Tax News

Tax Forms for Self-Employed Individuals

tax forms for self-employed individuals

Filing taxes when you are self-employed can be very complex. There are plenty of factors involved, from figuring out how much you earned to adding up your business expenses. One of the ways you can better prepare yourself for the filing season is to ensure you have all the correct and relevant tax forms.  

Form 1040 

Most people will be familiar with Form 1040 since it’s the one that taxpayers submit to report their taxable income. Using your gross income and the credits and deductions you can claim, the form helps calculate the amount of tax you owe or the refund you will receive. Typically, an individual will be required to file Form 1040 if they meet certain gross income thresholds according to their filing status and age. For example, single filers under age 65 are required to file Form 1040 for 2022 if their gross income was at least $12,950. However, self-employed individuals follow different filing requirements. If you are self-employed and have net earnings of at least $400, you must file an income tax return.  

Schedule C 

A Schedule C, also known as a Business Profit and Loss Form, helps anyone with self-employed income report their gross business income and expenses. Self-employed income is basically all sources of income that do not come from a W-2. Income from your small business, gig work, or side hustles should be reported with a Schedule C, typically one form for every individual business activity you are involved in, unless they fall into the same category. For example, if you have an Etsy shop and deliver for both Uber Eats and DoorDash, you’ll likely fill out two Schedule C forms, one for your Etsy shop and one for both driving services.  

While most of the categories on Schedule C are self-explanatory, some can be quite difficult to calculate. You probably received at least one 1099 if you collected payment for your self-employed work. You can use these to add up your income. You’ll be able to deduct any returns or refunds given during the year, auto expenses if you use your vehicle for business use, and the cost of goods sold. Calculating your expenses can be the trickiest part of filing for self-employed taxpayers, so it’s probably best to discuss this with a qualified tax preparer.  

Form 4562 

Form 4562 is used to depreciate or amortize your business assets. This can include buildings, machinery, equipment, vehicles, and patents. You may not depreciate land. Taxpayers must file a separate Form 4562 for each depreciation or amortization deduction being claimed.  

Form 8829 

If you plan to deduct your home office expenses, you’ll need to file Form 8829, Expenses for Business Use of Your Home. Remember you can only claim the home office deduction for areas in your home used exclusively for business and if it is your principal place of business. Typical deductions include insurance, rent, utilities, repairs and maintenance, home depreciation, deductible mortgage interest. However, you may only deduct the portion that is used for business use only. For example, if you use 15% of your home’s square footage exclusively for business use, you may deduct 15% of your home expenses for a business deduction.  

Schedule SE 

Schedule SE is used to calculate your self-employment taxes to determine your Social Security benefits. You’ll only need to file a single Schedule SE, even if you have multiple businesses. You would simply combine your net earnings on a single form. However, married couples filing jointly who both earn self-employed income should file separate Schedule SE forms. 

Tax Relief for Self-Employed Individuals 

Filing taxes when self-employed can be very complicated, especially if done on your own. Because there are several business expenses that can be exaggerated, the IRS typically takes a closer look at deductions claimed by self-employed individuals, leading to more audits. It may be best to seek the help of a credible tax preparer or professional to look at your tax situation. Give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

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An Update on Fed Rate Hikes

an update on fed rate hikes

American households have been feeling the full effects of inflation all year with rates at their highest since early 2008. To support a healthy U.S. economy, the Federal Reserve, also known as the Fed, has raised its federal funds rate. Put simply, the federal funds rate is a suggested interest rate for banks to use when lending money. The Fed raises and lowers the rate accordingly to control the money supply and help keep inflation under control.  

Fed Rate Hikes in 2022 

In 2022, the fed funds rate has increased seemingly every other month. So far, the Fed has made the following adjustments: 

  • March 2022: The Fed raised its rate from 0.25% to 0.50% 
  • May 2022: The Fed raised its target rate range between 0.75% and 1% and announced it was reducing its holdings of Treasury and mortgage-backed securities. 
  • June 2022: The Fed raised its target rate range between 1.5% and 1.75%, the largest rate hike in nearly 20 years. 
  • July 2022: The Fed raised its rate to a target range between 2.25% and 2.5% 
  • September 2022: The Fed raised its target rate range between 3% and 3.25% and announced the anticipated rate by the end of 2022 to be 4.4%. 
  • November 2022: The Fed raised its target rate range between 3.75% and 4%, the highest level since 2008. 

What’s Next For the Fed? 

In October 2022, the Consumer Price Index (CPI), which is used to measure inflation, showed some signs of cooling prices in some areas. While this may sound encouraging, the Fed has announced that it does not view the small change as a victory. The option of raising their rate range in the December policy meeting is very much a possibility that Americans should prepare for. In fact, several financial institutions have predicted a rate of over 5% by March 2023.  

What The Fed Rate Hikes Mean for Americans 

The Fed rate hikes impact anyone who uses or is seeking financing because of rising interest rates. Home buyers have experienced higher interest rates on mortgages, meaning less buying power. On the flipside, home sellers might see a decrease in demand because it’s more expensive to purchase a home right now. Credit card debt also becomes more expensive since consumer debt interest rates rise after rate hikes. One of the few positives of rate hikes is that rates on savings accounts have increased slowly. Putting money into a high-yield savings account or a CD during inflation can result in greater interest yields. 

Tax Relief for Those Affected by Fed Rate Hikes 

Just about everyone in the U.S. has been affected by fed rate hikes, either directly or indirectly. On the tax side of things, the IRS has increased their interest rates for overpayments and underpayments to 6% per year, compounded daily. This rate is up from July’s rate of 5%. Higher rates make it a worse time to fall behind on tax payments, so staying compliant is even more crucial during this time. Optima Tax Relief can help with your tax debt needs. Give us a call at 800-536-0734 for a free consultation today. 

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Taxes on Social Security Benefits

taxes on social security benefits

Many taxpayers are often shocked to learn that their Social Security benefits can be taxed by the federal government. Taxes on Social Security benefits are typically determined by income levels. In addition, there are currently 12 U.S. states that tax Social Security benefits to some extent. Here’s a brief overview of how Social Security income is taxed, both at the federal and state level. 

Will My Social Security Income Be Taxed? 

According to the IRS, the easiest way to determine if your Social Security benefits are taxable is to add half of your annual Social Security income and add it to all other income, plus all tax-exempt interest, to find your total combined income. If your combined income is above the IRS base amount, you’ll be required to pay some tax. The 2022 combined income limit for single filers, heads of household, or qualifying widows with dependent children is $25,000. The limit for joint filers is $32,000. Married couples who file separately will likely need to pay taxes on Social Security income. 

How Much Will I Be Taxed? 

In 2022, 50% of a taxpayer’s benefits can be taxed if they meet any of the following criteria: 

  • Filing single, head of household, or qualifying widow with income between $25,000 and $34,000 
  • Married filing separately and lived separately from their spouse for the entire 2021 year, and earned between $25,000 and $34,000 
  • Married filing jointly with income between $32,000 and $44,000 

If the taxpayer fits any one of these criteria, then 50% of their benefits will be subject to tax. However, the actual amount will be the lesser of either: 

  • Half of their annual Social Security benefits, or 
  • Half the difference between their combined income and the IRS base amount 

For example, let’s say a single filer had an annual Social Security income of $20,000 and a combined income of $27,000. Half of their annual Social Security income would be $10,000. Half the difference between their combined income and the IRS base amount of $25,000 would be $1,000. 

($27,000 – $25,000) / 2 = $1,000

The taxable benefits would be the lesser of the two amounts, which is $1,000. 

If the taxpayer earns more than the IRS base amount, the tax rate is higher. In 2022, 85% of a taxpayer’s benefits can be taxable if they are: 

  • Filing single, head of household, or qualifying widow and earn more than $34,000 
  • Married filing jointly and earn more than $44,000  
  • Married filing separately, and lived separately from their spouse for the entire 2021 year, and earned more than $34,000 
  • Married filing separately and lived with their spouse at any time during 2021 

Does My State Tax My Social Security Benefits? 

In addition to federal taxes, residents of the following 12 states may also have to pay state taxes: 

  • Minnesota and Utah: Tax according to federal rules 
  • Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Vermont, and West Virginia: Tax according to federal rules but offer deductions or exemptions based on age or income 

Tax Relief for Social Security Recipients 

Being taxed on Social Security benefits can be unexpected. Generally, the benefits won’t be taxed if it’s a taxpayer’s only source of income, but with limited income during retirement age, it’s important to be prepared. Taxes on these benefits can be paid through quarterly estimated tax payments. Federal tax can even be withheld from these benefits. In any case, all Social Security recipients should ensure that they remain compliant and report their Social Security earnings during tax time. If you need tax help, give us a call at 800-536-0734 for a free consultation with one of our tax professionals. 

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Top 5 Tips to Avoid an IRS Audit

Top 5 tips to avoid an irs auditThe Senate recently approved nearly $80 billion in IRS funding, with $45.6 billion specifically for enforcement. This new funding is expected to result in more tax audits. There is no sure way to avoid an IRS audit. However, there are some things that the IRS has generally viewed as “red flags,” which could increase the chances of an audit for taxpayers. Here are our top five tips to avoid an IRS audit.  

File Your Tax Return 

Currently, you must file a tax return if your gross income meets certain thresholds based on your age and filing status. If you meet the minimum income requirement and you do not file a federal income tax return, or file late, you can be penalized 4.5% of your unpaid tax liability for each month your return is late, up to 22.5%. Additionally, you will incur a 0.5% per month for failure to pay penalty, up to 25%. While both penalties have a cap, interest will continue to accrue until the balance is paid off, which is compounded daily at the federal short-term rate, plus an additional 3%.  In addition, the IRS may prepare a substitute for return (SFR) on your behalf, using your W2 and 1099 forms for that tax year and even your bank account records. The SFR will likely result in a larger tax bill, since tax credits and deductions will not be claimed. In short, choosing to not file a return each year will not excuse you from paying taxes.  

Report All Income 

Underreporting income is one of the most common reasons taxpayers get audited. Remember, the IRS receives copies of all your W-2 and 1099 forms for the year. If incomes do not match up, they will investigate your tax situation. Failing to report all income can cost you an additional 20% in penalties, so it’s always best to report all earnings the first time around. 

Use Common Sense with Business Expenses 

The IRS reminds taxpayers that business expenses should be “ordinary and necessary” to produce income for your specific trade or business. In other words, items like office equipment and advertising costs are fine, but you should not try to deduct your daily lunch expenses. You should always avoid comingling personal and business expenses. 

Keep Good Records 

Keeping good records that support your reported income is critical. This can include invoices, canceled checks, mileage logs, and other documents. The IRS recommends keeping records for three years after filing. Bookkeeping can be a tedious process, so it may be best to hire a professional if you are not up to the task. 

Know How to Report Losses 

The IRS will likely audit individuals and businesses that report multiple or consecutive losses. If your business claims a loss for several years, the IRS may classify it as a hobby instead of a for-profit business. Once this happens, you will not be allowed to claim a loss related to the business and you will have to prove that your “business” has an acceptable motive to earn a profit. 

Tax Relief for Taxpayers 

Odds of an audit increase when the IRS notices any red flags. The audit process can be tedious and taxing. Failing an audit can result in a huge, unforeseen tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit.

Get a free consultation with one of Optima’s knowledgeable tax professionals to evaluate your audit risk and see if you qualify for tax relief. 

** Optima Tax Relief is a tax resolution firm independent of the IRS** 

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Gambling Income and Losses

gambling income and losses

When we think of gambling, our first thoughts may be of casino games or the lottery. However, the IRS requires all gambling income to be reported, including winnings from raffles, fantasy football, and even sports betting. With sports betting on the ballot in California in 2022, it might be a good time to revisit the IRS rules on gambling income and losses.  

All Gambling Income Must Be Reported 

All income earned through gambling must be reported to the IRS. This also includes any goods or trips won in a raffle or contest. For example, if you win a TV or a trip to Vegas in a raffle, you must claim the prize’s fair market value at the time that you won it.  

Reporting cash winnings is more straightforward, but taxpayers should know that they are not allowed to subtract the cost of gambling from their winnings. In other words, if you place a $10 bet and then win $500, your taxable winnings would be $500, not $490. Both cash and the value of prizes should be reported as “Other Income” on your Form 1040. Larger payouts will typically result in Form W-2G, which includes reportable winnings, the date won, withholding amount, and wager type. 

You Can Deduct Gambling Losses If You Itemize 

While you cannot deduct the cost of your wager from your winnings, you can deduct your losses as long as you itemize your deductions. You can deduct losses up to the amount of the gambling income claimed. For example, if you won $1,000 but lost $3,000, you can only deduct $1,000. You must also include the $1,000 won in your income.  

You Can Deduct More If You’re a Professional Gambler 

If you gamble to make a living, you are also not allowed to deduct losses that exceed your winnings. However, you would be considered a self-employed individual and would be able to deduct “business expenses.” This can include magazine subscriptions that relate to gambling, internet costs if you place bets online, and travel expenses.  

You Should Keep Adequate Records 

If you are ever audited, the IRS will expect to see detailed records of your gambling winnings and losses. Whether you gamble professionally or casually, you should record the date, name of the gambling establishment, type of wager made, amount won or lost, and the names of anyone with you during the gambling. You should also keep copies of receipts, W2-G forms, wager tickets, and anything else that can supplement your gambling log.  

Tax Relief for Gamblers 

Whether you gamble casually or professionally, you must always report all gambling winnings. It may be tempting to report large losses and downplay your winnings, but reporting losses typically raises red flags with the IRS. This means higher chances of being audited by the IRS, which is a whole other issue. In short, it’s always best to report your gambling income and losses accurately. Optima Tax Relief can help with your tax debt needs. Give us a call at 800-536-0734 for a free consultation today. 

Download the Optima Tax App to analyze your IRS notice instantly. 

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How to Maximize Tax Benefits of Gifts

how to maximize tax benefits of gifts

Giving Tuesday falls on Tuesday, November 29th this year and taxpayers are gearing up for their annual donations to nonprofit organizations. Before the holiday, taxpayers should review how to maximize their tax-deductible donations.  

What is a tax-deductible donation? 

The IRS considers a tax-deductible donation to be any contribution of money or goods to a qualified tax-exempt organization. As of April 2022, in order to deduct these contributions during tax season, you must itemize your deductions by filing Schedule A. 

How much can I deduct? 

Typically, you can deduct up to 60% of your adjusted gross income (AGI) if you are donating to a charitable organization. If you are donating to another type of organization like a private foundation or fraternal society, the limit is much smaller. These can range from 20% to 50%. If you exceed the limit for the year, you can carry over the excess contributions over the next five tax years.  

What are qualified organizations? 

A qualified organization is one that you make a charitable donation to that can be deducted during tax time. Some of these organizations include religious organizations, governments, nonprofit schools and hospitals, war veterans’ organizations, and others. Some that do not qualify for tax-deductible donations are social or sports clubs, most foreign organizations, lobbyist groups, homeowners’ associations, individuals, political groups and more. It’s also important to note that more common forms of donations like blood, time and services, and raffle tickets may not be deducted. However, you may deduct out-of-pocket expenses that related to volunteering if they were not reimbursed. These can include mileage, gas, and supplies.  

Tax Relief for Gift Givers 

Whenever you donate, it’s important to keep records, no matter how big or small the contribution amount. Bank statements or charity receipts will suffice for monetary donations. If you make donations automatically through paycheck deductions, the contribution amounts will show on your W-2 or pay stubs. If you donate goods, you are allowed to deduct the fair market value of the items. In other words, you may deduct the price a willing buyer would pay for them. The rules surrounding tax-deductible donations can be tricky so when in doubt, give us a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

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How to Expense Business Repairs

how to expense business repairs

Certain business owners, including sole proprietors, businesses and rental property owners, can deduct expenses related to maintenance and repairs. The deductions must apply to their property and equipment or vehicles. However, once the repair becomes classified as a betterment, restoration, or adaptation to the property or asset, other rules will apply.  

Routine Repairs & Maintenance 

According to the IRS, routine maintenance to a property or business helps increase the value and prolongs its usefulness. Because routine maintenance keeps the property or asset in normal working order, these expenses can be deducted in full during tax time. For example, repairing a leak in the roof of your rental property would be considered a fully deductible repair, while renovating the kitchen would be considered a capital improvement, which has other tax implications. 

Capitalization 

Capitalization, on the other hand, is considered to be a betterment, restoration, or adaptation to the property. In this case, you must capitalize and depreciate the expense over several years. Betterments are repairs that improve a property or business asset. This can include expanding a property or fixing a defect that existed before you purchased the property. Restorations are repairs that restore an asset to its normal condition, like replacing a roof. Adaptations are repairs that change how the property or asset is used. For example, converting a garage into additional office space would be considered an adaptation and would need to be capitalized. Generally, when depreciating these expenses, it is done over a 27.5-year period. 

Home Offices 

For smaller business owners or remote workers, there are home office deductions you can take advantage of during tax time. The IRS divides home office expenses into a couple categories: direct and indirect expenses. Direct expenses benefit your home office only while indirect expenses benefit both your office and your home as a whole. The rules of repairs and improvements also apply to home office expenses. Repairs are entirely deductible while improvements must be depreciated. You can determine if the expense needs to be depreciated if it fits the standards of being a betterment, restoration, or adaptation.  

Tax Relief for Business Owners 

The rules for expensing business repairs and improvements can become tricky. The most basic rule to remember is to deduct the expense when it is a repair that doesn’t qualify as an improvement to your property or business asset. You must capitalize and depreciate expenses that are considered a betterment, restoration or adaptation to your property or business asset. There are some exceptions to these guidelines, referred to as “safe harbors.” You should always check with a knowledgeable tax professional to ensure you remain compliant when capitalizing and depreciating expenses. Give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

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Vehicles for Business Use

vehicles for business use

You can deduct vehicle expenses if you use your car for business purposes. You can even deduct the vehicle’s entire cost of ownership and operation, with some limitations, if it’s only used for business purposes. Tax implications can vary on this topic, so it’s important to understand the deduction rules when it comes to vehicles for business use. 

Which vehicles qualify? 

Cars, SUVs and trucks used for business activities qualify for tax deductions. However, if the vehicle is used as equipment, it is not eligible. This can include dump trucks and cranes. Additionally, the vehicle is also ineligible if it used for hire, like taxis or airport transport vans. 

Standard Mileage Rate vs. Actual Expenses 

There are two methods for calculating your deductible car expenses: using the standard mileage rate or calculating the actual expenses incurred. The standard mileage rate allows employees and self-employed individuals to deduct 58.5 cents per mile in the first half of 2022, and 62.5 cents per mile for the second half of 2022. These miles should only be counted if it was driven for business use only. In addition to the total number of business miles driven, the IRS will also request the number of total miles driven in the year. Using this method, you may also deduct auto loan interest, registration and property taxes, and parking and toll fees. 

The actual expenses method allows taxpayers to deduct all vehicle costs incurred including gas, oil, maintenance, repairs, tires, registration fees, licenses, auto loan interest, insurance, rental or lease payments, depreciation, garage rent and parking and toll fees. You would then calculate your business-use percentage of the vehicle to find the amount you can deduct. 

For example, let’s say your total mileage for the year was 15,000 miles and 12,000 of those miles were for business use, 6,000 in the first half of the year and 6,000 in the second half. Your eligible vehicle expenses for the year totaled $6,000. If you used the standard mileage rate for 2022, your deduction would be $7,260.  

6,000 miles x 58.5 cents (first half of 2022) = $3,510, plus 

6,000 miles x 62.5 cents (second half of 2022) = $3,750 for a total of $7,260 

If you calculated actual vehicle expenses, you could deduct $4,800. 

12,000 miles / 15,000 miles = 80% business use 

80% x $6,000 = $4,800  

In this case, it would be more beneficial to use the standard mileage rate rather than deducting all vehicle expenses. A good rule of thumb is to use the actual expenses method when you have vehicles with high operating costs and the standard mileage rate when you use vehicles with lower operating costs.  

Tax Relief for Businesses 

The rules for taking the standard mileage rate or calculating actual vehicle expenses are mostly straightforward. Another deduction for vehicles for business use is depreciation. You can deduct depreciation to account for general wear and tear of your vehicle. The rules surrounding depreciation can be very complex and it is always best to check with a knowledgeable tax preparer about what is allowed. Give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

If you’ve received a letter from the IRS and need help understanding what it means, you can analyze your IRS notice in three easy steps with the Optima® TAX APP. 

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How Home Equity Loans Affect Taxes

how home equity loans affect taxes

Sometimes the idea of taking out a second mortgage can be a viable solution to eliminating debt, funding home renovations, or paying off unexpected medical bills. Before taking out a home equity loan, you should know the tax implications that come with it.  

What is a home equity loan? 

Also known as a second mortgage, a home equity loan is a type of consumer debt that allows homeowners to borrow against the equity in their residence. The equity that you have accumulated through mortgage payments is used as collateral. The loan is paid out to you in a lump sum and is repaid with interest at a fixed rate each month for a set number of years.  

How much can I borrow with a home equity loan? 

Typically, the max you may borrow is around 80% to 85% of your home’s appraised value less the remaining balance on your mortgage. For example, let’s say your home is valued at $500,000, your mortgage balance is $200,000, and your lender will allow you to borrow up to 80% of your home’s value. 

$500,000 x 80% = $400,000  

$400,000 – $200,000 = $200,000 maximum loan amount 

In this scenario, you may borrow up to $200,000. The principal would be repaid at a fixed rate each month for a set number of years in addition to your regular mortgage payment, hence the term “second mortgage.” 

How Do Home Equity Loans Affect My Taxes? 

Like many other loans, the interest on a home equity loan can be tax deductible, but there are some limitations. If you used funds from the loan to “buy, build, or substantially improve” the home that was used to secure the loan, the interest is tax deductible. Since the passage of the Tax Cuts and Jobs Act of 2017, you may no longer deduct the interest of the loan if it was used for any other purpose. The amount of interest that may be deducted will also depend on your filing status.  

Tax Relief for Homeowners 

Deducting home equity loan interest only makes sense if your itemized deductible expenses are more than the amount of the standard deduction. If you choose to itemize your deductions and would like to deduct home equity loan interest paid, you will need to supply your tax preparer with IRS Form 1098, Mortgage Interest Statement. Tax planning can be incredibly stressful and intimidating, especially when taking new actions such as deducting loan interest. It is always best to check with a trusted tax professional to ensure you remain compliant with the most updated tax laws. If you need tax help, give us a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.

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