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What You Need to Know About Severance Packages & Taxes

what you need to know about severance packages and taxes

Losing your job is stressful enough as it is. If you are offered a severance package when let go, your first thought might not be on taxes. However, even severance pay is considered income which means it is taxable. Here we will discuss what you need to know about severance packages and how they affect your taxes. 

What Is a Severance Package? 

A severance package is a combination of pay and benefits offered to employees after being laid off from an employer. To receive the package, an employee will typically need to sign a severance agreement that details the amount of pay to be received, as well as any benefits that will be offered. The agreement may also list terms that the employee must abide by to receive the package. For example, accepting a severance package could mean that you are not eligible to file a wrongful termination lawsuit or collect unemployment benefits. Severance packages are offered at the employer’s discretion. In other words, employers are not legally obligated to offer a laid off employee any severance pay.  

Is Severance Pay Taxable? 

Severance pay is taxable, similar to any regular wages or salary income you earned prior to being laid off. Severance pay is taxed in the year of payment and most employers will include your severance pay on your W-2, along with any unused accrued vacation or sick time. Employers will typically withhold federal and state taxes for you, including: 

  • Social Security tax 
  • Medicare tax 
  • Federal income tax withholding 
  • State income tax withholding (if applicable) 
  • Federal unemployment tax (FUTA) 

Are There Any Tax Deductions for Job Hunting? 

As of the 2017 Tax Cuts and Jobs Act, taxpayers may no longer write off job hunting or moving expenses. 

How Does Severance Pay Affect My Taxes? 

In some cases, not enough taxes are withheld from severance pay. If this happens, you might owe during tax time. To avoid this, you can confirm your withholding is correct or make an estimated tax payment on the IRS website.  

Another scenario can involve a large severance package bumping you up into a higher tax bracket. This could happen because your income is taxed the year it is received. For example, if you receive six months of severance pay at the end of the year, you will essentially receive 18 months’ worth of pay, which could be a drastic increase in income compared to the previous year. This could cause a change in your tax rate and disqualify you from certain credits and deductions.  

If you find yourself in the above scenario, there are ways to minimize your tax bill. For example, you can contribute to a tax-deferred retirement account, add funds to a health savings account (HSA), or open a 529 plan for your child’s college fund. You can also ask your employer to have the severance payments spread out to avoid a large tax bill. 

Tax Help for Those Who Received Severance Pay 

If you were recently laid off and received a severance package, you should make sure enough taxes were withheld. If it’s clear that is not the case, you can still avoid a large tax bill. Your best bet is to speak to a trusted tax professional to avoid a stressful tax issue. If you need tax help, call Optima at 800-536-0734 for a free consultation. 

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I Amended My Tax Return – Now What?

i amended my tax return now what

If all goes well during tax season, you file your tax return, get a decent tax refund and wait to do it all again next year. But what happens if you file a return but then notice an error? Do you let it be or file an amended return? If there are simple math errors, the IRS should be able to correct those on their own. However, if you noticed you made an error in your filing status, income, dependents, or credits, you should amend your return through Form 1040-X. Here we will take a look at what happens after you amend your tax return.  

How Long Does It Take Amended Returns to Process? 

The IRS processes amended returns in the order they are received. Because of the backlog of unprocessed returns, this could mean waiting longer than usual processing times. According to the IRS website, your amended tax return can take up to 3 weeks after you mail it to show up in the IRS system. From there, it can take more than 20 weeks, instead of up to 16 weeks, to process amended returns. You should not attempt to file a second tax return or call the IRS during this wait period. 

You can use the Where’s My Amended Return? (WMAR) IRS online tool to check the status of your return and confirm the IRS has received it. You can also call the toll-free telephone number 866-464-2050. These tools should not be utilized until three weeks after filing the return since that is when status updates may become available.  

How to Use the Where’s My Amended Return? Tool 

To check the status of your amended tax return, you’ll need your social security number, date of birth, and zip code that is currently on file with the IRS. Once you proceed, you will see one of the following statuses of your return. 

Status: Received 

Your amended return was received and is being processed by the IRS. It currently takes more than 20 weeks to complete processing. 

Status: Adjusted 

An adjustment was made to your IRS account. The adjustment will result in a refund, balance owed or in no tax change. Payments can be made by mail, online, or through the IRS Direct Pay system. 

Status: Completed 

Your amended return has been processed by the IRS. You will receive all the information connected to its processing by mail.

Why Hasn’t My Amended Return Been Processed Yet? 

In some cases, the IRS still may not have processed your amended return, even after the 20-week timeline. This can happen for several reasons including:  

  • It has errors 
  • It is incomplete 
  • It is not signed 
  • It is returned to you requesting more information 
  • It includes a Form 8379, Injured Spouse Allocation 
  • It is affected by identity theft or fraud 
  • It is routing to a specialized area 
  • It requires clearance by the bankruptcy area within the IRS 
  • It needs to be reviewed and approved by a revenue officer 
  • It needs a review of an appeal or a requested reconsideration of an IRS decision 

In any case, the IRS will contact you if it needs more information to get your amended return processed. 

Tax Help for Those Who Amended a Return 

You should always ensure that you are filing a complete and accurate tax return so you can avoid filing an amended return. Sometimes amending a return could potentially trigger an audit or other examination by the IRS. If you find that you cannot avoid amending your tax return, make sure to follow the correct steps, provide all necessary information, and be patient while waiting for the IRS to process your return. When in doubt, you can also contact a qualified tax professional for assistance. If you need tax help, call Optima 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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Tax Tips for 2023

tax tips for 2023

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

Wait for Form 1099-K Before Filing 

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

Consider Changes to Tax Credits 

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

Check Eligibility for a Clean Vehicle Credit 

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

Tax Relief for Taxpayers 

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

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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. 

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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. Be sure to confirm that the charity has a tax-exempt status with the IRS before donating if you plan to claim a deduction. A few examples of approved organizations include a trust, foundation, church, synagogue, or other religious organizations, and veterans’ organizations.

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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Inflation Reduction Act Part II: IRS Spending

Inflation

Between the inflation, the pandemic, and the Inflation Reduction Act, now is a scary time to owe back taxes. The bill has passed, granting the IRS $80 billion dollars in funds for their activity. We’re expecting a massive increase in the agency’s enforcement.

How will $80 billion impact the IRS?

The funds from the Inflation Reduction Act will be added on to the annual money the IRS receives from Congress, which was about $12.6 billion for 2022. The 50% increase will be paid across four departments over the next ten years.

More than half of the funds are specifically going toward enforcement activity. IRS enforcement includes collecting back taxes, conducting criminal investigations, legal support, and monitoring digital assets.The other three areas that will be supported include:

  • IRS operations- $25 billion for expenses such as rent, printing, postage, and telecommunications.
  • Customer service- $4.8 billion would be used for updating service technology. A callback service is in the talks.
  • Taxpayer assistance- $3 billion would go toward filing and account services, or other taxpayer needs.

What to expect from IRS collection activity

With a large budget provided by the Inflation Reduction Act, the IRS is expected to collect roughly $203 billion in federal tax revenue over the span of a decade. The net federal revenue would be raised by more than $124 billion.

Government officials are also expecting the tax gap to close. Meaning, the difference between the amount of taxes being collected and what taxpayers actually owe will be closer.

Are you prepared for increased collection activity?

If you haven’t started the process of tax debt relief, it’s not too late. Being prepared with a team of professionals that are already working on your compliance could spare you from more penalties, stress, and possibly help you save some money. Give Optima a call for a free consultation at 800-536-0734.

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Inflation Reduction Act Part I: What is it?

Inflation

From a pandemic to inflation, American taxpayers haven’t been able to catch a break since 2020. To combat the current state of the economy, Senate has passed a new bill with a ten-year plan. The Inflation Reduction Act is being sent to President Biden’s desk, requesting nearly $80 billion to the IRS.

What is the purpose of the Inflation Reduction Act?

While the funding will support the IRS, this will hopefully bring in more federal tax revenue to offset the cost of lowering prescription medicine and combating climate change. There are plans in motion to accomplish these goals, but federal funding to do so is lacking.

How will the IRS use these funds?

The IRS has been waiting for additional funding for years. In the last ten years, their activities have dwindled, and the agency’s budget decreased more than 15%. While IRS Commissioner Rettig has previously stated that the backlog will be complete by the end of 2022, there are still 11 million unprocessed tax returns.

The IRS will hire more staff and have access to more resources, such as legal representation for larger cases.

Cons of the Inflation Reduction Act

Naturally, more staff and resources for the IRS means more IRS enforcement. This act could trigger more audits for middle class businesses and individuals.

Outcome of the Inflation Reduction Act

Government officials have also stated that the goal is not to go after small businesses, but rather the large corporations and high net-worth individuals with high-end noncompliance.

Senior Fellow at the Urban-Brookings Tax Policy Center Janet Holzblatt was quoted as saying, “The goal should not only be to increase audits, but improve the productivity of audits. You want the IRS to select the businesses and people for audits who really have not been compliant.”

How the Inflation Reduction Act affects people who owe

With more IRS enforcement on the way, it’s better to be safe and get in compliance as soon as possible. Give Optima a call today for a free consultation at 800-536-0734.

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Tax Rules for an Airbnb or Vacation Rental

Tax rules

Renting out your property as an Airbnb can be a good way to secure residual income. While Airbnb may send you a tax form at the end of the year, it’s important to understand your tax responsibilities to check for errors and in the event you aren’t issued a form.

Reporting your Airbnb or vacation rental as income

The IRS requires that all payment processing companies (including Venmo, PayPal, and Airbnb) report gross earnings for all users within the US. If you earn $600 or more, and/or have 200 or more transactions for the year, Airbnb will issue Form 1099-K.

If you are not a US citizen but earned money from a vacation rental in the US, you will be provided Form W-8.

Withholding taxes from Airbnb payouts

You do have the option to withhold taxes from your Airbnb earnings, which is always recommended to avoid a large tax bill at the end of the year. You can also use a tax calculator to get an estimate of your earnings to save money for taxes.

Vacation home, rental, or personal use

To determine if your vacation property is a rental residence or being used for personal gain, you must identify how often the property is rented versus how often you reside there. Renting your property to someone that pays the fair market value while using the home as their primary residence would make it a rental property.

If you do not reside in the home and rent it frequently for short-term periods, it would be considered a vacation rental.

Should you find yourself residing in the home more frequently than you rent it, then you are using the home for personal use. The IRS requires that you still pay taxes on the money you earn from renting your property for 15 days or more out of the year.

Tax debt relief and filing assistance for Airbnb hosts

As a host, you may qualify for tax debt relief. Our tax professionals will review your case to determine the best course of action for your compliance. For a free consultation, you can call Optima at 800-536-0734.

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