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.
Generally speaking, most income sources are taxable. However, there are some income types that are exempt from taxes. CEO David King and Lead Tax Attorney Philip Hwang discuss different kinds of income that may or may not get taxed and provide insight on how you can find out if your income is taxable or not.
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.
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.
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 you. Here’s a quick overview of how student loan forgiveness affects your taxes.
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. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
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 an IRS interest rate increase 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 is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
The 2023 tax filing season will be different than the past few years. That said, 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. This is 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 pandemic-era tax credits. 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
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. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
Landing at No. 4 on this year’s list, the company was one of only two companies to rank in the “Top 5” over the last five years.
Optima Tax Relief, the nation’s leading tax resolution firm, has been honored as a 2022 Top Workplace winner by the Orange County Register for the eighth consecutive year. This year the company ranked fourth out of the 17 large company honorees, making them one of only two companies to land in the “Top 5” in a five-year span. Orange County Top Workplaces recognizes U.S. employers that have fostered a people-first company culture.
“At Optima, our success is deeply rooted in our company culture,” said Optima CEO David King. “We recognize that employee satisfaction and customer satisfaction not only go hand in hand, but also build each other up. Because of that, we are constantly working to cultivate a culture that is inclusive, nurturing and diverse.”
The list of honorees is based solely on employee feedback gathered through a third-party survey administered by employee engagement technology partner Energage LLC. The confidential survey uniquely measures 15 culture drivers that are critical to the success of any organization, including alignment, execution, and connection, just to name a few.
The Top Workplaces in Orange County award comes just months after Optima Tax Relief was named a Top Workplace USA winner for the second year in a row. The company was also recognized with Culture Excellence Awards in five categories: Leadership, Purpose & Value, Work-Life Flexibility, Innovation, and Compensation & Benefits. Optima was also honored with the “Excellence in Management” award for the last two years.
Optima’s Associate Vice President of Human Resources Kimberly Carson credits the company’s success to their close-knit staff. “Our best quality is our people,” Carson said. “The level of engagement (even in a remote or hybrid environment), teamwork, inclusivity, and drive for excellence every day is exactly why we are such a fun place to work while still delivering the highest quality service to our clients.”
An in-person awards program to celebrate the 2022 Orange County Top Workplaces winners took place on Wednesday, December 7th at the Irvine Improv. A complete list of this year’s winners can be found on the Top Workplaces website.
