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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.

While stocks may seem like an effortless path toward financial stability, they do affect your taxes. Understanding what’s expected when you file can keep you out of trouble with the IRS.

Brokerage Accounts and Taxes

When you sell the stock shares in a brokerage account, you may be responsible for capital gains taxes. Capital gains tax can affect you in two ways, depending on your circumstance:

Short-term Capital Gains Tax

This tax applies to profits from sold assets that were held for a year or less. The rates for short-term capital gains tax match your income tax bracket.

Long-term Capital Gains Tax

The long-term variant of this tax applies to sold assets held for longer than a year. The rates are 0%, 15%, or 20% depending on your filing status and taxable income. It’s important to note that long-term capital gains tax rates are usually lower, so it may work in your best interest to hold that stock for a little longer.

How Dividends Affect Taxes

There are two types of dividends and they’re usually considered taxable income, qualified and nonqualified. Qualified dividend rates range from 0%, 15%, or 20% (the same rule for long-term capital gains tax). Nonqualified dividends are ordinary dividends that have the same tax rate as your income bracket.

Taxpayers in higher brackets typically pay more taxes on dividends. Overall, dividend investments can drastically alter your tax bill.

How to Reduce Taxes on Stocks

Holding onto shares long enough for them to become qualified dividends can result in reducing taxes.

If possible, you should hold onto your assets for a little longer than a year. Long-term capital gains tax rates are often lower when you sell your stocks. Making a profit from stocks is all about strategy and figuring out what falls in line with your financial goals.

Tax Debt Assistance

If you find yourself in debt with the IRS due to stock investments, you may qualify for relief. Give us a call for a free consultation at (800) 536-0734.

The IRS shared a reminder for tax-exempt organizations that have a filing deadline of May 16, 2022. Filing is mandatory, so if you need more time, you should request an extension as soon as possible.

Which Form should tax-exempt organizations file?

Tax-exempt organizations would file one of four tax forms for a return:

1. Form 990-series annual information returns (Forms 990, 990-EZ, 990-PF)
2. Form 990-N, Electronic Notice for Tax-Exempt Organizations Not Required to File Form 990 or Form 990-EZ
3. Form 990-T, Exempt Organization Business Income Tax Return (other than certain trusts)
4. Form 4720 Return of Certain Excise axes Under Chapters 41 and 42 of the Internal Revenue Code

Electronic filing for tax-exempt organizations

You should e-file to save time on processing and to avoid inevitable delays that occur when filing by paper. E-filing also reports your compliance with the IRS.

However, for tax-exempt organizations filing a Form 990, 990-EZ, 990-PF or 990-T for 2021, it’s mandatory to file electronically.

For organizations filing Form 990-N, the IRS website states, “organizations eligible to submit Form 990-N must do so electronically and can submit it through Form 990-N (e-Postcard) on IRS.gov.”

Requesting an extension for tax-exempt organizations

Should you need additional time to file, you can request a 6 month extension by filing  Form 8868, Application for Extension of Time To File an Exempt Organization Return. While this form allows you to file later, it does not push payment due dates if you owe the IRS.

Owing the IRS as a tax-exempt organization

Optima Tax Relief takes on clients with both individual and business tax debt. Give us a call for a free consultation today at (800) 536-0734.

Optima Tax Relief has once again teamed up with the IRS to provide assistance to low-income residents and other members of their surrounding community with free tax preparation services. Over 100 members of Optima’s staff registered with the United Way of Orange County, California to participate in the Volunteer Income Tax Assistance (VITA) program, which was launched by the IRS to provide free tax preparation services to those such as:

• Persons with disabilities
• Limited English-speaking taxpayers
• Elderly taxpayers
• Low to moderate-income taxpayers

The free tax help offered by the VITA program is particularly beneficial for those who are 60 years of age and older, as it specializes in questions about pensions and other retirement-related issues that are unique to seniors. Many of the community members who would qualify for the program are retired individuals associated with non-profit organizations that receive grants from the IRS. This year, however, we saw a wide range of ages attend for assistance. We were happy to help anyone that we could!

“It gave me the opportunity to offer assistance, to the people of our community, who may not have had the fortune to go elsewhere for tax assistance and walk away with a smile on their face for the help and guidance they received,” said Associate Director of Payments Steve Stoffel.

SVP of Accounting, Richard Hamiprodjo called volunteering for the VITA program “a rewarding experience getting involved with the community and helping those who are in need.”

By partnering with the IRS, the VITA program is able to offer reliable, trustworthy tax filing services for free. Optima’s volunteers for the VITA program helped with tax preparation, greeting guests, and some gathered the appropriate tax documents from taxpayers.

Associate VP of Human Resources Kimberly Carson was also a volunteer this year. She shared her thoughts and experience, saying, “It was great to have the opportunity to give back to our community and help people with getting their taxes completed. Not everyone has extra money to get their taxes done by professionals to ensure it is done correctly, so to be able to provide this service to the community is not only needed but fulfilling. Thank you for the opportunity!”

Our volunteers exclaimed how exciting and fulfilling it was to be part of this event. The culture within Optima is very community oriented, and it shows through the tenacity Optimians have for helping others and connecting. Martha Casillas, a Payments Coordinator at Optima said, “My participation as a VITA volunteer gave me a boost of self-confidence, and self-esteem within the company. Being new to the OTR family, it also allowed me to connect with other Optimians, as well as see some of the involvements OTR has within the surrounding communities.”

Case Manager Kateri Drewes added, “For me, being a VITA volunteer means taking the time to give back to my local community. I cherish the opportunity to help folks get the care and quality service they deserve!”

Optima looks forward to working with United Way to host our very own VITA site at our California office next year. Our goal is to serve more taxpayers with a bigger outreach in the Santa Ana community.

Working with a qualified tax preparer can lessen the likelihood of delays and mistakes when you file. What makes a tax preparer qualified? Lead Tax Attorney Philip Hwang and CEO David King discuss tips for choosing your tax preparer. The Tax Show hosts cover types of tax professionals, credentials, minimum requirements, and red flags to look out for. Tune in to learn how to choose the best tax preparer for your tax situation.

Many small business owners are at risk of being assigned a Revenue Officer (RO). If a small business withholds taxes from their employees but fails to hand it over to the IRS, the IRS can assign an RO, garnish bank accounts and wages, seize property and real estate, and even show up at your place of business. CEO David King and In-house Expert & Enrolled Agent Rosie Steele provide helpful tips on what small business owners should do if they are assigned an RO.