IRS Collections

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. 

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.

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.

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.

Do you provide over half the cost of living for your household? You may want to consider filing your taxes as head of household, which could qualify you for a higher standard deduction. Head of household filing status also provides lower tax rates than filing as single or married and filing separately.

How can you qualify as Head of Household?

There are a few qualifying criteria to meet in order to file under head of household status:

1. You must be single, divorced, or separated by the last day of the tax year.
2. You are responsible for over half of your household’s living expenses.
3. You have a child or qualifying dependent.

What are dependent qualifications?

Your dependent will be one of the following: a qualifying child or a qualifying relative.

Qualifying Child

To claim a qualifying child, the child must be part of your family. Some qualifying relationships include:

• Your biological child
• Your stepchild
• Your foster child
• Your sibling or half sibling
• Step sibling
• A descendent of either of the above (which includes grandchildren, nieces, and nephews)

The child must also be of a certain age. The IRS states that one of the following must be true of the child’s age:

• They’re 18 or younger at the end of the year and younger than you or your spouse.
• They’re 23 or younger at the end of the year, was a student and younger than you or your spouse. To qualify as a student, the child must be full-time for at least five months of the year in question.
• The child can be over the age limit if they are diagnosed by a doctor as permanently disabled.

Another important key factor to claiming a dependent is that the child must live with you for more than half of the tax year. The IRS provides particular exceptions for temporary absences (such as extended hospital stay, college, or juvenile detention). Other exceptions include children of divorced or separated parents and children that were kidnapped.

Should the child in question get a job and provide at least half of their own financial support, you cannot claim them as a dependent.

The child can’t file a joint tax return with someone and be claimed as a dependent. The exception to this rule is if the child and their spouse file a joint return only to claim an income tax or estimated tax refund.

Last, but not least, the child must be a U.S. citizen, resident alien, U.S. national or a resident of Canada or Mexico.

Qualifying Relative

A second, broader category of dependents falls under the “qualifying relative” category. Although it is implied by the name, no familial relationship is actually required under this provision. In fact, a qualifying relative can be anyone who:

1) lives with the taxpayer all year,

2) made less than the exemption amount ($3,950 for 2014),

3) relied on the taxpayer for more than half their support and

4) is not a qualifying child of another taxpayer.

An important distinction between the qualifying child and qualifying relative categories are that the qualifying relative has no “age test”, but does have a “gross income test”.

Gross Income Test

Applying the gross income test correctly requires you to identify the type of dependent and the type of income received by that person. When applicable, the gross income test uses an income threshold that matches the exemption amount for the applicable year. In 2014 for example, that threshold (exemption) is $3,950.

First, the gross income test is primarily a concern for a qualifying relative, as the qualifying child dependent does not have to satisfy a gross income test. The following example is illustrative of this distinction:

In 2014, Junior (age 17) worked part-time for his father’s landscaping business and earned $5,000 for the year. Even though Junior’s income exceeded the $3,950 threshold amount, because he is under 19 years old and meets both the residency and support tests, his income does not disqualify him from being a qualifying child. However, if Junior was 22 years old in 2014 and not a full-time student, he would not qualify as a dependent under either category because he fails both the age test for a qualifying child and the income test for the qualifying relative.

Second, the type of income derived must be considered in the gross income test. Tax-exempt income, such as social security benefits or municipal bond interest, is not considered income for the gross income test. So for example, if a taxpayer provides more than half the support for her aged parent and the parent receives $15,000/yr in untaxed social security benefits, the parent would still qualify under the income test as a qualifying relative.

What kind of expenses are you responsible for as the Head of Household?

Taking responsibility for living expenses includes, but is not limited to:

• Rent or mortgage
• Utility bills
• Insurance
• Property taxes
• Groceries
• Repairs
• Other household bills (internet, phone, etc.)

As head of household, you are required to be responsible for the listed expenses for over half of the tax year.

If your dependent is a parent, they are not required to live in the same household as you. The stipulation is that you maintain their cost of living. It’s important to note that if you are married and living in separate households, this does not qualify you for Head of Household status. You must be unmarried.

What does the IRS mean by “unmarried?”

Unmarried means that you’re filing a separate return and your spouse didn’t live with you for the last half of the year. Two people cannot file as head of household on the same return.

If you share a child (biological, stepchild, or foster) with your former spouse, your home should be the primary residence of the child to qualify for head of household status. If you are unable to claim the child as a dependent, this could make qualifying a bit more difficult.

Pros of filing as Head of Household

This filing status offers a better standard deduction amount than most others, even with a lower tax bracket. The deduction may not be as favorable as joint filing, but it’s a considerably larger deduction than filing single by roughly 50%. The standard deduction for 2021 head of household status was $18,800.

Tax debt and filing assistance for Head of Household status

Tax debt with the weight of other financial burdens can be a stressful ordeal. As a head of household filer, you may qualify for relief. Give Optima a call for a free consultation today at 800-536-0734.