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Dependents & Your Taxes

dependents and your taxes

Claiming a dependent on your tax return can help save a lot of money each year. Some taxpayers may be unsure about who qualifies as a dependent, especially since a living situation can change year to year. Here’s all you need to know about dependents and your taxes. 

What is a dependent? 

In the tax world, a dependent is someone who can be claimed on your tax return because they rely on your financial support. While you cannot claim yourself or your spouse as a dependent, you can claim your children, relatives, or domestic partners as dependents, as long as they meet the requirements for a qualifying child test and qualifying relative test. All dependents must be a U.S. citizen or resident. They also cannot be claimed on another return or file a joint return. 

What is the qualifying child test? 

A qualifying child must one of the following relationships to you: 

  • Son, daughter, or stepchild 
  • Eligible foster child or adopted child 
  • Brother, sister, half-brother, or half-sister 
  • Stepbrother or stepsister 
  • An offspring of any of the above 

They must be under age 19, or age 24 if they attend school full time. Permanently and totally disabled children can be claimed at any age. The child must live with you for most of the year and you must provide more than half of their financial support. 

What is the qualifying relative test? 

You might also be able to claim qualifying relatives in your life if they lived with you all year long. You can claim someone who has not lived with you all year if they are: 

  • Your child, stepchild, adopted child, foster child, or descendant of any of these 
  • Your brother, sister, half-brother, half-sister, stepbrother, or stepsister 
  • Your parent, stepparent, or grandparent 
  • Your niece or nephew of your sibling or half-sibling 
  • Your aunt or uncle 
  • Your immediate in-laws, including son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law 

They cannot have made more than $4,400 in 2022 and you must have provided more than half of their total support.  

What deductions and credits are available for dependents? 

  • Child Tax Credit: The CTC is $2,000 per qualifying child under age 17 in 2022 
  • Earned Income Tax Credit: While you don’t need children to claim the EITC, the credit does increase if you have children. For tax year 2022, you can claim a max credit of $3,733 for one child, $6,164 for two children, and $6,935 for three or more children.  
  • Child and Dependent Care Credit: This credit is meant to help pay for daycare while you work, go to school, or if your parent is unable to take care of themself. This credit is worth 20-50% of up to $6,000 of expenses in 2022. 
  • Adoption Credit: In 2022, you may claim a nonrefundable credit up to $14,890 of expenses that pay for the adoption of a child who is not your stepchild.  
  • Higher Education Credits: The American Opportunity Tax Credit and Lifetime Learning Credit can be claimed for yourself, your spouse, or dependents who are enrolled in college, vocational school, or job training. You can get a maximum annual credit of $2,500 per eligible student with the American Opportunity Tax Credit. The Lifetime Learning Credit allows a credit of 20% of the first $10,000 in qualified education expenses, and a maximum of $2,000 per tax return. 
  • Credit for Other Dependents: This nonrefundable credit allows a maximum credit of $500 for each dependent. 

Tax Relief for Those with Dependents 

Knowing the rules surrounding dependents and taxes is very important. Claiming someone on your tax return when they are not eligible can result in the IRS rejecting your return or an IRS audit. On the other hand, knowing these rules can help save money if you suddenly become financially responsible for another person, like a sick parent or a foster child. Optima Tax Relief can help with your tax debt situation. Contact us at 800-536-0734 for a free consultation.

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How to Get Rid of Back Taxes

how to get rid of back taxes

IRS enforcement has cooled in the years following the COVID-19 pandemic, but the 2022 Inflation Reduction Act is equipping the agency with over $45 billion for tax enforcement. With high interest rates in place, now is an even worse time to owe the IRS. Here is an overview of back taxes and how to get rid of them.  

What are back taxes? 

Back taxes are unpaid taxes from a previous year. For example, if you had a tax bill of $1,000 after filing your 2021 tax return and did not pay it, you owe back taxes. Not only would you owe the $1,000, but you would also owe any penalties and interest that accrued on this tax bill. You can owe taxes by not reporting all earned income, not filing a return, or filing but failing to pay your tax bill. 

What happens if I don’t pay back taxes? 

Unpaid taxes will result in an IRS notice, which is a formal letter from the IRS. Typically, the notice will advise the taxpayer to pay the balance owed within 21 days. If the balance is still unpaid within 60 days, the IRS will likely proceed with collections. While the IRS is awaiting payment, the tax balance will accrue interest and penalties.  

How do I get rid of back taxes? 

If you do find yourself in the unfortunate situation of owing the IRS, there are some options for how to pay your back taxes. If you cannot afford to pay, you still have options. It’s important to know that there are always options and the worst thing you can do is ignore the issue. 

Pay your taxes 

This is the most straight-forward solution to getting rid of back taxes. If you can afford to pay off your tax balance, you should do it immediately to avoid additional penalties and interest. IRS interest rates are high right now, making your tax bill more expensive than it would’ve been in previous years. You can pay your tax bill with a credit or debit card through your online IRS account, by phone or even on the IRS mobile app. If you don’t have enough to cover the balance, you can request a short 120-day extension with the IRS. This option doesn’t stop interest or penalty fees, but it will allow more time to pay the tax debt in full. Even borrowing from your retirement fund or taking out a personal loan might be a better option than allowing your tax balance to grow. 

Request an Installment Agreement 

You can request an installment agreement, or a monthly payment plan, with the IRS. With this option, the 0.5% monthly penalty will be reduced to 0.25% until the balance is paid off. Interest will continue to accrue until the balance is paid. If you cannot pay your back taxes within 120 days and you owe less than $50,000, this might be the best option for you. Taxpayers should note if they do not pay according to the IRS’s set schedule, they can void the installment agreement and proceed with enforcement. 

Apply for an Offer in Compromise 

In some cases, the IRS may settle your tax debt for less than the amount you owe with an offer in compromise (OIC). This is understandably the most sought-after option to get rid of back taxes, but it is also rarely approved by the IRS. To qualify, taxpayers need to prove that paying off their tax debt would result in financial hardship according to IRS standards. They also need to be current on all tax returns and cannot be in bankruptcy. Applying requires an application fee, which can be waived if you are a low-income taxpayer and an initial nonrefundable payment. Your debt will also still accrue interest while your application is reviewed.  

Tax Help for Taxpayers with Back Taxes 

Having unpaid back taxes can cause severe stress and dealing with the IRS on your own can be intimidating and time-consuming. A knowledgeable and experienced tax professional can help you understand your options better and do the heavy lifting when trying to get rid of your back taxes. Optima Tax Relief can help with your tax debt situation. Contact us at 800-536-0734 for a free consultation.

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Tax Credits vs. Tax Deductions

tax credits vs tax deductions

Tax season is officially here. As you prepare to file your tax return, it might be helpful to research ways to decrease your tax liability. A popular way to do this is to claim tax credits and tax deductions. Credits and deductions often seem like the same thing, but they are different. Here’s a comparison of the two. 

What is a tax credit? 

A tax credit is a dollar-for-dollar reduction of your income. They are created by the federal and state governments to encourage certain behaviors that benefit the economy or environment. For example, there is a solar tax credit available to taxpayers who purchase solar panels for their home. There is also a federal adoption tax credit that helps offset adoption costs. These credits reward behaviors that the government deems beneficial to society.  

How do tax credits reduce my tax bill? 

As mentioned, a tax credit is a dollar-for-dollar reduction of your income. Let’s say your tax liability is $1,000 but you are eligible for a $750 tax credit. This would reduce your tax liability to $250. There are two types of credits: refundable and nonrefundable. Refundable credits allow you to receive the full amount of the credit, even if it exceeds your tax liability. For example, if your tax bill is $1,000 and you claim $1,200 in refundable tax credits, you will receive a $200 refund. Nonrefundable credits do not have the same perk. If those same tax credits are nonrefundable, you would simply owe $0 and would not receive the additional $200 in your tax refund.  

What is a tax deduction? 

A tax deduction is a reduction of taxable income to lower your tax bill. You can lower your tax bill through deductions using one of two methods: claiming the standard deduction or itemizing your deductions. The standard deduction is a fixed dollar amount determined by the IRS each year that can be subtracted from your taxable income. Itemizing your deductions is more work and requires substantiation, but it allows you to deduct expenses like student loan interest, mortgage interest, retirement contributions, medical expenses, investment losses and more.  

How do tax deductions reduce my tax bill? 

Any taxpayer can claim the standard deduction. The standard deduction for single filers is $12,950 for the 2022 tax year. This means that if you are a single filer with a taxable income of $50,000, you can take the $12,950 standard deduction. Doing so would reduce your taxable income to $37,050. If you itemize deductions, you will need to tally up all your eligible expenses on Schedule A of Form 1040. This typically only makes sense to do if you have enough expenses to exceed the standard deduction. For example, if last year you had a lot of medical expenses, paid a lot of mortgage interest, or incurred disaster losses that were not insured, itemizing might be the best option for you. Finally, there is something called an above-the-line deduction, which is essentially a deduction that you can take to decrease your tax bill even further after taking the standard deduction. Some examples are self-employment tax, health insurance premiums for self-employed, and student loan interest. 

Tax Relief During Tax Season 

The bottom line is that both tax credits and deductions can help lower your tax bill. Many taxpayers may wonder which is better. Tax credits have a slight edge since they directly reduce taxes dollar-for-dollar whereas tax deductions will depend on your marginal tax bracket. For example, a single filer who earns $60,000 a year has a tax rate of 22%. If they had a $10,000 deduction, their taxable income would drop to $50,000 and would result in a tax bill of $11,000.  

$50,000 x 0.22 = $11,000 

If this same taxpayer had a $10,000 credit instead of a deduction, their calculated tax would be $13,200 before the credit and $3,200 after the credit.  

$60,000 x 0.22 = $13,200 $13,200 – $10,000 = $3,200 

Figuring out how to file your return yourself can be tricky and intimidating. Our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call Optima at 800-536-0734 for a free consultation. 

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The 1099-K Reporting Threshold Is Delayed – Now What?

the 1099-k reporting threshold is delayed now what

In December 2022, the IRS announced that the new reporting thresholds for Form 1099-K have been delayed. The new thresholds are part of the American Rescue Plan of 2021, which will require Form 1099-K to be issued by well-known third-party settlement organizations (TPSOs) for any aggregate transactions of $600 or more. Here’s an overview of what this means for your taxes. 

Old 1099-K Thresholds vs. New 1099-K Thresholds 

Prior to the American Rescue Plan of 2021, taxpayers would only receive Form 1099-K if they earned an aggregate amount of $20,000 in over 200 transactions for goods and services. The plan changed the reporting requirements by drastically lowering it to any payments exceeding $600. Beginning January 1, 2023, TPSOs were supposed to be required to report third-party network transactions paid in 2022 that exceed $600 through an annual Form 1099-K. However, due to concerns about lack of guidance, the existing tax return backlog, and taxpayer confusion, the IRS will delay the requirement until 2024. In other words, the original $20,000 and 200 transaction threshold will remain in place through the rest of 2023.  

What This Means for Taxpayers 

It is a lot more common for taxpayers to also be freelancers or small business owners now, especially those who receive payments for goods and services via third-party payment networks. These can include PayPal, Venmo, Amazon, Square, Cash App, Stripe and many more. 1099-Ks are only generated for payments associated with goods and services, so taxpayers should not worry about receiving one for personal expenses paid via these apps. For example, you might collect rent from your roommates through Venmo, which you then send to your landlord. This is a personal expense, and you will not receive a 1099-K. However, if you are the landlord collecting rent through a third-party payment network, you should expect to receive a 1099-K.  

If you are a freelancer or small business owner who collects payments with a third-party payment app, you should use the delay to become more familiar with the new reporting rules that will take effect in 2024. You can also ensure that any transactions you receive through apps like Venmo or PayPal are correctly classified as a personal transaction and not a business transaction for goods and services. With the new rules taking effect, a single large transaction of $600 accidentally marked as a business transaction could trigger Form 1099-K to be generated. While this issue is correctable, it has to be done with the third-party payment network directly and the IRS will expect to see the reported income on your return until a correction is sent to them. This process could be time-consuming and cause further delays in processing your return. 

Tax Relief for Freelancers and Small Business Owners 

If the new rules go into effect and the IRS’s numbers do not match up with your own, you risk triggering an IRS audit, which can lead to unmanageable stress. You’ll want to avoid owing taxes now more than ever as IRS interest rates have recently increased, making your balance more expensive, especially with interest and penalties. Taxpayers should also note that this delay does not change any rules regarding taxable income. If you earn money through freelancing or your small business, you should report all income on your tax return, even if you did not receive a 1099-K. Our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call Optima Tax Relief at 800-536-0734 for a free consultation. 

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How Student Loan Forgiveness Affects Your Taxes

how student loan forgiveness affects your taxes

Generally, student loan debt cancellation is considered taxable income. If you are one of the 43 million borrowers who will benefit from President Biden’s student loan forgiveness plan, you might be wondering how it will affect your taxes. Here’s a quick overview of how the plan can affect you. 

President Biden’s Student Loan Forgiveness Plan 

In August 2022, President Biden enacted a federal student loan forgiveness plan for up to $10,000 per borrower who earns less than $125,000 a year, or $250,000 if you file married filing jointly. The amount increases to up to $20,000 if you received a Pell Grant while in school. Forgiveness would be applied to those who submit a simple application to verify their income through the Department of Education. Borrowers on an income-driven repayment (IDR) plan would automatically receive loan relief. 

In December 2022, the Supreme Court put the plan on hold as there are multiple lawsuits challenging the lawfulness of the plan. The Court will begin reviewing the plan again in February 2023. As of now, there are tens of millions of borrowers waiting to hear if their loans will be forgiven. 

How Forgiveness Affects Taxes 

As mentioned, forgiven debt is usually taxable income. However, Biden’s American Rescue Plan of 2021 included a measure that exempts forgiven student debt from being taxed through 2025. This means that the forgiven debt would not be subject to federal income tax. On the other hand, there are some states that have already announced their plan to tax the debt cancellation if it is found lawful by the Supreme Court. Those states include: 

  • Indiana 
  • Minnesota 
  • Mississippi 
  • North Carolina 
  • Wisconsin 

If you live in one of the states listed above, you should plan to have your forgiven debt taxed as income. Since tax season has already begun and no debt has been cancelled, you may not have to worry about the taxation until 2024. However, this allows you greater time to plan accordingly. When the time comes, your forgiven debt will be added to your taxable income under Cancellation of Debt (COD) income. The exact amount forgiven is usually stated on Form 1099-C, so it is probably safe to assume that student loan forgiveness will work the same. 

The taxes owed on the debt will depend on your income tax bracket. Indiana has a flat tax rate of 3.23% for 2022. Indiana residents may also have to pay county taxes. Minnesota’s income tax rates are graduated for 2022, ranging from 5.35% to 9.85%. Mississippi does not have state income tax on the first $5,000 of taxable income but has a flat rate of 5% for all taxable income over $10,000. North Carolina’s 2022 flat tax rate of 4.99% will result in a state tax liability for the cancelled debt. Finally, Wisconsin has a graduate tax rate ranging from 3.54% to 5.3% in 2022. Borrowers can multiply their income tax rate by the forgiven amount to find their state tax liability.  

Tax Help for Student Loan Borrowers 

If you live in one of the states that will tax student loan forgiveness, you can begin preparing now. The plan is still being reviewed by the Supreme Court which gives you extra time to put money aside for the extra taxes you will owe. In short, receiving up to $20,000 in student loan forgiveness can result in an unexpected state tax liability. If the debt is forgiven, borrowers are allowed to opt out of receiving loan cancellation through the Department of Education. The only exception is if you are one of the 8 million borrowers who will receive automatic loan forgiveness because you are enrolled in an income-driven repayment program. These new changes can result in a more stressful tax season. Working with a qualified and dedicated tax professional can help ease the process. If you need tax help, call us at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

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Common IRS Penalties & How to Avoid Them

common irs penalties and how to avoid them

Owing the IRS doesn’t just stop with your tax balance. If your tax obligations are not met, you could face penalties that can make your debt even more unmanageable. Here are some of the most common IRS penalties and how to avoid (or reduce) them. 

Failure to Pay 

The Failure to Pay penalty is charged if you do not pay taxes owed by the due date. The 0.5% penalty is applied to any unpaid taxes for every month or partial month the tax is not paid. However, it will not exceed 25% of your unpaid taxes. There are some scenarios in which this penalty can increase or decrease. For example, if the IRS sends a notice with an intent to levy, you have 10 days to pay your tax. If you do not, the Failure to Pay penalty increases to 1% per month or partial month. However, if you set up a payment plan, the penalty is reduced to 0.25% per month or partial month.  

Failure to File 

If you don’t file by the tax deadline, or the requested extension deadline, you will be charged with a Failure to File penalty. This penalty is 5% of your unpaid tax for every month or partial month that your return is late. Like the Failure to Pay penalty, it caps out at 25% of your balance. The best way to avoid this penalty is to file on time. If you can’t file, or don’t have the money to pay your balance, by the April deadline, you should request an extension. The deadline to file your 2022 tax return is April 18, 2023. Taxpayers should note that for tax returns due after January 1, 2020, and more than 60 days late, there is a minimum penalty of either $435 or 100% of the owed tax, whichever is less. 

Underpayment of Estimated Tax 

If you don’t withhold enough taxes throughout the year, you need to make quarterly estimated tax payments. If you don’t pay the correct amount of estimated tax, or if you pay late, you may be penalized. Estimated payments are due every April 15th, June 15th, September 15th and January 15th. The penalty can change quarterly but as of Q1 of 2023, individuals are charged 7% on underpaid tax while large corporations are charged 9%. You can avoid this penalty by meeting one of two requirements: 

  • Pay 90% of the tax you owe for the current year in four equal estimated payments, or through paycheck withholding 
  • Pay 100% of last year’s tax bill, before withholding or tax credits. If you have an AGI of more than $150,000, you should pay 110%.  

Accuracy-Related Penalty 

If you don’t report all your income, or if you claim deductions or credits you don’t qualify for, you could be given an accuracy-related penalty. The two types of this penalty are: 

  • Negligence or Disregard of the Rules of Regulations Penalty: This penalty is common among those who do not follow tax laws or are careless when preparing their return. Examples include not reporting all income or not checking tax deductions that result in a refund that seems too good to be true. 
  • Substantial Understatement of Income Tax Penalty: This penalty is given to those who understate their tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater.  

Both of these accuracy-related penalties charge 20% of the portion of underpaid tax that resulted from negligence, disregard, or understated income.  

Penalty Relief for Reasonable Cause 

In some cases, the IRS may remove or reduce penalties if you acted in good faith with reasonable cause. These situations are determined by the IRS on a case-by-case basis. Some valid reasons for not filing or paying taxes might be because of a natural disaster, inability to obtain records, death, or certain system issues. The IRS may also reduce accuracy-related penalties if you made an effort to correct the issue or seek help about your error. You may qualify for First Time penalty abatement if you have been and are currently compliant with your taxes.  

Get Help Avoiding and Reducing IRS Penalties 

Remember, the IRS charges interest on penalties and interest will continue to increase your balance until it’s paid in full. Since interest on underpayments begin on the tax due date, it’s important to act as quickly as possible to resolve your tax issue. If you can pay your balance in full, you should do so immediately. If you cannot afford to, you should look into options including payment plans or tax relief. Our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call Optima Tax Relief at 800-536-0734 for a free consultation. 

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What is the IRS Fresh Start Program?

what is the irs fresh start program

A new year could mean a financial fresh start. The IRS Fresh Start program was created to help struggling taxpayers and small businesses. In 2023, taxpayers are still asking how the program works. Here are some key details about the program. 

The History of the Fresh Start Program 

The Fresh Start Initiative was established in 2011 to give first-time tax offenders leniency and the opportunity to solve their tax issues through consolidated tax bills and payment arrangements Shortly after launching the program, the IRS made it easier to remove federal tax liens and allowed taxpayers to come to more favorable payment arrangements with the IRS. One year after that, the IRS gave more taxpayers access to the Offer in Compromise (OIC) program.  

Changes to Federal Tax Liens and Installment Agreements 

The IRS used to file tax liens on balances above $5,000. The Fresh Start program increased the tax balance limit to $10,000. It also gave taxpayers the chance to withdraw their lien, which then helped those taxpayers access more credit. 

 Streamlined installment agreements (SLIAs) were also expanded in 2011 that allowed more favorable terms for the taxpayer and helped avoid tax liens. This allowed taxpayers with debt of up to $50,000 to be set up with a SLIA, up from the previous $25,000 cap. Further, the term length was increased from 60 months to 71 months. The simple installment agreement is preferred for most taxpayers since it does not require giving the IRS extensive documents detailing financial situations.  

Changes to the OIC Program 

The OIC program is very sought after by taxpayers with a large tax debt balance. An Offer in Compromise is essentially an agreement between the IRS and taxpayer that settles the owed tax debt for a lesser amount. However, offers are not accepted if the IRS thinks that the taxpayer is capable of paying the balance in full. In 2012, the IRS allowed greater access to the OIC program by revising how it calculates taxpayer future income, allowing taxpayers to repay student loans and past-due state and local taxes, expanding the allowable living expense amount, and reducing the offer amount for those who qualify for an OIC. It’s important to note that the IRS does not accept OICs often. In fact, the IRS only accepted about a third of OIC applications from 2010-2019.  

Tax Help for Those Who Owe 

The Fresh Start program can really help taxpayers who owe the IRS but don’t necessarily have the funds to pay their debt. Working with an experienced tax relief company can help ease the process. If you are wondering if you are eligible for the Fresh Start program, let Optima Tax Relief help. Contact us today at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

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IRS Interest Rate Increases for Q1 of 2023

irs interest rate increases for q1 of 2023

While the Fed continues to increase interest rates, other entities are adjusting their own rates accordingly, the IRS included. In fact, the first quarter of 2023 has already seen a rise in IRS interest rates that took effect January 1, 2023. Here’s what it means for taxpayers. 

How much did rates increase? 

Both overpayment and underpayment rates with the IRS increased from 6% to 7%. These rates are per year and are compounded daily. The rate for overpayments corporations is 6%. If the corporation’s overpayment exceeds $10,000, the excess payment will accrue interest at a rate of 4.5%. However, if a corporation underpays, it will be charged interest on the balance due at a rate of 9%.   

How will this affect taxpayers? 

Taxpayers receive an overpayment credit when their tax payments exceed what they owe. In other words, the rate increase will be good for those still waiting for past refunds. If a taxpayer is still missing their tax refund for 2022, they will receive 7% interest from the IRS, beginning January 1, 2023. The IRS adds interest to a tax refund if it takes more than 45 days after the filing deadline to process a return and refund. As of November 18, 2022, there were still over 3 million unprocessed individual 2022 tax returns. This figure does not include unprocessed returns from the previous tax years. 

Tax Relief for Those Who Owe 

The rate increase will be good news for those still waiting to receive their 2022 tax refunds. However, this is bad news for those who owe a tax balance. If a taxpayer owes taxes but does not pay the balance in full, the remaining balance will be charged underpayment interest. Because underpayments just became more expensive, it is essential to pay off your tax debt as quickly as possible to avoid even more interest charges. Now more than ever, neglecting your tax bill can be very costly due to the interest rate increases accompanied by the regular penalties for underpayment. Optima Tax Relief and our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call us at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

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Tax Tips for 2023

tax tips for 2023

The 2023 tax filing season will be different than the past few years and getting prepared early can help make the process much easier. Some of the changes expected in 2023 could affect tax bills, which in turn could affect tax refunds. Here are some tax tips for 2023.  

Wait for Form 1099-K Before Filing 

Perhaps the most notable change for tax year 2022 is the reporting rule change for Form 1099-K. The form reports all funds received through third-party payment networks like Venmo and PayPal. With the rise of small businesses and gig work, a large number of taxpayers are expected to receive this form, especially since the reporting threshold has changed. Prior to the American Rescue Plan Act of 2021, Form 1099-K was not sent out unless a taxpayer collected more than 200 transactions valued at an aggregate above $20,000. Now, that threshold has dramatically decreased to just $600. 1099-Ks must be sent out by January 31, 2023, which would make filing at the end of February or early March ideal for taxpayers. The IRS is urging everyone to wait until they receive these forms before filing. Failing to include this income can have serious, negative consequences. 

Consider Changes to Tax Credits 

Another major change for tax year 2022 is the end of expanded tax credits that were introduced during the COVID-19 pandemic. Some of these credits, including the Child Tax Credit (CTC), Earned Income Tax Credit (EITC) and Child and Dependent Care Credit will return to pre-COVID levels. For example, the expanded CTC which previously granted $3,600 per dependent in 2021 will be reduced to $2,000 for the 2022 tax year. In 2021, eligible taxpayers without children received about $1,500 for the EITC but that amount will drop to about $500 for 2022. The Child and Dependent Care Credit is returning to a maximum of $2,100, down from 2021’s maximum of $8,000. These changes can drastically affect tax refunds so taxpayers should plan accordingly. 

Check Eligibility for a Clean Vehicle Credit 

The Inflation Reduction Act of 2022 amended the Qualified Plug-in Electric Drive Motor Vehicle Credit, also known as the Clean Vehicle Credit. If you purchased a new electric vehicle after August 16, 2022, you may be eligible for a tax credit. To qualify, your purchased vehicle must have finished assembly in North America. You can check the Department of Energy’s list of approved vehicles. If you purchased an electric vehicle before August 16, 2022 but did not take possession of the vehicle until on or after August 16, 2022, you may still claim the credit. In this scenario, the final assembly of your vehicle does not need to be in North America. The credit is worth up to $7,500.  

Tax Relief for Taxpayers 

The changes for the 2022 tax year can leave many taxpayers with surprise tax bills, especially if they have not prepared for these changes throughout the year. Still, steps can and should be taken to prepare for 2023 tax filing season. These new changes can result in a more stressful tax season. Working with a qualified and dedicated tax professional can help ease the process. If you need tax help, call us at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

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End of Year Tax Planning

end of year tax planning

As the year comes to an end, it’s time to prepare for the tax filing season. Getting prepared can help ease the process and result in a more accurate return and faster refund. Here are some tips for end of year tax planning.  

Review Your IRS Account 

Every taxpayer should have an online account with the IRS. In your account you can view any tax balances, payment history or payment plans. You can access tax records, manage communication preferences from the IRS, and view your Power of Attorney authorizations. You can also make payments or request a payment plan with the IRS. If you do not have an IRS account, you can create one on their website. Alternatively, if you want to access your tax information without using your online account, you can request an Account Transcript by mail. However, you’ll need to request one transcript per tax year, and they may not have the most up-to-date information regarding your penalties, interest, or pending actions. Businesses or individuals who filed a form that is not a 1040 can request transcripts through Form 4506-T. 

Organize Your Records 

Getting organized can help facilitate a smooth filing season. It’s important to make sure you have all relevant tax forms before filing to avoid errors that can lead to rejections or even IRS audits. You should have a W-2 form from each of your employers. You may also receive 1099 forms if you earn income from other sources. For example, Form 1099-INT will be sent to all taxpayers who were paid interest. Form 1099-G will be sent to anyone who received unemployment. Form 1099-DIV will be sent to all taxpayers who received at least $10 in dividends and distributions. A new form to be on the lookout for if you are a gig worker or small business owner this coming year is Form 1099-K, which will include income earned through third-party payment networks, like Venmo or PayPal. You’ll also want to collect any IRS notices you receive throughout the year.  

Check Your Individual Tax ID Number (ITIN) 

An ITIN is a tax processing number that the IRS issues to individuals who are required to have a U.S. taxpayer ID number but who not qualify for a Social Security number. Typically, an ITIN is valid unless you did not use it at least once during the previous three-year period, at which point it would expire. In other words, if your ITIN wasn’t used on a federal tax return at least once for tax years 2019, 2020, and 2021, it will expire on December 31, 2022. While the IRS will still accept a tax return with an expiring or expired ITIN, it could result in delays.  

Update Your Withholding 

Having the wrong amount withheld from your paychecks can result in a tax bill or a larger refund. If you had a tax bill last year, it could be that you did not withhold enough from your paychecks. While a larger refund sounds positive, it could mean that you withheld too much during the year, meaning you could’ve had more money each paycheck. If you had a major life change, like a marriage, divorce, the birth of a child, or a second job, it may be a good time to adjust your withholding. The IRS website has a free Tax Withholding Estimator tool that can help you calculate the correct amount of tax to withhold from each paycheck. Adjusting your withholding is as simple as submitting a new Form W-4 with your employer. In some cases, you may not have any taxes withheld. This is common for self-employed individuals or those who have investment income, pensions, Social Security benefits and other sources of income. If this applies to you, it’s important to make estimated tax payments to avoid a tax bill and penalties. The last quarterly tax payment for the year is due on January 17,2023 and can be made in your online IRS account. 

Tax Relief for Taxpayers 

Following these steps can help you prepare for the filing season in 2023. It is important to note that the 2023 tax season will be a bit different from previous years. Keep in mind that there will be no stimulus payments to collect and that some tax credit amounts have returned to pre-COVID levels. There will also be a much larger number of taxpayers who will receive Form 1099-K. Taxpayers should be warned that if their return does not include what is reported on Form 1099-K, it can trigger an automatic IRS notice or even an audit. Filing an accurate return can prevent financial stress in the long run. If you need Tax help, give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

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