Tax Planning

An Overview of Estate & Inheritance Taxes

an overview of estate and inheritance taxes

Sometimes after the death of a loved one, we are left to deal with grief, funeral planning, and an estate. In some cases, we inherit assets from a deceased loved one. Unfortunately, not much in this life comes for free, and even the things we inherit can cost us. In this article, we will take a closer look at estate and inheritance taxes, including who is affected by them and how they work. 

What Are Estate Taxes? 

Estate taxes are federal taxes levied on the entire taxable estate of a deceased individual. The tax is calculated based on the asset’s current market value. The IRS exempts estates worth less than $12.06 million in 2022 and $12.92 million in 2023. The amounts are per person. Estates worth more than these amounts are taxed according to the following rates: 

  • 18% tax rate: $0 to $10,000 
  • 20% tax rate: $10,001 to $20,000 
  • 22% tax rate: $20,001 to $40,000 
  • 24% tax rate: $40,001 to $60,000 
  • 26% tax rate: $60,001 to $80,000 
  • 28% tax rate: $80,001 to $100,000 
  • 30% tax rate: $100,001 to $150,000 
  • 32% tax rate: $150,001 to $250,000 
  • 34% tax rate: $250,001 to $500,000 
  • 37% tax rate: $500,001 to $7500,000 
  • 39% tax rate: $750,001 to $1,000,000 
  • 40% tax rate: $1,000,001 and up 

Some states impose their own estate taxes, but in general, your estate tax bill is subtracted from the value of your taxable estate before you calculate what you might owe the IRS. The states that impose an estate tax are Connecticut, District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. 

Federal and state taxes are paid from the assets of the estate before they can be distributed to beneficiaries. Typically, the executor of the estate will ensure all taxes are paid from the estate, confirm there are no other liabilities needed to be paid, and then distribute the remaining assets.  

What Are Inheritance Taxes? 

Inheritance taxes are state taxes that are levied on the assets of a deceased individual. These taxes are typically paid by the heirs or beneficiaries of the estate, and the amount owed is calculated based on the total value of the estate.  The assets can be anything from money to stocks to property. Currently, six states impose an inheritance tax:  

  • Iowa: 0% – 15%  
  • Kentucky: 0% – 16% 
  • Maryland: 0% – 10% 
  • Nebraska: 0% – 18% 
  • New Jersey: 0% – 16% 
  • Pennsylvania: 0% – 15% 

Iowa is preparing to eliminate its inheritance tax for deaths on or after January 1, 2025. The tax rate you pay is typically determined by your relationship to the decedent. Surviving spouses are almost always exempt from this tax, and in some states, so are sons, daughters, and parents of the deceased. Usually, you will pay a higher rate if you had no familial relationship to the decedent. 

Inheritance taxes come into effect after the estate has been divided and distributed to the appropriate beneficiaries. Typically, each state will have their own exemption rules, meaning that the assets inherited are taxed after they reach a certain value. For example, if your state imposes a 5% tax on inheritances larger than $3 million, and you inherited $5 million in assets, you will pay tax on $2 million. 

How Can I Reduce Estate and Inheritance Taxes? 

We know taxes are the furthest thing from your mind when grieving the death of a loved one. Alternatively, preparing a will should not have to result in worry over your loved ones paying taxes once you’re gone. If you are planning to leave behind assets for your loved ones after death, you can reduce estate taxes using a few methods. You can pay for educational or medical expenses from your estate and the payments will be exempt from taxes as long as the funds go directly to the provider. Also, setting up an irrevocable trust or life insurance trust (ILIT) can help ensure that assets are not used to pay taxes. A team of expert tax professionals can help. Contact us for a free, no-obligation tax consultation today.  

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What is Supplemental Income?

what is supplemental income

These days it is very common for individuals to have regular income, as well as supplemental income. While regular income earned through an employer typically has taxes withheld, some supplemental income does not. If you earn supplemental income, it’s important to learn how it is taxed and when. Here is a brief overview of supplemental income tax.  

What Is Supplemental Income? 

Supplemental income is any money earned on top of your regular income. Even if you only work a regular 9 to 5 job, you may still earn supplemental income through any of the following sources: 

  • Bonuses 
  • Overtime pay 
  • Commissions 
  • Tips 
  • Prizes or awards 
  • Severance pay 
  • Back pay 
  • Payments for paid time off 
  • Taxable fringe benefits 

Some taxpayers do not have regular income through an employer. Some may earn supplemental income through contact work or through a business. Some examples of supplemental income for these groups are: 

  • Schedule E income  
  • Ridesharing service 
  • Sales made through an online shop 
  • Direct sales 

How Is Supplemental Income Taxed? 

How supplemental income is taxed depends on how the income is classified. Income reported on Schedule E will usually consist of estates, trust, real estate rental income, royalties, partnership and S corporation income, and residual interests in real estate mortgage investment conduits (REMICs). Many of these income sources are taxed differently. 

Estates and Trusts 

Beneficiaries pay tax on the income of the estate or trust they inherit at their regular income tax rates and at capital gains rates for any capital gains they receive. In addition, if the estate or trust does not distribute all the income to the beneficiaries it will pay tax on any undistributed income. 

Royalties 

If you are paid royalties for the use of any of your intangible assets, you will receive a Form 1099-MISC that tells you the amount of royalties to report on Schedule E. These royalties are taxed at your regular income tax rate. 

Business Income from Partnerships and S-Corps 

Taxes for S-Corps are passed through to shareholders, while taxes for partnerships are passed through to the partner’s personal income. The tax rate will depend on personal income rates.  

Real Estate Rental Income 

The tax rate for rental real estate varies from 10% to 37%, depending on your filing status and taxable income.  

Supplemental income for employees is based on personal income tax rates. However, the amount withheld will vary depending on whether your employer pays it out with your regular wages or separately. If it’s combined with your wages, the amount withheld will typically be like the way your wages are withheld. If they are paid out separately, employers can withhold at the IRS’s flat rate of 22%. If you are fortunate enough to earn $1 million in supplemental income, it will be taxed at 37%.  

Supplemental income earned through gig, contract, or freelance work should be reported on your individual tax return using Schedule C. If you receive any 1099 Forms, you should use these to calculate your total income through independent work.  

Tax Help for Supplemental Income Earners 

Tax policy can change every now and then. If you earn any type of supplemental income, you should stay up to date on all the most recent changes in taxation rules. For example, in 2024 the rules for reporting income earned through Form 1099 are changing drastically. Being unprepared for a change in policy could lead to all sorts of issues, from a large tax bill to an IRS audit. When in doubt, your best bet is to speak to a trusted tax professional to avoid a stressful tax issue. If you need tax help, Optima and our team of experts are here. Contact us for a free consultation. 

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Tax Planning for the Self-Employed

tax planning for the self-employed

Being your own boss can feel freeing and powerful, but with great power comes great responsibility, especially when it comes to taxes. Taking care of all business aspects on your own means you should be prepared to handle all the financial work that comes with the new adventure. Here’s a brief tax guide for the self-employed. 

Get Financially Organized 

There’s nothing worse than scrambling for income and expenses during tax time. Staying organized throughout the year can save you time and money. You’ll want to maintain accurate records including: 

  • Income statements with invoices, receipts, Forms 1099, etc. 
  • Purchase invoices 
  • Receipts for travel, transportation, entertainment, and gifts that are business-related 
  • A breakdown of your assets, including purchase price, cost of improvements, depreciation deductions, etc.  
  • Employment tax records 

Know Your Responsibilities 

We know you are already responsible for the success of your business, but you also need to know your financial responsibilities to maintain your business. This includes paying self-employment taxes and quarterly estimated tax payments. If you earned $400 or more in 2022, you need to pay self-employment taxes. The current rate for self-employment tax is 15.3% of your net earnings, which consists of social security and Medicare tax. The good news is that since in a typical job, the employer is responsible for paying half of this tax, you’ll be able to deduct 50% of your self-employment tax during tax time.  

Since you won’t have an employer to withhold tax from your self-employed income, you’ll need to make estimated tax payments by each quarterly deadline: 

  • April 18, 2023 
  • June 15, 2023 
  • September 15, 2023 
  • January 16, 2024 

A good rule of thumb is to make an estimated tax payment if you expect to owe more than $1,000 in federal taxes for the year. If you do not make these payments, you could face underpayment penalties. 

Take Advantage of Tax Deductions 

As a business owner, you have the benefit of writing off expenses that most employees cannot, as long as they are ordinary and necessary for business operations. You can write off advertising costs, supplies, legal fees, repairs, vehicle expenses, business travel and entertainment, and even more if you operate your business from home. If you aren’t eligible to participate in your spouse’s workplace health plan, you can typically pay for your own health insurance and deduct your premiums. If you have a business loan or business insurance, you can also deduct the loan interest and insurance premiums. If you only take advantage of one deduction as a business owner, you should consider the one for self-employed retirement plan contributions to an SEP-IRA, SIMPLE IRA, or 401(k). These accounts can reduce your tax bill at tax time and help you accrue tax-deferred investments gains in the future. Be sure to look into all tax deductions available so your taxable income is reduced.  

Tax Help for the Self-Employed 

Running a business, whether small or large, has immense opportunities for financial success. However, all of that hard work and prosperity can be taken away if you do not file your taxes correctly. In the worst-case scenario, owing the IRS taxes and not being able to pay can result in a tax lien, which can shut down your business. If this is your first year as a business owner, start off right by knowing your tax responsibilities. If you’ve had your business a while but need tax help now, Optima Tax Relief can help. Contact us for a free consultation with one of our knowledgeable tax professionals. 

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Tax Guide for New Investors

tax guide for new investors

When considering investing, you may first daydream of the potential rewards of the risky endeavor. But as a new investor, it can be overwhelming to navigate the world of taxes. However, understanding the basics of taxation can help you make informed decisions and avoid costly mistakes during tax time. In this brief tax guide for new investors, we will cover some of the essential things you need to know. 

Capital Gains vs. Ordinary Income 

When you invest, you have the potential to earn income through two methods: capital gains and ordinary income. Capital gains are the profits you make when you sell an asset for more than you paid for it. Ordinary income is income earned through wages, salaries, interest, dividends, and other sources. 

The tax rate for capital gains is generally lower than the tax rate for ordinary income. The tax rate you pay on capital gains depends on how long you hold the asset before selling it. If you hold it for more than a year, it’s considered a long-term capital gain. In this case, the tax rate will be lower than if you hold it for less than a year, otherwise known as a short-term capital gain. Short-term capital gains are taxed as ordinary income. In 2022, the tax rates for long-term capital gains are as follows: 

Filing Status  0%  15%  20% 
Single  Up to $41,675  $41,675 to $459,750  Over $459,750 
Head of Household  Up to $55,800  $55,800 to $488,500  Over $488,500 
Married Filing Jointly or

Qualified Widow(er) 

 Up to $83,350  $83,350 to $517,200  Over $517,200 
Married Filing Separately  Up to $41,675  $41,675 to $258,600  Over $258,600 

 

Tax Implications of Different Types of Investments 

Different types of investments are taxed differently. For example, stocks are taxed on capital gains and dividends, while bonds are taxed on interest income. Real estate is also subject to specific tax rules, including depreciation deductions and the potential for tax-deferred exchanges. 

It’s important to understand the tax implications of your investments before you invest. For example, if you’re investing in a high-yield bond, you may be subject to higher taxes on the interest income than if you were investing in a low-yield bond. By understanding the tax implications, you can make informed decisions about where to invest your money. Consulting with a financial advisor before making these financial moves can help you make the most informed decision now and prepare for any tax bill later. 

Investment Expenses 

Investment expenses can be deducted from your taxes, which reduces your taxable income. These expenses can include brokerage fees, investment advisory fees, and other costs related to your investments. It’s important to keep track of these expenses throughout the year, so you can deduct them on your tax return. Be sure to have proper documentation just in case the IRS requests substantiation later. 

Selling Investments 

Knowing when to sell your investments can have a significant impact on your taxes. If you sell an asset for a loss, you can use that loss to offset capital gains from other investments. This is called tax-loss harvesting and can help reduce your tax bill. Tax-loss harvesting could also help reduce your ordinary income tax liability, even if you don’t have any capital gains to offset. To do this, you would sell a stock at a loss and then purchase a similar stock with the proceeds.  

Tax-Advantaged Accounts 

Tax-advantaged accounts are investment accounts that offer tax benefits. These accounts include 401(k)s, IRAs, and 529 college savings plans. Contributions to these accounts are tax-deductible, and the investment interest grows tax-free. When you withdraw the money during retirement or for qualified education expenses, you’ll pay taxes on the withdrawals, but typically at a lower tax rate than during your working years. Investing in tax-advantaged accounts can be an effective way to reduce your tax bill and grow your investments over time. 

In conclusion, understanding taxes is an essential part of investing. By knowing the tax implications of your investments, keeping track of your investment expenses, and taking advantage of tax-advantaged accounts, you can reduce your tax bill and maximize your investment returns. Remember to consult with a tax professional for personalized advice on your specific situation. 

Tax Help for New Investors 

Remember, the most important thing you can do during tax time is ensure that you are reporting all income, whether it is ordinary income, interest earned on a bond, or dividends paid out to you that year. Failing to report income during tax time can put you on a fast path to being audited by the IRS. If you need help with a large tax liability because you were unprepared for the tax implications of investments, a knowledgeable and experienced tax professional can assist. Contact Optima Tax Relief at 800-536-0734 for a free consultation. 

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Life Transitions That Affect Your Taxes: Part II

life transitions that affect your taxes

For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here, we will continue to review some of the most common life transitions that can affect your taxes. 

Buying or Selling a Home 

There are several tax benefits to becoming a homeowner. For example, homeowners can deduct expenses like mortgage interest, real estate taxes, mortgage points, and insurance premiums. In addition to these deductions, new homeowners can also take advantage of penalty-free IRA withdrawals used to pay for the down payment on their home purchase.  

On the other hand, selling a home can mean turning profit, especially in a seller’s market. However, homeowners should stay mindful of capital gains taxes. Single filers who sell their home after owning and living in the house for at least two of the last five years before a sale can avoid paying taxes on the first $250,000 of profit from the sale. Married couples filing jointly in the same scenario can avoid paying taxes on the first $500,000 of the profit from the sale. Any excess profit will be subject to capital gains taxes, which can be a hefty and unplanned expense.  

Accepting an Inheritance 

If you ever receive an inheritance after the death of a loved one, you might wonder if any of it is taxable. In general, money inherited is not taxable. If you receive property, things are a little more complicated. You will receive the home at its fair market value determined on the date of inheritance. If you sell the property for more than the fair market value, you’ll be taxed on those gains only. If you inherit an IRA account, the rules of taxation vary depending on your relationship to the original account owner. Generally, you’ll likely be taxed on any distributions taken from the account. 

Retiring 

If you currently save for retirement, you might already know that you are eligible for certain tax breaks, like deducting contributions to your 401(k) or traditional IRA accounts. On the other hand, when it comes to taking distributions on these accounts, you will have to pay income tax on your withdrawals each year. You will not owe taxes on Roth IRA withdrawals since your contributions were made with after-tax dollars.  

Dealing With Taxes After Death 

Many taxpayers are unaware that after death, one final tax return will need to be filed in your name. If you’re married, your spouse will be able to file a joint return one last time. Your spouse, or other named representative, may even need to file an estate tax return, which summarizes the assets of the deceased.  

Tax Help for All Life Transitions 

You may not be at an age to begin worrying about how these life transitions could affect your taxes. However, being unprepared is what can lead to financial mishaps. So again, plan for the year ahead so you are not blindsided by a large tax bill in the future. If you find yourself financially crippled by a large tax liability because you were unprepared, a knowledgeable and experienced tax professional can help. Contact Optima Tax Relief at 800-536-0734 for a free consultation. 

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Life Transitions That Affect Your Taxes: Part I

life transitions that affect your taxes

For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here are some of the most common life transitions that can affect your taxes. 

Getting Married 

While a wedding will bring many types of joy, newlyweds can also celebrate new tax breaks. Once you are married, you and your spouse will likely have the benefit of filing jointly, which can offer lower tax rates and a higher standard deduction. Married couples filing jointly also have extra tax perks to look forward to. For example, if you are not working, you cannot contribute to an IRA account if you are single, but you can if you are married and use your spouse’s income. You can also take advantage of flexible spending accounts (FSAs) and lower health care expenses. 

Having a Baby 

Having a baby, or growing your family in other ways, can significantly reduce your tax liability. Claiming dependents can grant access to new tax credits and deductions. The Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Credit, Adoption Credit, the Credit for Other Dependents, and higher education credits are just a few examples of credits available for those who can claim dependents. 

Education Expenses 

If you have recently decided to go back to school, or if you have a dependent who will be attending college soon, you might be able to take advantage of some education-related tax breaks. There are tax credits available to students to help offset qualifying expenses, including the American Opportunity Credit and the Lifetime Leaning Credit. If you have already graduated and are now paying student loans, you can deduct up to $2,500 of your student loan interest during tax time.  

Moving Out of State 

Sometimes new opportunities come from out-of-state and moving states can affect your tax bill. Aside from moving expenses, you’ll need to figure out if you’ll be paying less or more taxes in your new state of residency. States like California and New York have much higher tax rates compared to others. Some states do not have any income tax. It’s important to factor this into your budget before you decide to make the big move.  

Accepting a Promotion at Work 

After properly celebrating a job well done, you might want to consider how your new role at work can affect your taxes. A bump in pay can also bump you up into a higher tax bracket, which means more taxes owed. For most, the tradeoff is worth it, but either way you should do the math to be prepared for tax season. To help offset any additional costs during tax time, you can also adjust your W-4 withholding.  

Tax Help for All Life Transitions 

Often times, you’ll find most of these life transitions that can affect your taxes offer greater benefits than things to worry about. The best thing you can do is prepare for the aftermath of each of these changes. Plan for the year ahead so you are not blindsided by a large tax bill next filing season. If you find yourself scrambling with a large tax liability because you were unprepared, a knowledgeable and experienced tax professional can help. Contact Optima Tax Relief at 800-536-0734 for a free consultation. 

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How Unemployment Affects Your Taxes

how unemployment affects your taxes

If you spent time unemployed last year, you might be wondering how that’ll affect your tax return this year, especially if it was your first time ever being without work. When it comes to unemployment and taxes, you might have some questions. Here’s a breakdown of how unemployment affects your taxes. 

Is Unemployment Taxable? 

Perhaps the first question people ask about unemployment is: “Is my unemployment income taxable?” In short, it is taxable. The IRS requires you to report any unemployment income on your federal tax return with Form 1099-G, Certain Government Payments. Most states tax unemployment income as well, except for the few that don’t tax any income and the few that exempt unemployment benefits from income taxes. You can check with your state’s Department of revenue to see if your income is taxed at the state level. 

How Do I Pay Unemployment Taxes? 

When applying for unemployment benefits, you can request your state to withhold federal taxes from your checks. In this case, 10% will be used to pay federal taxes. You can also make estimated quarterly tax payments throughout the year. If you go this route, be mindful of the deadlines for each quarter: April 15, June 15, September 15, and January 15 of the following year. Your final option is to just pay all taxes due during tax time. The same three options usually also apply to paying taxes at the state level. 

Does Unemployment Affect My Tax Credits? 

Receiving unemployment benefits might affect your eligibility for certain tax credits. For example, eligibility of the earned income tax credit (EITC) and the child tax credit (CTC) are determined by earned income. Since unemployment benefits are not considered earned income, it could reduce your credit amount or completely disqualify your eligibility. Since the EITC is worth up to $6,935 and the CTC is worth $2,000 per qualifying child in 2022, it is best to check with your tax preparer to see exactly how unemployment will affect your eligibility for tax credits you rely on each year.  

Are Other Government Benefits Taxable? 

Sometimes the unemployed seek other financial assistance from the government, including housing subsidies, childcare subsidies, and SNAP benefits. You might also accept food donations from food pantries. These benefits are generally not taxable, but you should check with your local benefits offices to confirm. 

What If I Can’t Pay My Taxes? 

Being unemployed might mean you’re low on funds and might need extra help if you run into issues during tax time. The IRS offers a free tax filing service on their website and Volunteer Income Tax Assistance (VITA) provides free tax preparation for lower-income taxpayers. If your tax issues are bigger or more complex, it might be best to consider tax relief options. Our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call Optima at 800-536-0734 for a free consultation. 

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A Newlywed’s Guide to Taxes

a newlywed's guide to taxes

If you recently got married, you might have spent a lot of time planning a ceremony, reception, or honeymoon. As a newlywed, have you considered how your new life change will affect your taxes this year? Here are some things you should keep in mind when filing your taxes. 

Name and Address Change 

Before we get to the obvious changes like filing status, one of your first actions should be to report your name change to the Social Security Administration (SSA) if necessary. The name on your tax return must match the one on file with the SSA or else it can cause delays in processing your return or refund. You’ll also want to make sure you update the IRS and USPS of a change in address if paper mail is your preference for correspondence or refund payment.  

Withholding 

While adjusting your tax withholding with your employer is not necessary, it can help avoid any overpayment or underpayment in taxes throughout the year. You can use the IRS Online Withholding Calculator to find out how much you should withhold. Once you determine the best option for you and your spouse, you should submit a new FormW-4 to your employer. 

Tax Bracket 

Getting married could change your tax bracket if you file together since your income is combined with your new spouse’s. Here are the tax brackets for the 2022 tax year: 

Tax Rate  Married Filing Jointly  Married Filing Separately 
10%  $0 -$20,550  $0 – $10,275 
12%  $20,551 – $83,550  $10,276 – $41,775 
22%  $83,551 – $178,150  $41,776 – $89,075 
24%  $178,151 – $340,100  $89,076 – $170,050 
32%  $340,101 – $431,900  $170,151 – $215,950 
35%  $431,901 – $647,850  $215,951 – $323,925 
37%  $647,851 or more  $323,926 or more 

Filing Status 

You might be used to filing single each tax season, but as a newlywed that will no longer be an option. You’ll either file married filing jointly or married filing separately. Most couples will opt for a joint return as it opens access to more tax breaks and sometimes a better tax rate. Every situation is different, so your best bet may be to prepare your tax return both ways to see which has a better outcome.  

Standard Deduction 

Married couples filing jointly can claim one of the largest standard deductions at $25,900 if you are both 65 and under. If you file separately, you can only claim the $12,950 standard deduction. You should note that if one spouse opts to itemize, both of you must itemize, so you should determine which method would result in a lower taxable income. 

Tax Credits and Deductions 

As mentioned, filing separately eliminates eligibility for some tax credits. For example, couples married filing separately may not claim the Earned Income Tax Credit (EITC) or education credits like the American Opportunity Credit or Lifetime Learning Credit. They might be able to claim the Child and Dependent Care Credit if they meet certain requirements. They also cannot deduct student loan interest. On the other hand, married couples filing jointly have extra tax perks to look forward to. For example, if you are not working you cannot contribute to an IRA account if you are single, but you can if you are married and use your spouse’s income. You can also take advantage of flexible spending accounts (FSAs) and lower health care expenses. You can consult with a tax preparer for more tax breaks. 

Tax Help for Newlyweds 

Taxes are sure to be the furthest thing from your mind after getting married, but it’s critical to remember that as long as you are legally married by December 31st, the IRS considers you to be married for the full tax year. The sudden change in rules may be intimidating and brand new to you, but there are always experts who are ready to help. If you need tax help, contact Optima Tax Relief at 800-536-0734 for a free consultation. 

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Filing Guide for First-Time Taxpayers

filing guide for first-time taxpayers

Filing taxes is one of life’s responsibilities that we simply cannot avoid. At some point, we all file taxes on our own. Filing a tax return for the first time can be intimidating. Here is a guide for first-time taxpayers with filing tips and common mistakes to avoid. 

Find out if you need to file 

It may have been your first year being employed, but you might not be required to file a tax return. Be sure to include any income you earned, even if the job was nontraditional like gig work or freelancing. There are a lot of rules surrounding filing requirements, but in general, you must file if you meet one of the following scenarios: 

  • You are filing single and earned at least $12,950 in 2022 
  • You are married filing jointly and earned at least $25,900 in 2022 if both you and your spouse are under age 65 
  • You are married filing jointly and earned at least $27,300 in 2022 if one spouse is under age 65 and the other is 65 or older 
  • You are filing head of household and earned at least $19,400 in 2022 

The rules are different if your parents provide financial assistance, either through living expenses, education, or a monthly allowance. If this is the case, your parent might be able to claim you as a dependent. Before you file your own tax return, you should confirm if your parents intend to claim you as a dependent on their tax return.  

Decide how to file 

The easiest and fastest way to file a tax return is electronically. You can use a tax software to prepare and file a return for you if your tax situation is simple. The IRS offers free tax preparation through IRS Free File, a program idea for young and first-time filers.  

Collect all your tax documents 

If you’re a first-time filer you might need the following items to file: 

  • Income forms, including W-2s and 1099s 
  • Education expense forms, including Form 1098-T, receipts, scholarship records 
  • Social security number 
  • Routing and account numbers for direct deposit 
  • Dependent information (if applicable), including names, date of birth, SSNs, etc.  

Find out which credits and deductions you are eligible for 

Even first-time filers are eligible for credits and deductions. A tax credit is a dollar-for-dollar reduction of your income. Some credits you may be eligible for are: 

  • Saver’s Credit: If you contributed to a retirement plan and earned less than $36,501 in 2022, you may be eligible for this credit. Dependents claimed on another tax return and full-time students are not eligible.  
  • American Opportunity Tax Credit: Worth up to $2,500 the AOTC allows you to claim a credit for tuition, fees and courser materials. You can use Form 1098-T to determine your credit amount. You cannot claim this credit if you are listed as a dependent on another tax return. 
  • Lifetime Learning Credit: This credit is worth up to $2,000 per tax return and is for qualified tuition and related expenses paid for education, excluding course materials. You cannot claim this credit if you are listed as a dependent on another tax return. 
  • Earned Income Tax Credit: This credit for low- to moderate-income workers is worth up to nearly $7,000 for 2022.  

A tax deduction is a reduction of taxable income to lower your tax bill. You can either claim the standard deduction of $12,950 for single filers in 2022, or you can itemize your deductions by adding up your eligible expenses. This might include vehicle expenses if you use it for work or student loan interest. Generally speaking, it is more beneficial to take the standard deduction instead of itemizing.  

File by the deadline 

Now that you’re ready to file, you should be sure to submit your return by the tax deadline. In 2023, the deadline is April 18th. If you are getting a refund, you can have it sent by paper check or direct deposit. Direct deposit is the fastest way to receive your federal refund and you can track its status on the IRS website. You can also track your state refund online.  

Tax Help for First-Time Taxpayers 

First-time filers should note that filling your tax return by the tax deadline is critical. If you prepare your return and find that you will owe taxes, don’t panic. You will need to pay your tax bill by the April deadline or request an extension to file. If approved, you will have until October 16, 2023. Do not ignore your tax bill as this can lead to greater financial stress later. You should also figure out why you owe so you can avoid this problem again next tax season. Common reasons for owing are not withholding enough taxes during the year or not making quarterly estimated payments if you do not withhold any taxes from your income. If you need tax help, contact us at 800-536-0734 for a free consultation. 

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How to Get Rid of Back Taxes

how to get rid of back taxes

IRS enforcement has cooled in the years following the COVID-19 pandemic, but the 2022 Inflation Reduction Act is equipping the agency with over $45 billion for tax enforcement. With high interest rates in place, now is an even worse time to owe the IRS. Here is an overview of back taxes and how to get rid of them.  

What are back taxes? 

Back taxes are unpaid taxes from a previous year. For example, if you had a tax bill of $1,000 after filing your 2021 tax return and did not pay it, you owe back taxes. Not only would you owe the $1,000, but you would also owe any penalties and interest that accrued on this tax bill. You can owe taxes by not reporting all earned income, not filing a return, or filing but failing to pay your tax bill. 

What happens if I don’t pay back taxes? 

Unpaid taxes will result in an IRS notice, which is a formal letter from the IRS. Typically, the notice will advise the taxpayer to pay the balance owed within 21 days. If the balance is still unpaid within 60 days, the IRS will likely proceed with collections. While the IRS is awaiting payment, the tax balance will accrue interest and penalties.  

How do I get rid of back taxes? 

If you do find yourself in the unfortunate situation of owing the IRS, there are some options for how to pay your back taxes. If you cannot afford to pay, you still have options. It’s important to know that there are always options and the worst thing you can do is ignore the issue. 

Pay your taxes 

This is the most straight-forward solution to getting rid of back taxes. If you can afford to pay off your tax balance, you should do it immediately to avoid additional penalties and interest. IRS interest rates are high right now, making your tax bill more expensive than it would’ve been in previous years. You can pay your tax bill with a credit or debit card through your online IRS account, by phone or even on the IRS mobile app. If you don’t have enough to cover the balance, you can request a short 120-day extension with the IRS. This option doesn’t stop interest or penalty fees, but it will allow more time to pay the tax debt in full. Even borrowing from your retirement fund or taking out a personal loan might be a better option than allowing your tax balance to grow. 

Request an Installment Agreement 

You can request an installment agreement, or a monthly payment plan, with the IRS. With this option, the 0.5% monthly penalty will be reduced to 0.25% until the balance is paid off. Interest will continue to accrue until the balance is paid. If you cannot pay your back taxes within 120 days and you owe less than $50,000, this might be the best option for you. Taxpayers should note if they do not pay according to the IRS’s set schedule, they can void the installment agreement and proceed with enforcement. 

Apply for an Offer in Compromise 

In some cases, the IRS may settle your tax debt for less than the amount you owe with an offer in compromise (OIC). This is understandably the most sought-after option to get rid of back taxes, but it is also rarely approved by the IRS. To qualify, taxpayers need to prove that paying off their tax debt would result in financial hardship according to IRS standards. They also need to be current on all tax returns and cannot be in bankruptcy. Applying requires an application fee, which can be waived if you are a low-income taxpayer and an initial nonrefundable payment. Your debt will also still accrue interest while your application is reviewed.  

Tax Help for Taxpayers with Back Taxes 

Having unpaid back taxes can cause severe stress and dealing with the IRS on your own can be intimidating and time-consuming. A knowledgeable and experienced tax professional can help you understand your options better and do the heavy lifting when trying to get rid of your back taxes. Optima Tax Relief can help with your tax debt situation. Contact us at 800-536-0734 for a free consultation.

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