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Tax Benefits of Donor-Advised Funds

tax benefits of donor-advised funds

Donor-Advised Funds (DAFs) have emerged as a powerful tool that not only allows philanthropists to make a positive impact but also offers substantial tax benefits. By understanding the unique advantages of DAFs, you can optimize your giving strategy and create a legacy of support for the causes you care about. Here’s an overview of the tax benefits of donor-advised funds. 

What are Donor-Advised Funds? 

Donor-Advised Funds (DAFs) are philanthropic vehicles administered by a public charity or financial institution. Contributors make irrevocable donations to their DAF accounts, which are then invested and managed by the sponsoring organization. Donors can recommend how their funds are distributed to eligible nonprofit organizations over time. 

Immediate Tax Benefits 

One of the most appealing aspects of contributing to a Donor-Advised Fund is the immediate tax benefit. When you donate cash, securities, or other assets to your DAF, you become eligible for an immediate tax deduction. This deduction is based on the fair market value of the assets donated, allowing you to lower your taxable income for the year of contribution instead of the year in which the contributions are transferred to the charity. 

Assume you donate $500 per month to a charity, or $6,000 per year. You are allowed to prepay years’ worth of donations by contributing to a DAF. For example, you could prepay three years’ worth of donations, or $18,000. Even though the DAF would use your contributions to disburse your regular $500 per month, you may deduct the full $18,000 now instead of the yearly $6,000.  

Avoid Capital Gains Taxes 

One key advantage of donating assets to a DAF is that you can avoid paying capital gains taxes on appreciated assets. If you were to sell these assets directly, you would typically be liable to pay capital gains tax on the difference between the purchase price and the current market value. In addition, if you donate assets that are worth more than what you paid for them, you can generally deduct the current market value of the asset instead of your original purchase price. 

Strategic Timing 

Donor-Advised Funds also provide an opportunity for strategic timing of your charitable contributions. For instance, if you experience a year of higher-than-usual income due to a business sale or other windfalls, you can contribute to your DAF to offset the income and reduce your tax liability for that year. 

Lower Estate Taxes 

By establishing a DAF and contributing assets to it, you can potentially reduce the value of your taxable estate. This can result in lower estate taxes that your heirs or beneficiaries might have to pay upon your passing. However, most individuals do not need to worry about paying estate taxes since they only apply to estates worth more than $12.92 million in 2023. 

Conclusion 

Donor-Advised Funds offer a powerful combination of immediate tax benefits and the potential for long-term impact. By strategically contributing to your DAF and leveraging its features, you can optimize your charitable giving while enjoying substantial tax advantages. Whether you’re an experienced philanthropist or just beginning your giving journey, exploring the benefits of Donor-Advised Funds can be a game-changer in your approach to making a positive difference in the world. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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How to Request a Tax Transcript From the IRS

how to request a tax transcript from the irs

When it comes to financial matters, accurate documentation is key. The IRS maintains various types of transcripts that provide a detailed record of your tax-related activities. Whether you need transcripts for tax filing, loan applications, or personal financial planning, understanding how to request IRS transcripts is crucial. In this guide, we’ll walk you through the process step by step. 

Step 1: Determine the Type of Transcript You Need 

The IRS offers several types of transcripts, each serving a specific purpose. The most common ones include: 

  • Tax Return Transcript: This transcript shows most line items from your tax return, including your Adjusted Gross Income (AGI). 
  • Tax Account Transcript: It displays basic information such as your filing status, payment history, and any adjustments made to your return. 
  • Record of Account Transcript: This comprehensive transcript combines both the Tax Return and Tax Account transcripts. 
  • Wage and Income Transcript: This transcript includes information from your W-2s, 1098s, 1099s, and 5498s.  

Step 2: Choose the Request Method 

The IRS offers multiple ways to request transcripts: 

  • Online Request: Visit the IRS website and use the “Get Transcript Online” tool. You’ll need to provide personal information, including your Social Security Number (SSN), date of birth, and access to your email account to verify your identity. 
  • Phone Request: Call the IRS Transcript Request line at 1-800-908-9946. Follow the automated prompts to provide your information and request the desired transcript type. This method also requires identity verification. 
  • Mail Request: Visit the IRS website and use the “Get Transcript by Mail” tool. You’ll need to provide personal information, including your Social Security Number (SSN), date of birth, and mailing address.  
  • Request Through Form 4506-T: Fill out Form 4506-T, Request for Transcript of Tax Return, available on the IRS website. Mail it to the address specified in the instructions. 

Step 3: Verify Your Identity 

Regardless of the method you choose, the IRS requires you to verify your identity to ensure the security of your personal information. This is done to prevent unauthorized access to your transcripts. Be prepared to provide personal details, such as your SSN, date of birth, and mailing address. 

Step 4: Review and Submit Your Request 

If you’re using the online tool, carefully review the information you’ve entered before submitting your request. For phone requests, listen closely to the automated prompts and follow the instructions. In the case of a mail request, ensure that you’ve accurately filled out Form 4506-T. 

Step 5: Receive and Review the Transcripts 

Once the IRS processes your request, you’ll receive the transcripts either online, by mail, or both, depending on your chosen delivery method. Review the transcripts carefully to ensure they contain the information you need. If you identify any discrepancies or errors, contact the IRS for assistance. 

Conclusion 

Requesting IRS transcripts might seem like a daunting task, but with the right guidance, it’s a straightforward process. Remember to choose the appropriate transcript type, select a suitable request method, and be prepared to verify your identity. Whether you’re preparing for tax season, applying for loans, or managing your personal finances, having access to your IRS transcripts can provide valuable insights and peace of mind. Optima Tax Relief is the nation’s leading tax resolution firm and can help you with your tax debt. 

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

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How Freelancers Can Avoid Surprising Tax Bills

how freelancers can avoid surprising tax bills

The allure of freelancing lies in its flexibility and independence, allowing individuals to pursue their passions while managing their own time. However, freelancers often find themselves grappling with financial complexities, particularly when it comes to taxes. One of the most dreaded scenarios is receiving an unexpected tax bill. In this article, we’ll explore practical strategies that freelancers can adopt to proactively manage their finances and steer clear of surprise tax bills. 

Understand Your Tax Obligations as a Freelancer 

The first step to avoiding tax surprises is to gain a clear understanding of your tax obligations as a freelancer. This includes knowledge of self-employment taxes, income tax rates, and any deductions or credits you might be eligible for. Keep in mind that different states have varying tax regulations, so take the time to research and comprehend the tax laws that apply to you. 

Make Estimated Quarterly Payments 

Freelancers are often required to make estimated quarterly tax payments to the government. The IRS requires taxes to be paid as income is earned, so these payments help you stay current with your tax obligations and prevent a hefty tax bill at the end of the year. For 2023, quarterly tax payments are due on: 

  • April 18, 2023 
  • June 15, 2023 
  • September 15, 2023 
  • January 16, 2024 

However, if you file your 2024 tax return by January 31, 2024, and pay your entire balance, you do not have to make the January 16th payment. Making these payments can be easier if you regularly set money aside. A general rule of thumb is to set aside 25-30% of your income for taxes, but this percentage may vary depending on your specific circumstances.  

Stay Informed About Deductions 

Freelancers are entitled to various tax deductions that can help lower their taxable income. These deductions could include home office expenses, equipment costs, travel expenses, and more. Research and stay informed about the deductions that apply to your industry and work-related expenses. However, make sure to accurately document and justify these expenses in case of an audit. 

Maintain Accurate Records 

Accurate record-keeping is crucial for freelancers to avoid tax surprises. Keep meticulous records of all your income and expenses. This can include invoices, receipts, contracts, and any communication related to your freelance work. Utilize accounting software or apps to help you organize your finances effectively. 

Consider Incorporating Your Freelance Business 

Depending on your situation, it might be beneficial to incorporate your freelance business. Different business structures have varying tax implications, and incorporation could provide you with opportunities to reduce your tax liability. Consult a tax professional or accountant to determine the most suitable business structure for your situation. 

Hire a Tax Professional 

Navigating the complexities of freelance taxes can be overwhelming. Hiring a qualified tax professional or accountant who specializes in working with freelancers can provide you with expert guidance and help you avoid surprises. They can assist with tax planning, ensuring you’re taking advantage of all available deductions, and help you stay compliant with tax laws. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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Ask Phil: No More Surprise RO Visits

Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses an important update regarding IRS revenue officers, or ROs. 

The IRS just announced that it is discontinuing home visits as an enforcement method. This means the days of intimidating revenue officers (ROs) knocking on your door are over. Instead, you will receive IRS Letter 725-B, which serves as an appointment letter to schedule an in-person meeting between you and an RO. In this meeting, you and the RO will review your financials, analyze your ability to pay your back taxes, and discuss how you can remain tax compliant moving forward.  

Remember, the IRS will never contact you via social media or text message. If you receive a message through one of these channels, you should report it to the IRS immediately. In addition, all letters coming in the mail from the IRS should be reviewed for potential scams. Be wary of letters advising you of unclaimed refunds, unclaimed Economic Impact payments, or unclaimed Child Tax Credits. If you’re unsure about a letter or notice, contact the IRS directly to confirm its validity. 

Don’t miss next week’s episode where Phil will discuss passports and taxes. See you next Friday!  

If You Need Help Dealing with the IRS, Contact Us Today for a Free Consultation 

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How State Residency Affects Your Taxes

how state residency affects your taxes

When it comes to taxes, the old adage “location, location, location” takes on a new meaning. State residency plays a significant role in determining the taxes you owe, as each state has its own tax laws, rates, and regulations. Things get even more tricky if you work and live in two different states. In this article, we’ll delve into the intricacies of how state residency affects taxes and why it’s crucial to understand these implications. 

Defining State Residency 

State residency refers to the place where an individual has established a permanent home and intends to return to when absent. It’s important to differentiate between domicile and physical presence. Domicile refers to the place you consider your permanent legal residence, while physical presence simply refers to your location at a given time. 

Residency and Income Tax 

One of the most notable ways state residency affects taxes is through state income tax. If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, you don’t need to worry about income taxes since these nine states do not impose one. The majority of states, however, levy income taxes, and whether you owe taxes in a particular state depends on your residency status, or where your domicile is. States employ different criteria to determine residency status, which can include factors like the amount of time spent in the state, the location of your primary home, voter registration, employment location, location of your children’s school, and driver’s license issuance. 

Statutory Residents 

Keep in mind that you may only have one domicile at a time, and it is where you will spend more than half of the year living. However, for those who consider two states home may be a resident of one and a statutory resident of the other. To figure out if you are considered a statutory resident, you can use the 183-day rule. If you have spent more than 183 days in one particular state, you are considered a statutory resident and may be liable for taxes in that state as well as your main state of residency.  

Dual Residency 

You may find yourself in a situation where you are considered a dual resident. Examples of this might include: 

  • Having homes in two different states 
  • Living in one state while working in another 
  • Living in one state, moving to another, and then moving back to the original state 
  • Moving to another state without establishing domicile there 

This means you’ll likely need to file tax returns in both states and pay taxes based on the portion of income earned while a resident of each state. Dual residency can lead to complex calculations, but it’s essential to accurately report your income and residency to avoid potential penalties.  

Impact on Sales and Property Taxes 

Income tax isn’t the only way state residency can affect your tax obligations. Some states have higher sales taxes or property taxes, which can impact your overall tax burden. Additionally, property tax rates can vary significantly between states, so choosing a state with favorable property tax laws might be an important consideration for homeowners. For example, Texas does not impose an income tax, but they have the sixth highest property tax rates in the U.S. in 2023. 

Conclusion 

State residency has a profound impact on your tax obligations, affecting everything from income taxes to property and sales taxes. Being aware of the residency rules and tax laws in the state you reside in or are considering moving to is vital for accurate tax reporting and minimizing your overall tax liability. As tax laws can be complex and subject to change, consulting with a tax professional or financial advisor can provide valuable insights tailored to your specific situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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How to File Past-Due Tax Returns

how to file past due tax returns

Life can sometimes throw us curveballs, and as a result, important tasks like filing tax returns can fall through the cracks. If you find yourself in a situation where you have past-due tax returns, it’s essential to address the issue promptly to avoid penalties and legal complications. In this article, we’ll walk you through a step-by-step guide on how to file those overdue tax returns and get your financial records back on track. 

Step 1: Gather All Relevant Documents 

Before you begin the process of filing past-due tax returns, gather all the necessary documents. You’ll need income documents, which typically include W-2 forms from employers and 1099 forms for other sources of income. If you misplaced or never received these documents, reach out to the issuing companies to obtain them. You can also request an IRS tax transcript. You should also gather records for deductions and credits. Some examples can include: 

  • Retirement account statements to show proof of contributions 
  • Education expense receipts 
  • Medical bills 
  • Donation slips 
  • Property tax receipts 
  • Mortgage or student loan interest statements 

Finally, having previous tax returns and any other relevant financial information on hand will ensure accuracy when filling out your tax forms. 

Step 2: Obtain and Fill Out the Required Tax Forms 

Visit the IRS website to download the appropriate tax forms for the year(s) you need to file. Make sure you select the correct forms for the specific year(s) you’re filing for. If you are filing using tax software, be sure you purchase the software for the correct year(s) you need to file. Carefully fill out the tax forms using the information you’ve gathered. Be meticulous in providing accurate details to prevent errors and discrepancies. If you’re unsure about any information, seek guidance from tax professionals or consult the relevant tax guides for that year. 

Step 3: Calculate Your Tax Liability and Know Your Options 

Calculate your tax liability based on the information you’ve provided on the forms. If you are using tax software, this amount will be calculated for you based on the information you provide. If something doesn’t seem right with the populated amount, double check your information. If you’re eligible for any deductions or credits, make sure to include them to potentially reduce your tax burden. Be thorough to ensure you’re paying the correct amount.  

If you cannot afford your tax bill, don’t ignore the issue. The IRS offers many tax relief options, including installment agreements and offers in compromise. Research your options and consult with an experienced tax professional if necessary.  

Step 4: Mail or E-File the Forms 

Depending on the options available, you can either mail your completed forms or e-file them. E-filing is generally faster and more convenient, and it also reduces the chances of errors since the software will perform necessary calculations. If mailing, use certified mail to track the delivery and ensure your forms reach the tax authorities. 

Step 5: Address Penalties and Interest 

Late filing of tax returns often incurs penalties and interest on the unpaid taxes. Upon filing your overdue returns, the IRS will send you a notice detailing the penalties and interest you owe. It’s important to pay these amounts promptly to avoid further accumulation of charges. Keep in mind that the IRS offers penalty abatement. Look into these options to see if you can get your penalties reduced or removed. 

Step 6: Seek Professional Help 

If you’re overwhelmed by the process, consider seeking assistance from tax professionals. Enrolled agents, certified public accountants (CPAs), or tax attorneys have expertise in navigating complex tax situations. They can help you accurately file your past-due tax returns, communicate with tax authorities, and potentially negotiate penalties if applicable. 

Step 7: Stay Organized Moving Forward 

After successfully filing your past-due tax returns, make a commitment to stay organized when it comes to your taxes. Set up a system for keeping track of your financial documents throughout the year, making the tax-filing process smoother in the future. 

Tax Help for Those with Past-Due Tax Returns 

Filing past-due tax returns might seem like a daunting task, but with careful planning and organization, you can successfully navigate the process. Remember, the sooner you address overdue taxes, the better it will be for your financial well-being. By following this step-by-step guide, you’ll be well on your way to resolving the issue and ensuring compliance with tax regulations. If you’re unsure about any aspect of the process, don’t hesitate to seek professional advice to make the experience as smooth as possible. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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IRS Ends Surprise Visits from Revenue Officers

The IRS recently announced it is ending its longstanding practice of surprise in-person visits to taxpayers. Optima CEO David King and Lead Tax Attorney Philip Hwang provide helpful insight on what communication you can expect to receive from a Revenue Officer moving forward and what you can do to resolve your tax burden with the IRS.

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Ask Phil: Maximizing Tax Deductions

Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses all things tax deductions. 

Everyone wants a big refund. So, how do we know we’re maximizing our deductions to accomplish this? It depends on whether you choose to take the standard deduction or itemize your deductions. Most taxpayers find it more financially rewarding to take the standard deduction. In addition, itemizing deductions can be tedious work and meticulous expense tracking throughout the year. If you itemize, you can deduct expenses like: 

  • Charitable deductions 
  • State taxes paid 
  • Mortgage interest 
  • Property taxes paid 
  • Some medical and dental expenses  

How do you know which option is best for you? It depends on how many deductible expenses you had for the year, as well as the standard deduction amount for your filing status. In 2023, the standard deductions are: 

  • $13,850 for single filers and married couples filing separately 
  • $20,800 for heads of household 
  • $27,700 for married couples filing jointly and surviving spouses 

You can fill out a Schedule A on Form 1040 to see the total amount of itemized deductions you have for the year. If your itemized deductions do not exceed the standard deduction for your filing status, you should take the standard deduction as it will result in a lower taxable income.  

Next week, Phil will discuss an important update about IRS revenue officers. See you next Friday! 

If You Want to Maximize Your Deductions, Contact Us Today for a Free Consultation 

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What is a Section 179 Deduction?

what is a 179 deduction

When it comes to running a business, one of the key goals is to minimize expenses and maximize profits. One often overlooked avenue for achieving this is by taking advantage of tax deductions. Section 179 of the Internal Revenue Code offers a powerful tool for business owners to significantly reduce their tax liability while investing in essential equipment and technology. In this article, we’ll break down Section 179 deductions, how they work, and how you can leverage them to benefit your business’s bottom line. 

Understanding Section 179 Deductions 

Section 179 is a provision in the U.S. tax code that allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. This deduction is designed to encourage businesses to invest in themselves by providing an immediate tax break for capital expenditures. In other words, instead of depreciating the cost of these assets over several years, you can deduct the entire expense in the year you make the purchase. 

Qualifying Assets 

Not all assets are eligible for Section 179 deductions. The IRS defines eligible assets as tangible personal property used for business purposes. This includes machinery, equipment, vehicles, livestock, computers, and furniture. It also includes some intangible assets such as copyrights, patents, and software that is not custom-made. It’s important to note that the asset in question must be used more than 50% for business-related activities to qualify for the deduction. 

Limits and Maximum Deductions 

While Section 179 deductions can be incredibly advantageous, there are limits to how much you can deduct in a given tax year. For tax year 2023, the maximum deduction limit was $1,160,000, with a spending cap of $2,890,000. This means that if your business spends more than $2,890,000 on qualifying assets, the deduction begins to phase out dollar-for-dollar.  

In addition, there are specific limitations on which vehicles for business use qualify. For example, there is a spending cap on heavy vehicles that weigh between 6,000 and 14,000 pounds. These typically include SUVs, pickup trucks, and commercial vans. In 2023, this cap is $28,900. All other eligible vehicles need to weigh under 6,000 pounds.  

It’s also worth mentioning that real estate is not covered by Section 179 deductions, and neither are land or land improvements. However, there are a few exceptions, including: 

  • Roofs 
  • Fire alarms and other protective systems 
  • Lodging property 
  • Heating, ventilation, and air conditioning (HVAC) property 

Conclusion 

If you don’t qualify for Section 179 deductions, you might try bonus depreciation, which allows businesses to deduct a large percentage of the asset’s purchase price up front. However, the percentage will be decreasing each year per the Tax Cuts and Jobs Act of 2017. Taxpayers can depreciate 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. For help figuring out what is best for your business, consider consulting a tax professional. Optima Tax Relief is the nation’s leading tax resolution firm for both individuals and businesses alike. 

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

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GoFundMe: How are Donations Taxed?

gofundme: how are donations taxed?

Crowdfunding is the act of funding a project by collecting small donations from a large number of individuals, often via the internet. GoFundMe is one of the most popular crowdfunding sites that provides a fundraising platform for just about anyone. From education campaigns to medical expenses, GoFundMe makes it easy to raise and collect funds for many causes. But like many other acts that result in free money, taxes are not often considered. Here’s a breakdown of how GoFundMe donations are taxed. 

How do crowdfunding and GoFundMe work? 

Crowdfunding sites, like GoFundMe, provide a way for people to solicit donations from friends, family members, and even strangers who want to support their cause. First, you’ll need to set up a campaign page with a title, description, and images or videos that explain your cause. You’ll also set a fundraising goal. Once your campaign page is set up, you can share it with others through social media, email, and other online channels. People who visit your campaign page can make donations directly through the GoFundMe platform by using their credit or debit cards, and sometimes third-party payment apps, like PayPal. Once you start receiving donations, you can withdraw the funds from your campaign, less any fees that the site charges.  

Is crowdfunded money taxed? 

The big question everyone wants to know is “Are these donations taxed?” Typically, donations are considered nontaxable gifts in the IRS’s eyes. However, there are a couple of exceptions that can cause the IRS to consider your crowdfunded money taxable income.  

Crowdfunded money is taxable if your donors received something in return for their donations 

If you offer something of value in exchange for a donation, this transaction could instead be viewed as a sale. Since profits from sales are taxed as income, the IRS would view the “donation” as taxable. 

Crowdfunded money is taxable if an employer sets up the fund for their employee 

In this scenario, because the fund was set up by an employer, it is considered additional income, which means it is taxed accordingly. 

Crowdfunded money is taxable if someone organized the fund on behalf of someone else but does not give the funded money to them 

In this scenario, the fund would be considered taxable income and would be added to the organizer’s gross income.  

Of course, if you are crowdfunding for a business venture, instead of a personal cause like help with funeral expenses, the answer to this question can become very complicated. Consulting a tax professional is your best option if you are attempting to crowdfund for a business venture. 

How do taxes on donations work? 

What if you’re on the other side of the screen and you are the one making the donations? One key thing to remember is the IRS does not allow you to deduct crowdfunded contributions during tax time. In order to deduct donations, you have to deliver it to a qualified 501(c)3 organization. That said, most GoFundMe pages do not qualify.  

However, there is one more tax obligation to keep in mind if you donate large sums of money via crowdfunding: the federal gift tax. The gift tax is a federal levy on gifts over a certain value. Gifts can include money, property, art, vehicles, and more. In 2023, the federal gift tax cap is $17,000. This means you can give a single person up to $17,000 without having to report it to the IRS. If you exceed the limit, you’ll need to file a federal gift tax return via IRS Form 709. However, just because you file this return doesn’t necessarily mean you’ll owe taxes on the gift. You technically won’t owe taxes until you’ve exhausted the lifetime exemption amount, which is $12.92 million in 2023. If and when you finally exhaust the lifetime limit, you’ll be subject to a gift tax rate from 18% to 40%, depending on how much you gifted. 

Tax Help for Crowdfund Donors 

The important thing to keep in mind here is that there are responsibilities on both sides of the aisle, whether you are the organizer of a crowdfunding campaign or a donor. If you are the organizer, always make sure to use the platform responsibly and transparently, providing accurate information to donors about how their contributions will be used. If you are a donor, stay below the annual gift tax limit as often as possible. When you can’t, or when you finally exhaust the lifetime limit, stay on top of all the necessary tax filings and payments. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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