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Life Transitions That Affect Your Taxes: Part II

life transitions that affect your taxes

For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here, we will continue to review some of the most common life transitions that can affect your taxes. 

Buying or Selling a Home 

There are several tax benefits to becoming a homeowner. For example, homeowners can deduct expenses like mortgage interest, real estate taxes, mortgage points, and insurance premiums. In addition to these deductions, new homeowners can also take advantage of penalty-free IRA withdrawals used to pay for the down payment on their home purchase.  

On the other hand, selling a home can mean turning profit, especially in a seller’s market. However, homeowners should stay mindful of capital gains taxes. Single filers who sell their home after owning and living in the house for at least two of the last five years before a sale can avoid paying taxes on the first $250,000 of profit from the sale. Married couples filing jointly in the same scenario can avoid paying taxes on the first $500,000 of the profit from the sale. Any excess profit will be subject to capital gains taxes, which can be a hefty and unplanned expense.  

Accepting an Inheritance 

If you ever receive an inheritance after the death of a loved one, you might wonder if any of it is taxable. In general, money inherited is not taxable. If you receive property, things are a little more complicated. You will receive the home at its fair market value determined on the date of inheritance. If you sell the property for more than the fair market value, you’ll be taxed on those gains only. If you inherit an IRA account, the rules of taxation vary depending on your relationship to the original account owner. Generally, you’ll likely be taxed on any distributions taken from the account. 

Retiring 

If you currently save for retirement, you might already know that you are eligible for certain tax breaks, like deducting contributions to your 401(k) or traditional IRA accounts. On the other hand, when it comes to taking distributions on these accounts, you will have to pay income tax on your withdrawals each year. You will not owe taxes on Roth IRA withdrawals since your contributions were made with after-tax dollars.  

Dealing With Taxes After Death 

Many taxpayers are unaware that after death, one final tax return will need to be filed in your name. If you’re married, your spouse will be able to file a joint return one last time. Your spouse, or other named representative, may even need to file an estate tax return, which summarizes the assets of the deceased.  

Tax Help for All Life Transitions 

You may not be at an age to begin worrying about how these life transitions could affect your taxes. However, being unprepared is what can lead to financial mishaps. So again, plan for the year ahead so you are not blindsided by a large tax bill in the future. If you find yourself financially crippled by a large tax liability because you were unprepared, a knowledgeable and experienced tax professional can help. Contact Optima Tax Relief at 800-536-0734 for a free consultation. 

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Life Transitions That Affect Your Taxes: Part I

life transitions that affect your taxes

For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here are some of the most common life transitions that can affect your taxes. 

Getting Married 

While a wedding will bring many types of joy, newlyweds can also celebrate new tax breaks. Once you are married, you and your spouse will likely have the benefit of filing jointly, which can offer lower tax rates and a higher standard deduction. Married couples filing jointly also have extra tax perks to look forward to. For example, if you are not working, you cannot contribute to an IRA account if you are single, but you can if you are married and use your spouse’s income. You can also take advantage of flexible spending accounts (FSAs) and lower health care expenses. 

Having a Baby 

Having a baby, or growing your family in other ways, can significantly reduce your tax liability. Claiming dependents can grant access to new tax credits and deductions. The Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Credit, Adoption Credit, the Credit for Other Dependents, and higher education credits are just a few examples of credits available for those who can claim dependents. 

Education Expenses 

If you have recently decided to go back to school, or if you have a dependent who will be attending college soon, you might be able to take advantage of some education-related tax breaks. There are tax credits available to students to help offset qualifying expenses, including the American Opportunity Credit and the Lifetime Leaning Credit. If you have already graduated and are now paying student loans, you can deduct up to $2,500 of your student loan interest during tax time.  

Moving Out of State 

Sometimes new opportunities come from out-of-state and moving states can affect your tax bill. Aside from moving expenses, you’ll need to figure out if you’ll be paying less or more taxes in your new state of residency. States like California and New York have much higher tax rates compared to others. Some states do not have any income tax. It’s important to factor this into your budget before you decide to make the big move.  

Accepting a Promotion at Work 

After properly celebrating a job well done, you might want to consider how your new role at work can affect your taxes. A bump in pay can also bump you up into a higher tax bracket, which means more taxes owed. For most, the tradeoff is worth it, but either way you should do the math to be prepared for tax season. To help offset any additional costs during tax time, you can also adjust your W-4 withholding.  

Tax Help for All Life Transitions 

Often times, you’ll find most of these life transitions that can affect your taxes offer greater benefits than things to worry about. The best thing you can do is prepare for the aftermath of each of these changes. Plan for the year ahead so you are not blindsided by a large tax bill next filing season. If you find yourself scrambling with a large tax liability because you were unprepared, a knowledgeable and experienced tax professional can help. Contact Optima Tax Relief at 800-536-0734 for a free consultation. 

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How Unemployment Affects Your Taxes

how unemployment affects your taxes

If you spent time unemployed last year, you might be wondering how that’ll affect your tax return this year, especially if it was your first time ever being without work. When it comes to unemployment and taxes, you might have some questions. Here’s a breakdown of how unemployment affects your taxes. 

Is Unemployment Taxable? 

Perhaps the first question people ask about unemployment is: “Is my unemployment income taxable?” In short, it is taxable. The IRS requires you to report any unemployment income on your federal tax return with Form 1099-G, Certain Government Payments. Most states tax unemployment income as well, except for the few that don’t tax any income and the few that exempt unemployment benefits from income taxes. You can check with your state’s Department of revenue to see if your income is taxed at the state level. 

How Do I Pay Unemployment Taxes? 

When applying for unemployment benefits, you can request your state to withhold federal taxes from your checks. In this case, 10% will be used to pay federal taxes. You can also make estimated quarterly tax payments throughout the year. If you go this route, be mindful of the deadlines for each quarter: April 15, June 15, September 15, and January 15 of the following year. Your final option is to just pay all taxes due during tax time. The same three options usually also apply to paying taxes at the state level. 

Does Unemployment Affect My Tax Credits? 

Receiving unemployment benefits might affect your eligibility for certain tax credits. For example, eligibility of the earned income tax credit (EITC) and the child tax credit (CTC) are determined by earned income. Since unemployment benefits are not considered earned income, it could reduce your credit amount or completely disqualify your eligibility. Since the EITC is worth up to $6,935 and the CTC is worth $2,000 per qualifying child in 2022, it is best to check with your tax preparer to see exactly how unemployment will affect your eligibility for tax credits you rely on each year.  

Are Other Government Benefits Taxable? 

Sometimes the unemployed seek other financial assistance from the government, including housing subsidies, childcare subsidies, and SNAP benefits. You might also accept food donations from food pantries. These benefits are generally not taxable, but you should check with your local benefits offices to confirm. 

What If I Can’t Pay My Taxes? 

Being unemployed might mean you’re low on funds and might need extra help if you run into issues during tax time. The IRS offers a free tax filing service on their website and Volunteer Income Tax Assistance (VITA) provides free tax preparation for lower-income taxpayers. If your tax issues are bigger or more complex, it might be best to consider tax relief options. 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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Does the IRS Use Private Collection Agencies (PCAs)?

Now that IRS enforcement is picking back up, some taxpayers are seeing that the IRS has placed their overdue tax account with a private collection agency (PCA). CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on what collection agencies you can trust, how PCAs will notify you of your tax balance and what you can do to resolve your tax burden.

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A Newlywed’s Guide to Taxes

a newlywed's guide to taxes

If you recently got married, you might have spent a lot of time planning a ceremony, reception, or honeymoon. As a newlywed, have you considered how your new life change will affect your taxes this year? Here are some things you should keep in mind when filing your taxes. 

Name and Address Change 

Before we get to the obvious changes like filing status, one of your first actions should be to report your name change to the Social Security Administration (SSA) if necessary. The name on your tax return must match the one on file with the SSA or else it can cause delays in processing your return or refund. You’ll also want to make sure you update the IRS and USPS of a change in address if paper mail is your preference for correspondence or refund payment.  

Withholding 

While adjusting your tax withholding with your employer is not necessary, it can help avoid any overpayment or underpayment in taxes throughout the year. You can use the IRS Online Withholding Calculator to find out how much you should withhold. Once you determine the best option for you and your spouse, you should submit a new FormW-4 to your employer. 

Tax Bracket 

Getting married could change your tax bracket if you file together since your income is combined with your new spouse’s. Here are the tax brackets for the 2022 tax year: 

Tax Rate  Married Filing Jointly  Married Filing Separately 
10%  $0 -$20,550  $0 – $10,275 
12%  $20,551 – $83,550  $10,276 – $41,775 
22%  $83,551 – $178,150  $41,776 – $89,075 
24%  $178,151 – $340,100  $89,076 – $170,050 
32%  $340,101 – $431,900  $170,151 – $215,950 
35%  $431,901 – $647,850  $215,951 – $323,925 
37%  $647,851 or more  $323,926 or more 

Filing Status 

You might be used to filing single each tax season, but as a newlywed that will no longer be an option. You’ll either file married filing jointly or married filing separately. Most couples will opt for a joint return as it opens access to more tax breaks and sometimes a better tax rate. Every situation is different, so your best bet may be to prepare your tax return both ways to see which has a better outcome.  

Standard Deduction 

Married couples filing jointly can claim one of the largest standard deductions at $25,900 if you are both 65 and under. If you file separately, you can only claim the $12,950 standard deduction. You should note that if one spouse opts to itemize, both of you must itemize, so you should determine which method would result in a lower taxable income. 

Tax Credits and Deductions 

As mentioned, filing separately eliminates eligibility for some tax credits. For example, couples married filing separately may not claim the Earned Income Tax Credit (EITC) or education credits like the American Opportunity Credit or Lifetime Learning Credit. They might be able to claim the Child and Dependent Care Credit if they meet certain requirements. They also cannot deduct student loan interest. On the other hand, married couples filing jointly have extra tax perks to look forward to. For example, if you are not working you cannot contribute to an IRA account if you are single, but you can if you are married and use your spouse’s income. You can also take advantage of flexible spending accounts (FSAs) and lower health care expenses. You can consult with a tax preparer for more tax breaks. 

Tax Help for Newlyweds 

Taxes are sure to be the furthest thing from your mind after getting married, but it’s critical to remember that as long as you are legally married by December 31st, the IRS considers you to be married for the full tax year. The sudden change in rules may be intimidating and brand new to you, but there are always experts who are ready to help. If you need tax help, contact Optima Tax Relief at 800-536-0734 for a free consultation. 

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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. 

Find out 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. Be sure to include any income you earned, even if the job was nontraditional like gig work or freelancing. There are a lot of rules surrounding filing requirements, but in general, you must file if you meet one of the following scenarios: 

  • You are filing single and earned at least $12,950 in 2022 
  • You are married filing jointly and earned at least $25,900 in 2022 if both you and your spouse are under age 65 
  • You are married filing jointly and earned at least $27,300 in 2022 if one spouse is under age 65 and the other is 65 or older 
  • You are filing head of household and earned at least $19,400 in 2022 

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 parent might be able to claim you as a dependent. Before you file your own tax return, you should confirm if your parents intend to claim you as a dependent on their tax return.  

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 idea for young and first-time filers.  

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 out which credits and deductions you are eligible for 

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: 

  • Saver’s Credit: If you contributed to a retirement plan and earned less than $36,501 in 2022, you may be eligible for this credit. Dependents claimed on another tax return and full-time students are not eligible.  
  • American Opportunity Tax Credit: Worth up to $2,500 the AOTC allows you to claim a credit for tuition, fees and courser materials. You can use Form 1098-T to determine your credit amount. You cannot claim this credit if you are listed as a dependent on another tax return. 
  • 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. 
  • Earned Income Tax Credit: This credit for low- to moderate-income workers is worth up to nearly $7,000 for 2022.  

A tax deduction is a reduction of taxable income to lower your tax bill. You can either claim the standard deduction of $12,950 for single filers in 2022, or you can itemize your deductions by adding up your eligible expenses. This might include vehicle expenses if you use it for work or student loan interest. Generally speaking, it is more beneficial to take the standard deduction instead of itemizing.  

File by the deadline 

Now that you’re ready to file, you should be sure to submit your return by the tax deadline. In 2023, the deadline is April 18th. 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 will 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 will have until October 16, 2023. 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. If you need tax help, contact us at 800-536-0734 for a free consultation. 

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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. 

By |Tax News|Comments Off on The 1099-K Reporting Threshold Is Delayed – Now What?
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