amount is then remitted to the IRS on behalf of the payee. The withholding won’t be a surprise though. The tax filer will be notified several times of the intent to withhold.  

How to Avoid 

To prevent this withholding, taxpayers should ensure that their TINs are accurately provided to payers on relevant tax documents. This includes completing Form W-9 truthfully and promptly when requested by a payer. Additionally, maintaining compliance with tax filing obligations and promptly addressing any issues with the IRS can help mitigate the risk of backup withholding. 

Credit for Backup Withholding 

While you cannot claim a tax credit for backup withholding, the amount withheld is still considered tax already paid to the IRS. So, when you file your tax return, you will report the income subject to backup withholding, and the amount withheld will be reflected on your return. This helps ensure that you receive credit for the taxes already paid when calculating your final tax liability for the year. 

Example 

Let’s say you failed to report $500 in taxable income on last year’s tax return. The IRS then attempted to contact you for months letting you know you are subject to backup withholding. After six months, you open a new brokerage account and submit a W-9. On the W-9, you’ll need to cross out line item 2, which is an acknowledgment that you’re subject to this withholding. The brokerage company will then withhold 24% of your payments. At the end of the year, the brokerage company will send you a 1099 and indicate how much federal income tax was withheld on line 4. Your federal income tax liability will decrease. Furthermore, if you owe less than the withholding amount, you may receive a tax refund. 

Tax Help for Those Subject to Backup Withholding 

Backup withholding is a mechanism employed by the IRS to promote tax compliance. While it may seem burdensome, it serves a vital role in maintaining the integrity of the tax system. By understanding the circumstances under which backup withholding applies and taking proactive steps to comply with tax regulations, individuals and businesses can navigate the complexities of taxation more effectively. 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 

Top Mistakes to Avoid When Filing Your Tax Return 

Top Mistakes to Avoid When Filing Your Tax Return 

Filing taxes can be an intimidating task for many individuals, but it’s a crucial responsibility that shouldn’t be taken lightly. Making mistakes on your tax return can lead to delays in processing, missed deductions, or even audits by the tax authorities. To ensure a smooth and accurate tax filing process, here are some of the top mistakes to avoid when filing your tax return. 

Incorrect Personal Information 

One of the most common mistakes taxpayers make is providing incorrect personal information such as name spellings, Social Security numbers, or filing status. Ensure that all personal details are accurately entered to avoid processing delays and potential issues with tax credits or deductions. 

Math Errors 

Even simple math errors can have significant consequences on your tax return. Double-check all calculations to ensure accuracy, especially when totaling income, deductions, and tax credits. Using tax preparation software or hiring a professional can help minimize the risk of math mistakes. 

Failing to Report All Income 

It’s essential to report all sources of income, including wages, self-employment income, investment earnings, and any other taxable income. Failing to report income can result in penalties and interest charges, as well as potential audits by the IRS. 

Overlooking Deductions and Credits 

Deductions and credits can significantly reduce your tax liability, so it’s important not to overlook them. Common deductions include mortgage interest, charitable contributions, and medical expenses, while credits such as the Earned Income Tax Credit (EITC) and Child Tax Credit can provide valuable tax savings. 

Forgetting to Sign and Date the Return 

It may seem like a minor detail, but forgetting to sign and date your paper tax return can invalidate it. Make sure to sign and date your return before submitting it to the IRS or state tax authority. If filing jointly, both spouses must sign the return. 

Using the Wrong Tax Form 

Taxpayers often use the wrong tax form or schedule, leading to errors and delays in processing. Make sure to use the correct form based on your filing status, income sources, and any special circumstances. The IRS website provides guidance on choosing the appropriate forms for your tax situation. Tax preparation software will determine which tax forms are needed based on a series of questions it asks. 

Missing the Filing Deadline 

Failing to file your tax return by the deadline can result in penalties and interest charges, even if you’re due a refund. The deadline for filing federal income tax returns is typically April 15th, unless it falls on a weekend or holiday. The 2024 tax deadline is April 15. If you need more time to file, you can request an extension, but remember that an extension to file does not extend the deadline to pay any taxes owed. 

Not Keeping Records 

Keeping accurate records of income, expenses, and supporting documents is essential for substantiating items on your tax return and defending against potential audits. Maintain organized records throughout the year, including receipts, bank statements, and investment statements. 

Ignoring State Tax Obligations 

In addition to federal taxes, most taxpayers are also required to file state income tax returns. Make sure to fulfill your state tax obligations by filing the necessary forms and paying any taxes owed to the state revenue agency. State tax laws vary, so be sure to familiarize yourself with the requirements in your state. 

Relying Solely on Automated Software 

While tax preparation software can be helpful, it’s not foolproof. Automated programs may not catch every deduction or credit you’re eligible for, especially if you have complex tax situations. Consider consulting with a tax professional for personalized advice and assistance, especially if you have significant investments, own a business, or experienced major life changes during the tax year. 

Tax Help in 2024 

By avoiding these common mistakes and taking the time to ensure accuracy and compliance with tax laws, you can streamline the filing process and minimize the risk of errors, penalties, and audits. Remember to file your tax return on time, keep thorough records, and seek professional assistance when needed to navigate the complexities of the tax system effectively. 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 

Ask Phil: What is FinCEN?

Today, Phil discusses the Financial Crimes Enforcement Network, also known as FinCEN. 

If you’ve never heard of the Financial Crimes Enforcement Network, you aren’t alone. FinCEN is a bureau of the United States Department of the Treasury. The Financial Crimes Enforcement Network’s primary mission is to combat and prevent financial crimes, including money laundering, terrorist financing, and other illicit activities that involve the financial system. 

FinCEN is important to know about because they may have filing requirements that apply to small businesses. You can check if you have a filing requirement for your small business on their website, fincen.gov. If your business was founded and registered before 2024, you have until January 1, 2025, to report all beneficial ownership interest.  

If you need tax help, contact us today for a Free Consultation 

Filing Guide for First-Time Taxpayers

filing guide for first-time taxpayers

Filing taxes is one of life’s responsibilities that we simply cannot avoid. At some point, we all file taxes on our own. Filing a tax return for the first time can be intimidating. Here is a guide for first-time taxpayers with filing tips and common mistakes to avoid.  

Determine if You Need to File

It may have been your first year being employed, but you might not be required to file a tax return. Calculate all gross income you earned this past year, even if the job was nontraditional like gig work or freelancing. Remember gross income is the amount you earned before taxes or deductions were taken out. There are a lot of rules surrounding filing requirements, but in 2024, you must file if you meet one of the following scenarios:  

Filing Status Age at the end of 2023 Must file if gross income is at least: 
Single Under 65 $13,850 
Single 65 or Older $15,700 
Head of Household Under 65 $20,800 
Head of Household 65 or Older $22,650 
Married Filing Jointly Under 65 (Both Spouses) $27,700 
Married Filing Jointly 65 or Older (One Spouse) $29,200 
Married Filing Jointly 65 or Older (Both Spouses) $30,700 
Married Filing Separate Any Age $5 
Qualified Widow(er) Under 65 $27,700 
Qualified Widow(er) 65 or Older $29,200 

The rules are different if your parents provide financial assistance, either through living expenses, education, or a monthly allowance. If this is the case, your parents might be able to claim you as a dependent. If you can be claimed on someone else’s tax return as a dependent, you still might have to file a tax return of your own. Single dependents must do so if any of the following applied to them in 2023: 

  • Unearned income was more than $1,250 
  • Earned income was more than $13,850 
  • Gross income was more than the larger of: 
    • $1,250, or 
    • Earned income (up to $13,450) plus $400 

These same criteria apply to married dependents as well. Furthermore, they have an additional criterion that applies: 

  • Gross income was at least $5, and spouse filed separately and itemized their deductions 

Remember, unearned income includes any money earned by doing nothing. Examples include investment income or rental property income. Earned income is the money you earn from work like salaries, tips, and self-employment income.  

Decide How to File  

The easiest and fastest way to file a tax return is electronically. You can use a tax software to prepare and file a return for you if your tax situation is simple. The IRS offers free tax preparation through IRS Free File, a program ideal for young and first-time filers. There is also online tax preparation software that is free for simple federal tax filings.  

Collect All Your Tax Documents  

If you’re a first-time filer you might need the following items to file:  

  • Income forms, including W-2s and 1099s  
  • Education expense forms, including Form 1098-T, receipts, scholarship records  
  • Social security number  
  • Routing and account numbers for direct deposit  
  • Dependent information (if applicable), including names, date of birth, SSNs, etc.   

Find Credits and Deductions 

Even first-time filers are eligible for credits and deductions. A tax credit is a dollar-for-dollar reduction of your income. Some credits you may be eligible for are:  

American Opportunity Tax Credit 

Worth up to $2,500 per student, the AOTC allows you to claim a credit for tuition, fees and course materials. You can use Form 1098-T to determine your credit amount. Your school will either mail this form or make it available to you by January 31 each year. You cannot claim this credit if you are listed as a dependent on another tax return or earn above certain income limits. Just be sure you are eligible for this credit before claiming it. If you wrongly claim it, the IRS can make you pay back the amount you received, plus interest.  

Lifetime Learning Credit 

This credit is worth up to $2,000 per tax return and is for qualified tuition and related expenses paid for education, excluding course materials. You cannot claim this credit if you are listed as a dependent on another tax return or earn above certain income limits.  

Tax Deductions 

A tax deduction is a reduction of taxable income to lower your tax bill. You can claim the standard deduction of $13,850 for single filers in tax year 2023, as it will likely result in a lower tax bill than if you were to itemize deductions. Additionally, you can deduct student loan interest payments you make even if you do not itemize deductions. If you use your car for business purposes, you can deduct your mileage. The 2023 standard mileage rate is 65.5 cents per mile.  

File By the Deadline  

Now that you’re ready to file, you should be sure to submit your return by the tax deadline. In 2024, the deadline is April 15th. If you are getting a refund, you can have it sent by paper check or direct deposit. Direct deposit is the fastest way to receive your federal refund and you can track its status on the IRS website. You can also track your state refund online.   

Tax Help for First-Time Taxpayers  

First-time filers should note that filling your tax return by the tax deadline is critical. If you prepare your return and find that you owe taxes, don’t panic. You will need to pay your tax bill by the April deadline or request an extension to file. If approved, you have until October 16, 2024. Do not ignore your tax bill as this can lead to greater financial stress later. You should also figure out why you owe so you can avoid this problem again next tax season. Common reasons for owing are not withholding enough taxes during the year or not making quarterly estimated payments if you do not withhold any taxes from your income. When in doubt, ask for help. 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 

How Does the IRS Collections Process Work?

How Does the IRS Collections Process Work?

The IRS is responsible for collecting taxes owed to the United States government. When taxpayers fail to pay their taxes on time, the IRS initiates a collections process to recover the outstanding debt. This process can be complex and intimidating for those unfamiliar with it. Understanding how the IRS collections process works can help taxpayers navigate their obligations and avoid potential consequences. 

Assessment of Taxes 

The IRS begins by assessing the amount of tax you owe. This assessment can occur through various means. For example, if you file a tax return reporting income and deductions, or if the IRS conducts an audit to determine the correct amount owed. Once the tax liability is determined, the IRS will send you a notice detailing the amount owed, including any penalties and interest that may have accrued. At this point, the collections process has begun, and it will only end when one of two things happens. The tax bill needs to be paid or settled, or the statute of limitations needs to run out.  

IRS Notice and Demand for Payment 

After assessing the tax liability, the IRS sends a Notice and Demand for Payment. This notice outlines the amount owed and provides instructions on how to pay. It is important for you to respond promptly to this IRS notice to avoid further collection action by the IRS. Keep in mind that interest will accrue until the tax balance is paid in full. The current rate is 8% per year, compounded daily. Unfortunately, those who do not pay their tax bills will also need to deal with the failure to pay penalty. This is 0.5% for each month, or partial month, that the tax goes unpaid. The penalty can cost up to 25% of the total amount owed.  

Payment Options 

The IRS also accepts various forms of payment, including electronic funds transfer, credit card, check, or money order. You can pay the full amount owed in a lump sum. If paying in full is not possible, there are options for tax relief.  

Installment Agreements 

An IRS installment agreement is a formal arrangement between a taxpayer and the IRS to pay off a tax liability over time. With a short-term installment agreement, you will need to pay your full tax bill within 180 days. This option is available to those who owe less than $100,000 in combined tax, penalties and interest. With a long-term installment agreement, you can pay your full tax bill in over 180 days. This option is available to those who owe less than $50,000 in combined tax, penalties and interest.   

Offer in Compromise 

An Offer in Compromise (OIC) is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed. It’s a viable option for individuals or businesses who are unable to pay their tax liability in full or would suffer undue financial hardship if forced to do so. It’s important to understand that the chances of the IRS accepting an OIC is not high. This form of tax relief is reserved for taxpayers who have suffered severe, long-term financial troubles, making it impossible for you to pay your tax bill. 

Currently Not Collectible Status 

Currently Not Collectible (CNC) status, also known as hardship status, is a designation used by the IRS for taxpayers who are experiencing significant financial hardship and are unable to pay their tax debt. When a taxpayer is granted CNC status, the IRS temporarily suspends collection activities, such as liens, levies, and garnishments, until the taxpayer’s financial situation improves. 

IRS Notice of Federal Tax Lien 

Once the tax debt remains unpaid, the IRS files a Notice of Federal Tax Lien. Filing the NFTL makes your unpaid tax debt public and establishes the IRS’s legal claim to your property. The IRS will also send you a copy of the notice. A federal tax lien will make it very difficult for you to sell or transfer property without satisfying the IRS’s claim. Furthermore, the lien may affect your credit score and ability to obtain loans or credit. 

To release the Notice of Federal Tax Lien, you must satisfy the tax debt in full, either by paying the amount owed, entering into an installment agreement with the IRS, or settling the debt through an Offer in Compromise. Once the tax debt is paid or otherwise resolved, the IRS will issue a Certificate of Release of Federal Tax Lien within 30 days. This removes the lien from your property and releases the IRS’s claim. 

IRS Final Notice of Intent to Levy 

If you still make no effort to pay your taxes, the IRS will issue a Final Notice of Intent to Levy. This notice typically comes 30 days before the levy is initiated. When the IRS levies, it means they seize your property to satisfy a tax debt. Levies can take various forms, including seizing wages, bank accounts, vehicles, real estate, retirement accounts, or other assets.  

You have the right to appeal a levy action by requesting a Collection Due Process (CDP) hearing with the IRS Office of Appeals. During the CDP hearing, you can dispute the validity of the tax debt, propose alternative collection options, or present evidence of financial hardship or other extenuating circumstances. The IRS may release a levy if you apply for a payment arrangement, demonstrate financial hardship, or present an Offer in Compromise. Once the IRS releases the levy, you regain control of your assets, and the IRS stops collection actions related to those assets. 

Legal Action 

In extreme cases, the IRS may take legal action against delinquent taxpayers to enforce collection of unpaid taxes. This can involve filing a lawsuit in federal court to obtain a judgment against the taxpayer or pursuing criminal charges for tax evasion or fraud. Legal action should be avoided whenever possible, as it can result in significant financial penalties and even imprisonment. 

Tax Help for Those in IRS Collections 

The IRS collections process is a complex and multifaceted system designed to ensure compliance with the tax laws. While dealing with tax debt can be stressful and intimidating, understanding how the process works can help you navigate their obligations and avoid serious consequences. By responding promptly to notices from the IRS and exploring payment options, taxpayers can resolve their tax issues and move forward with peace of mind. When in doubt, seeking the help of a credible tax professional is a good option. 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 

An Overview of Estate & Inheritance Taxes

an overview of estate and inheritance taxes

Sometimes after a loved one dies, we must 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 IRS taxes based on the asset’s current market value. The IRS exempts estates worth less than $12.92 million in 2023 and $13.61 million in 2024. The amounts are per person. If the estate is worth more, it’s taxed according to the following rates:  

Tax Rate Taxable Amount Tax Owed 
18% $0-$10,000 18% of taxable income 
20% $10,001-$20,000 $1,800 plus 20% of amount over $10,000 
22% $20,001-$40,000 $3,800 plus 22% of amount over $20,000 
24% $40,001-$60,000 $8,200 plus 24% of amount over $40,000 
26% $60,001-$80,000 $13,000 plus 26% of amount over $60,000 
28% $80,001-$100,000 $18,200 plus 28% of amount over $80,000 
30% $100,001-$150,000 $23,800 plus 30% of amount over $100,000 
32% $150,001-$250,000 $38,800 plus 32% of amount over $150,000 
34% $250,001-$500,000 $70,800 plus 34% of amount over $250,000 
37% $500,001-$750,000 $155,800 plus 37% of amount over $500,000 
39% $750,001-$1,000,000 $248,300 plus 39% of amount over $750,000 
40% $1,000,001 and up $345,800 plus 40% of amount over $1,000,000 

State Estate Tax Exemptions

Some states impose their own estate taxes. In general, your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS. There are a handful of states that impose an estate tax. These are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Here are their individual exemption amounts. 

State 2023 Exemption 2024 Exemption 
Connecticut $12.92 million $13.61 million 
District of Columbia $4.52 million $4.71 million 
Hawaii $5.49 million $5.49 million 
Illinois $4 million $4 million 
Maine $6.41 million $6.8 million 
Maryland $5 million $5 million 
Massachusetts $1 million $2 million 
Minnesota $3 million $3 million 
New York $6.58 million $6.94 million 
Oregon $1 million $1 million 
Rhode Island $1.73 million $1.77 million 
Vermont $5 million $5 million 
Washington $2.19 million $2.19 million 

Your estate assets pay any federal and state taxes before they are distributed to beneficiaries. Typically, the executor of the estate is responsible for making tax payments. They also confirm there are no other liabilities due, and then distribute the remaining assets.   

What Are Inheritance Taxes?  

Inheritance taxes are state taxes levied on a deceased individual’s assets. The beneficiaries are usually responsible for paying these taxes. The amount owed is 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:   

State Tax Rates 
Iowa 0%-6% 
Kentucky 0%-16% 
Maryland 0%-10% 
Nebraska 0%-15% 
New Jersey 0%-16% 
Pennsylvania 0%-15% 

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

Inheritance taxes come into effect after the estate is divided and distributed to the appropriate beneficiaries. Typically, each state will have their own exemption rules. In other words, the assets 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. If you are planning to leave behind assets for your loved ones after death, you can reduce estate taxes. For example, you can pay for educational or medical expenses from your estate. These payments will be exempt from taxes if 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. 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 

 

Which TCJA Provisions are Expiring Soon? 

Which TCJA Provisions are Expiring Soon? 

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.  

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

Ask Phil: Top 5 Tax Tips for 2024 

Today, Phil discusses his top 5 tax tips for 2024.  

Tax Tip #5: Gather Your Tax Documents Early 

Most tax forms, including your W-2s and most 1099s, should be sent to you by January 31. However, there are some tax documents that come in a bit later. For example, 1099-B and 1099-MISC are due to recipients by February 15. 1095 health coverage forms are due by March 1. Be sure to wait for all your documents to arrive before filing your tax return.  

Tax Tip #4: Don’t Forget About Estimated Tax Payments 

If you are a small business owner, investor, landlord, or any taxpayer who receives income outside your normal job, you might need to pay estimated quarterly taxes. The 2024 quarterly tax payment deadlines are April 15, June 15, September 15, and January 15, 2025. Knowing these deadlines can help avoid tax penalties. You can use Form 1040-ES to calculate your estimated tax for the year. 

Tax Tip #3: Don’t Wait on Your Tax Refund 

In general, it takes about 21 days to receive your tax refund. However, some returns may take more time to review than others. That said, it’s best to not rely on your tax refund to make a big purchase or cover large expenses. You can use the online Where’s My Refund tool on the IRS’s website to track your refund status within 24 hours after e-filing and within 4 weeks of mailing a paper return. 

Tax Tip #2: Report 1099-K Income – Even If You Don’t Receive the Form 

If you receive payments on Venmo, PayPal, Etsy, eBay, or other third-party sites for your business, you probably know what a 1099-K is. The 1099-K reporting thresholds have changed quite a bit in the last couple of years, making the topic confusing for many small businesses. In short, if you receive income from these third-party payment networks, you must report it on your tax return, even if you do not receive a 1099-K form. This income is still considered taxable income, which means not reporting it can result in taxes owed to the IRS. 

Tax Tip #1: Create an IRS Online Account 

The IRS Online Account allows taxpayers to access various services and information related to their tax obligations. Taxpayers can access their tax return transcripts, make payments, access IRS notices and letters, apply for installment agreements, view payment histories, and more. Put simply, it helps you know where you stand with the IRS. 

Join us next Friday as Phil will answer your questions about FinCEN! 

If you need help with your taxes in 2024, contact us today for a Free Consultation 

What You Need to Know About IRS Notice CP2000

What You Need to Know About IRS Notice CP2000

Receiving a notice from the IRS can be anxiety-inducing for anyone. Among the various notices the IRS sends, Notice CP2000 stands out as one that often causes confusion and concern among taxpayers. However, understanding what Notice CP2000 entails and how to respond to it is crucial for resolving any discrepancies with your tax return. In this article, we’ll delve into the specifics of IRS Notice CP2000 and provide guidance on how to address it. 

What is IRS Notice CP2000? 

IRS Notice CP2000 is formally titled the “Notice of Proposed Adjustment for Underpayment/Overpayment.” It is sent when the IRS identifies a discrepancy between the income, payments, and credits reported on your tax return and the information reported to the IRS by third parties, such as employers, banks, or financial institutions. The notice typically outlines the proposed changes to your tax return and explains the adjustments the IRS believes are necessary. 

Why Did You Receive Notice CP2000? 

There are various reasons why you might receive Notice CP2000. Common discrepancies that trigger this notice include: 

  • Underreported income: The IRS has information indicating you received income that was not reported on your tax return. 
  • Overstated deductions or credits: The deductions or credits claimed on your tax return exceed what the IRS expects based on the information provided by third parties. 
  • Mismatched taxpayer information: Discrepancies in taxpayer identification numbers, filing status, or other key information can also prompt the issuance of Notice CP2000. 

How to Respond to Notice CP2000 

Receiving Notice CP2000 does not necessarily mean you are being audited. It is essentially a proposal for adjustments to your tax return based on the IRS’s records. Here’s what you should do if you receive this notice: 

Review the Notice Carefully 

Take the time to thoroughly read through the notice and understand the proposed changes to your tax return. Pay close attention to the specific items that the IRS is questioning. 

Compare with Your Records 

Compare the information provided in Notice CP2000 with your own records, including W-2s, 1099s, and other relevant documents. Verify whether the discrepancies identified by the IRS are accurate. 

Respond by the Deadline 

Notice CP2000 includes a response deadline. It’s essential to adhere to this deadline to avoid further penalties or interest. You have the option to agree with the proposed changes, partially agree, or disagree entirely. If you agree, you should send the notice back to the IRS with the payment they are requesting. If you partially agree or completely disagree with the notice, you should respond pleading your case. Do not amend your tax return. 

Provide Supporting Documentation 

If you disagree with the proposed adjustments, you must provide supporting documentation to substantiate your position. This may include bank statements, receipts, or other evidence to support your tax return. 

Await the IRS’s Response 

It usually takes the IRS anywhere from 4 to 8 weeks to respond, so be patient. If the IRS rejects your response, you can submit an appeal.  

Seek Professional Assistance 

If you’re uncertain about how to respond to Notice CP2000 or need assistance in resolving the discrepancies, consider consulting a tax professional or accountant for guidance. Be prepared to show them your notice, any responses you’ve submitted, copies of your tax returns, and proof of eligibility for deductions and credits. 

Tax Help for Those Who Receive IRS Notice CP2000 

Receiving IRS Notice CP2000 can be unsettling, but it’s essential to address it promptly and accurately. By understanding the reasons behind the notice and following the appropriate steps to respond, you can effectively resolve any discrepancies with your tax return. Remember to carefully review the notice, compare it with your records, and provide supporting documentation as needed. Seeking professional assistance may also be beneficial in navigating the process and ensuring compliance with IRS requirements. 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 

What Happens to IRS Tax Debt When You Die?

What Happens to IRS Tax Debt When You Die?

Death is an inevitable part of life, but what happens to our financial obligations when we pass away? Among the many considerations that arise after someone dies, tax liabilities can be a complex issue that requires careful attention and understanding. While tax liabilities don’t simply vanish upon death, the way they’re handled can vary depending on several factors. These include the type of liability, the estate’s assets, and applicable laws. Let’s delve into what happens to tax debt after death and explore the implications for their estate and heirs. 

Types of Tax Liability

Tax liabilities typically falls into two categories: federal and state. Federal tax obligations are owed to the IRS, while state taxes are owed to the relevant state tax authority. These can arise from various sources, such as income taxes, property taxes, or estate taxes. 

Responsibilities of the Estate 

Tax liabilities are generally considered a personal liability. This means that it’s tied to the individual who incurred the balance rather than their heirs or beneficiaries. So, when you die, your tax balance doesn’t automatically transfer to your family members. When someone dies, their estate becomes responsible for settling any outstanding balances, including tax obligations. An estate encompasses all the assets, property, and liabilities left behind by the deceased individual. Executors or administrators, appointed to manage the estate, play a crucial role in this process. 

Surviving Spouses 

In community property states, where spouses share ownership of assets and liabilities incurred during the marriage, the surviving spouse may be held responsible for the deceased spouse’s back taxes. However, even in community property states, the IRS typically only pursues the surviving spouse for tax liabilities if they were also responsible for filing the tax return or if the tax owed is related to joint returns.   

Settling Tax Liabilities

The settlement of tax liabilities from an estate typically follows a specific procedure: 

  1. Notification of Death: Executors or family members should inform relevant tax authorities of the individual’s death. 
  1. Filing Final Tax Returns: The executor must file the deceased person’s final income tax returns. These returns cover the period up to the date of death. They are also typically due by the usual April 15 tax filing deadline. 
  1. Payment of Tax Liability: Any taxes owed up to the date of death must be paid from the estate’s assets. This includes income taxes for the final year and any unpaid taxes from previous years. 
  1. Estate Tax Returns: If the estate’s value exceeds certain thresholds, an estate tax return may be required at the federal and/or state level. Estate taxes are assessed on the transfer of wealth from the deceased individual to their heirs and beneficiaries. 
  1. Payment of Estate Taxes: If estate taxes are owed, they must be paid from the estate’s assets before distribution to heirs. 

Assets and Liabilities 

The assets and liabilities of the estate play a significant role in determining how tax liabilities are settled. If the estate’s assets are insufficient to cover the tax obligations, certain assets may need to be sold to satisfy the balance. However, some assets, such as retirement accounts with named beneficiaries, may pass directly to heirs outside of the probate process and therefore not be subject to estate taxes. 

Inheritance and Heirs 

Heirs and beneficiaries of an estate are generally not personally responsible for the deceased individual’s tax balance. However, the amount they inherit may be affected if tax obligations deplete the estate’s assets. Sometimes, heirs may receive less than anticipated if a significant portion of the estate is used to settle tax liabilities. 

Options for Resolving Tax Liabilities

If an estate lacks sufficient assets to cover tax liability, there are several options available: 

  • Negotiation with Tax Authorities: Executors may negotiate with tax authorities to establish a payment plan or settle the balance for less than the full amount owed. 
  • Sale of Assets: Selling assets from the estate can generate funds to pay off tax balance. 
  • Abatement or Discharge: In certain circumstances, tax liabilities may be discharged or reduced, such as when it is disputed or when the estate qualifies for relief programs. 
  • Seeking Professional Guidance: Executors and heirs should consider consulting with tax professionals or estate attorneys to navigate the complexities of settling tax liabilities. Doing so can help ensure compliance with applicable laws. 

Estate Planning Strategies 

To minimize taxes on your estate and loved ones, it’s essential to engage in proactive estate planning. This may involve creating a will, establishing trusts, making gifts to beneficiaries during your lifetime, and exploring tax-saving strategies. By taking these steps, you can potentially reduce the amount of taxes owed by your estate and ensure a smoother transfer of assets to your heirs. 

Tax Help for Taxpayers Who Owe 

Navigating tax liability after the death of a loved one requires careful attention to detail and an understanding of the legal and financial implications involved. Executors play a crucial role in ensuring that tax obligations are properly addressed and settled from the deceased individual’s estate. By following the appropriate procedures and seeking professional guidance when necessary, families can manage tax liability effectively and minimize the impact on heirs and beneficiaries. 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