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Vehicles for Business Use

vehicles for business use

You can deduct vehicle expenses if you use your car for business purposes. You can even deduct the vehicle’s entire cost of ownership and operation, with some limitations, if it’s only used for business purposes. Tax implications can vary on this topic, so it’s important to understand the deduction rules when it comes to vehicles for business use. 

Which vehicles qualify? 

Cars, SUVs and trucks used for business activities qualify for tax deductions. However, if the vehicle is used as equipment, it is not eligible. This can include dump trucks and cranes. Additionally, the vehicle is also ineligible if it used for hire, like taxis or airport transport vans. 

Standard Mileage Rate vs. Actual Expenses 

There are two methods for calculating your deductible car expenses: using the standard mileage rate or calculating the actual expenses incurred. The standard mileage rate allows employees and self-employed individuals to deduct 58.5 cents per mile in the first half of 2022, and 62.5 cents per mile for the second half of 2022. These miles should only be counted if it was driven for business use only. In addition to the total number of business miles driven, the IRS will also request the number of total miles driven in the year. Using this method, you may also deduct auto loan interest, registration and property taxes, and parking and toll fees. 

The actual expenses method allows taxpayers to deduct all vehicle costs incurred including gas, oil, maintenance, repairs, tires, registration fees, licenses, auto loan interest, insurance, rental or lease payments, depreciation, garage rent and parking and toll fees. You would then calculate your business-use percentage of the vehicle to find the amount you can deduct. 

For example, let’s say your total mileage for the year was 15,000 miles and 12,000 of those miles were for business use, 6,000 in the first half of the year and 6,000 in the second half. Your eligible vehicle expenses for the year totaled $6,000. If you used the standard mileage rate for 2022, your deduction would be $7,260.  

6,000 miles x 58.5 cents (first half of 2022) = $3,510, plus 

6,000 miles x 62.5 cents (second half of 2022) = $3,750 for a total of $7,260 

If you calculated actual vehicle expenses, you could deduct $4,800. 

12,000 miles / 15,000 miles = 80% business use 

80% x $6,000 = $4,800  

In this case, it would be more beneficial to use the standard mileage rate rather than deducting all vehicle expenses. A good rule of thumb is to use the actual expenses method when you have vehicles with high operating costs and the standard mileage rate when you use vehicles with lower operating costs.  

Tax Relief for Businesses 

The rules for taking the standard mileage rate or calculating actual vehicle expenses are mostly straightforward. Another deduction for vehicles for business use is depreciation. You can deduct depreciation to account for general wear and tear of your vehicle. The rules surrounding depreciation can be very complex and it is always best to check with a knowledgeable tax preparer about what is allowed. Give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

If you’ve received a letter from the IRS and need help understanding what it means, you can analyze your IRS notice in three easy steps with the Optima® TAX APP. 

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How to Avoid Tax Scams and SMishing

The IRS recently announced that there has been an increase in tax-related scams where taxpayers personal financial information could be at risk of being exposed or stolen. CEO David King and Lead Tax Attorney Philip Hwang provide helpful insight on what tax scams to be on the lookout for and how to avoid them in the future.

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

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How Home Equity Loans Affect Taxes

how home equity loans affect taxes

Sometimes the idea of taking out a second mortgage can be a viable solution to eliminating debt, funding home renovations, or paying off unexpected medical bills. Before taking out a home equity loan, you should know the tax implications that come with it.  

What is a home equity loan? 

Also known as a second mortgage, a home equity loan is a type of consumer debt that allows homeowners to borrow against the equity in their residence. The equity that you have accumulated through mortgage payments is used as collateral. The loan is paid out to you in a lump sum and is repaid with interest at a fixed rate each month for a set number of years.  

How much can I borrow with a home equity loan? 

Typically, the max you may borrow is around 80% to 85% of your home’s appraised value less the remaining balance on your mortgage. For example, let’s say your home is valued at $500,000, your mortgage balance is $200,000, and your lender will allow you to borrow up to 80% of your home’s value. 

$500,000 x 80% = $400,000  

$400,000 – $200,000 = $200,000 maximum loan amount 

In this scenario, you may borrow up to $200,000. The principal would be repaid at a fixed rate each month for a set number of years in addition to your regular mortgage payment, hence the term “second mortgage.” 

How Do Home Equity Loans Affect My Taxes? 

Like many other loans, the interest on a home equity loan can be tax deductible, but there are some limitations. If you used funds from the loan to “buy, build, or substantially improve” the home that was used to secure the loan, the interest is tax deductible. Since the passage of the Tax Cuts and Jobs Act of 2017, you may no longer deduct the interest of the loan if it was used for any other purpose. The amount of interest that may be deducted will also depend on your filing status.  

Tax Relief for Homeowners 

Deducting home equity loan interest only makes sense if your itemized deductible expenses are more than the amount of the standard deduction. If you choose to itemize your deductions and would like to deduct home equity loan interest paid, you will need to supply your tax preparer with IRS Form 1098, Mortgage Interest Statement. Tax planning can be incredibly stressful and intimidating, especially when taking new actions such as deducting loan interest. It is always best to check with a trusted tax professional to ensure you remain compliant with the most updated tax laws. If you need tax help, give us a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.

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How Inflation Will Affect Your Taxes in 2023

how inflation will affect your taxes in 2023

Every year, the IRS makes inflation adjustments. With consistently high inflation in 2022, some experts are predicting larger adjustments than normal that can affect tax brackets in 2023.  

What is Inflation? 

Put simply, inflation is the overall increase in prices of goods and services over a given period of time. Inflation is the reason a gallon of milk costs about $4.33 today but only $2.72 in 2002. The increase can come from a rise in demand, like when a tech giant charges increasingly high prices for a new product because of growing popularity. The increase can also result from a decrease in supply, usually because of an increase in cost of production, materials or labor.  

Does Inflation Always Affect Taxes? 

Inflation does always affect taxes. In fact, the IRS automatically adjusts income tax brackets and the standard deduction each year according to inflation rates. Since the 1980s, the U.S. inflation rate has staggered around 2%, which is considered a healthy rate by the Federal Reserve’s standards. In some years when inflation has been relatively higher or lower, the rate has fluctuated between 0% and 4%.  

How is Inflation Affecting Income Tax Brackets in 2023? 

The consistently high inflation in 2022 has resulted in higher-than-expected inflation adjustments for income tax brackets, with most sitting between 6.5% and 8%. This essentially means that taxes will apply to less of your earnings beginning on January 1, 2023, to reflect the newest value of money based on inflation. The most notable changes are as follows: 

  • 12% Tax Bracket: Taxable earnings up to $11,001 for single filers and $22,001 for joint filers 
  • 22% Tax Bracket: Taxable earnings up to $44,726 for single filers and $89,451 for joint filers 
  • 24% Tax Bracket: Taxable earnings up to $95,376 for single filers and $190,751 for joint filers 
  • 32% Tax Bracket: Taxable earnings up to $182,101 for single filers and $364,201 for joint filers 
  • 35% Tax Bracket: Taxable earnings up to $231,251 for single filers and $462,501 for joint filers 
  • 37% Tax Bracket: Taxable earnings up to $578,126 for single filers and $693,751 for joint filers 

How is Inflation Affecting the Standard Deduction in 2023? 

The standard deduction will also increase.  

  • Single Filers: $13,850 
  • Married Individuals Filing Separately: $13,850 
  • Married Couples Filing Jointly: $27,700 
  • Heads of Households: $20,800 

Tips for Taxpayers 

Tax planning can be very complicated and sometimes it’s best to seek help from professionals in the industry. Give us a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

If you’ve received a letter from the IRS and need help understanding what it means, you can analyze your IRS notice in three easy steps with the Optima® TAX APP. 

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How to Manage Finances as a Single Individual 

how to manage finances as a single individual

 

As the cost of living continues to rise, it is becoming increasingly difficult for single individuals to live comfortably. Without the safety net of a second income, the need to manage finances as a single individual is more important than ever. The process comes with unique benefits and challenges, both throughout the year and during tax time.  

Budget Tips for Single Individuals 

There are countless budget strategies you can use as a single individual. Some of the most popular ones are the 50/30/20 budget and the zero-based budget. 

50/30/20 Budget 

One of the most popular methods is the 50/30/20 budget, in which you spend about half of your after-tax income on necessities. This includes bills, groceries, housing, and all the other items that are necessary to live. Thirty percent of your income should then go to your “wants”, like dinners, entertainment, and travel. The final 20% should be designated for savings and debt repayment. These percentages can be altered to fit your own specific needs. 

Zero-Based Budget 

In the zero-based budget strategy, every dollar you earn is allocated to a specific expense. A certain dollar amount goes to housing, another goes to utilities, another goes to debt, and so on until every dollar in your paycheck is assigned to one expense. At the end of the pay period, whatever is left over is sent to your savings. This strategy is especially helpful in preventing impulse spending. 

Retirement Tips for Single Individuals 

The key to retirement savings is understanding that the earlier you start, the better. Let’s say two people begin saving $100 per month. One begins at age 25 and the other begins at age 35. The one who begins saving earlier will have nearly twice as much savings by age 65. Prioritizing any portion of your income for retirement can really maximize your savings, especially if you take advantage of employer contributions.  

Automate and Maximize Your Saving 

Having an emergency fund that can cover three to six months of expenses is crucial if you don’t have a second income to rely on if you lose your job or cannot work. Automating your savings can help you reach your goals faster. You can create automatic bank account transfers or even use mobile apps that schedule money transfers from your checking account to your savings account or online account. While you’re at it, you can maximize your savings by opening a high-yield savings account that will accrue interest at a higher rate than a typical savings account. 

Tax Relief for Single Individuals 

During tax season, it’s important to know which tax bracket you’ll fall into as a single filer. The federal income tax bracket for 2022 is as follows: 

  • 10%: $0 – $10,275 
  • 12%: $10,276 – $41,775 
  • 22%: 41,776 – $89,075 
  • 24%: 89,076 – $170,050 
  • 32%: $170,051 – $215,950 
  • 35%: $215,951 – $539,900 
  • 37%: $539,901+ 

Single filers do not qualify for deductions that many families take advantage of, so it’s also important to learn which ones you are eligible for in order to reduce your taxable income, and even your tax bracket. Remember, the tax bracket ranges above are based on taxable income, and not the actual amount of earned income you receive. In other words, the tax bracket is based on your income after deductions and credits are taken. Doing taxes on your own can be intimidating and stressful. Give us a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.

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Assigned an IRS Revenue Officer? Hire a Tax Professional!

Owing a tax liability means that individuals are at a higher risk of falling into collections with the IRS. Optima CEO David King and Lead Tax Attorney Philip Hwang explain the risks taxpayers face when handling a tax liability on their own, as well as the benefits of hiring a tax professional to help you when dealing with a revenue officer. 

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

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Expenses You Didn’t Know Were Tax Deductible

 

Expenses you didn't know were tax deductible

 

Tax deductions can help lower your tax bill and even increase your tax refund on your return. There are several tax deductions you might not know are deductible. 

Sales Taxes 

In some tax years and some states, it might make sense to itemize your deductions rather than take the standard deduction. For example, if you made a large purchase like a vehicle or engagement ring, you could deduct sales taxes off your federal return. Or, if you live in a state that does not impose a state income tax, you could write off the sales tax you paid that year.  

Medical Expenses 

You can deduct medical expenses that exceed 7.5% of your AGI if you itemize your deductions. You may even be able to deduct 100% of your health insurance premiums if you are self-employed. To qualify, you must have no other health insurance coverage and you may only deduct the amount of business income earned that year.  

Home Office Deduction 

Any space in your home used exclusively for conducting business can be deducted at $5 per square foot, up to 300 square feet.  

Charitable Gifts 

Cash donations to approved charities can be deducted for up to 50% of your AGI but must be substantiated with bank statements or receipts. Non-cash donations can be deducted at fair market value. Even out-of-pocket expenses for charitable work can be deducted. 

Childcare & Dependent Care 

If you pay a babysitter to watch your children while you work, look for work or attend school full-time, you may be able to claim the Child Care Credit. This can also apply to care for an elderly parent who lives with and is a dependent of the adult child.  

Student Loan Interest 

If you are required to repay student loan debt, you can deduct the interest paid, up to $2,500, on your federal return. In addition, if your parents paid your student loan debt, the IRS views that money as a gift to you used to pay the loan. In this case, you can deduct up to $2,500 of the student loan interest they paid, as long as they do not claim you as a dependent on their tax return. 

College Expenses  

The number of deductions related to college is quite large. You can deduct up to $4,000 of eligible tuition. The Lifetime Learning Credit is worth up to $2,000 per year and can be claimed for education expenses to help gain or improve skills. The American Opportunity Tax Credit allows a maximum annual credit of $2,500 for qualified education expenses paid in the first four years of higher education. Some states even allow you to deduct contributions made to your 529 College Savings Plan.  

Tax Relief for Taxpayers 

Every tax situation is different. There are countless deductions and credits taxpayers can claim on their federal or state returns. The best thing to do is speak with a tax preparer about which deductions and credits you are eligible for and what substantiation might be needed to claim them. Remember claiming deductions without proper substantiation can lead to audits and delays in processing your return. If you need tax help, give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable agents. 

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Tax Tips for Last-minute Filers

Tax tips for last-minute filers

 

Filing your taxes can be stressful. Filing at the last minute can only add to the stress. If you haven’t filed your tax return yet, there’s no need to panic just yet. Here are some tax tips for last-minute filers.

Know Your Facts

The most important fact to keep in mind is the tax deadline. In 2022, the extension deadline is October 17th. Other than the deadline, it’s vital to understand your specific tax situation, especially since it can vary from year to year. New changes like getting married, having a child, starting a business, or purchasing a home can alter your tax situation. Knowing which credits you can claim, or which forms you’re required to submit can help prevent last-minute errors and stress.

Maximize Your Deductions

It’s not uncommon for taxpayers to overpay taxes or receive a smaller refund because they did not take advantage of all the tax deductions they qualify for. It’s important to understand that claiming tax deductions are incentives created by the government to reward certain actions, like investing in real estate or starting a business. Claiming these deductions can lower your tax bill and in turn, increase your refund amount. Be sure to ask your tax preparer about which deductions you may qualify for.

Check for Accuracy

Once you have all the forms completed and ready to be submitted, you should check everything for accuracy. Carefully check your identification numbers like Social Security numbers, mailing addresses, and all figures. If any of these are missing or incorrect, it can cause delays or even reduce your tax refund amount.

File Electronically

All taxpayers can e-file their returns, which the IRS claims is the safest, fastest and easiest way to submit their tax returns. E-filing a complete and accurate return will also mean receiving your refund faster. Most taxpayers who e-file receive their tax refunds within three weeks after their returns are accepted, while paper returns have generally taken more than 6 months to process.

Tax Relief for Last-minute Filers

Sometimes filing last minute is a necessity, but it is best to avoid this scenario whenever possible. Tax rules can change year to year so starting the filing process early is one of the few ways you can make the process run more smoothly. It’s understandable if sometimes this isn’t always possible and extra help is needed, in which case tax relief is available. If you need tax help, give Optima a call at 800-536-0734 for a free consultation with one of our tax professionals.

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Optima Newsletter – September

Optima Newsletter - September

Real Estate Investments & Tax Implications

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

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What is Payroll Tax?

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

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Is My Side Business a Hobby or a Small Business?

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

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Converting Your Home to a Rental Property

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

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How Will the Inflation Reduction Act Affect Your Taxes?

With the recent passing of The Inflation Reduction Act, individuals who have unfiled tax years or unpaid tax debt may now expect an increase in IRS collection enforcement. Optima CEO David King and Lead Tax Attorney Philip Hwang explain how the Inflation Reduction Act can directly affect taxpayers and how to get compliant with the IRS.

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

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