Tax Planning

NIL Income and Taxes

NIL income and taxes

Before 2021, college athletes had a few ways to earn money – typically from scholarships, grants, part-time jobs, or possibly even help from their parents. Since then, the National Collegiate Athletic Association (NCAA) has allowed these athletes, including high school level athletes, to engage in NIL, or Name, Image, and Likeness, activities. While this has created many financial opportunities for college athletes, it has also created more responsibilities for these first-time tax filers. Here, we will break down NIL income, including what types exist and how to report it during tax time.  

What is NIL Income? 

NIL income is the revenue earned by high school and collegiate athletes through the use of their name, image, and likeness. How much these athletes can earn typically depends on their social media presence, the sport they play and other factors. Currently, basketball and football players earn the most NIL income compared to other sports. The top NIL earner in 2023 is none other than 18-year-old basketball star Bronny James, son of superstar LeBron James. His NIL valuation is between $6.8 million and $7.6 million. Both his NIL valuation and social media following of nearly 13 million are comparable to many professional athletes who have been in the game much longer. While all this sounds fantastic for the emerging superstar, NIL income is taxable, meaning he and his fellow NIL earners will have financial responsibilities during tax time. 

How is NIL Income Earned? 

NIL income can be earned through various ways, including: 

  • Guest appearances 
  • Autograph signings 
  • Sponsorships 
  • Endorsements 
  • Content creation 
  • NFTs 
  • Gifts 
  • Vacations 
  • Apparel and athletic equipment 

How is NIL Income Taxed? 

To avoid surprises during tax season, it’s critical to understand the tax implications of NIL income. NIL income earners are technically considered independent contractors, which means they would receive Form 1099-NEC at the beginning of each year if they earned at least $600 in NIL income the previous year. This includes crypto payments. If they were paid through a third-party payment network, like Venmo or PayPal, they will instead receive Form 1099-K. Gifts or free items with values of $600 or more will be reported on Form 1099-MISC. If they also worked a job that gives Form W-2, this income should also be reported. Remember, the IRS receives all 1099s and W-2s from employers, so all income should be reported on your tax return if you are an NIL income earner. 

If an NIL earner has net income of $400 or more, they must file a tax return. Since they are considered self-employed, they will also need to pay estimated quarterly tax payments if they expect to owe $1,000 or more in taxes. In addition, they will be responsible for paying self-employment taxes, which equals 15.3% of their income.  

Tax Help for NIL Earners 

Earning money for your name, image, and likeness is an amazing opportunity for high school and college athletes. However, paying taxes on this income may not always be a first instinct which can lead to financial troubles. A good way for these earners to save money during tax time is to take advantage of tax-deductible expenses available, including plane fare, hotel bills, vehicle expenses, marketing and agency fees, and more. Meanwhile, there are also education tax credits and the student loan interest deduction for those who qualify. Also, keep in mind that each state has their own set of tax rules and regulations. It is critical to become acquainted with your state’s specific rules in order to understand how NIL income is taxed and what deductions or credits may be available to you. Keeping good records, planning ahead, staying informed, and consulting with a knowledgeable tax professional can make the biggest difference in this complex process.  

If You Need Tax Help, Contact Optima Tax Relief Today for a Free Consultation 

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Tax Implications of Buying a House

tax implications of buying a house

Purchasing a home is an exciting milestone in life as it represents a significant investment. However, beyond the joy of becoming a homeowner, it’s crucial to understand the tax implications that come with this major financial commitment. In this blog post, we’ll explore the various tax considerations related to buying a home, providing you with valuable insights to help you navigate this aspect of homeownership confidently.  

Itemizing Deductions 

Purchasing a home may be the first opportunity you receive to start itemizing your deductions during tax time. While itemizing can require much more work, it could result in a larger refund. It’s important to note that if you want to claim any expenses related to your home, such as mortgage interest or real estate taxes, you must itemize your deductions rather take the standard deduction. Consulting with a knowledgeable tax professional can give you a better understanding of your best option is.

Mortgage Interest Deduction 

If you have a home loan that originated after December 16, 2017, you can deduct mortgage interest, up to $750,000. Any loan with an origination date before this qualifies for a mortgage interest deduction of up to $1 million. To qualify for this deduction, you must itemize your deductions on your tax return and meet certain eligibility criteria. Every January, your home lender should send you Form 1098, Mortgage Interest Statement, which reports mortgage interest of $600 or more you paid during the year. Keep in mind that if you paid less than $600 in mortgage interest, you can still deduct it during tax time. 

In addition to mortgage interest, your 1098 will also show much you paid in mortgage points during the year. Mortgage points are a form of payment made to obtain your mortgage and are generally defined as a percentage of your loan amount. For instance, let’s assume you paid three points, or 3%, on your $500,000 mortgage, for a total of $15,000 (3% of $500,000). The IRS will typically allow you to deduct the entire amount of your points in the year they were paid.  You should note that the deductible amount should be shown on your 1098 form. 

Real Estate Tax Deduction 

As a homeowner, one of your expenses will be real estate taxes. The IRS allows you to deduct only the actual real estate tax amounts paid during the year, but you can also deduct local property taxes as well. If you pay these taxes through your lender, this amount should be shown on Form 1098. If you pay them directly, you should keep records of how much. If you just purchased a home, you may have reimbursed the seller for their real estate tax payments. If this is the case, you will be able to deduct this amount through the real estate tax deduction too. You should note that beginning in 2018, the total amount of state and local taxes you can deduct, including property taxes, is capped at $10,000 per year. 

Home Energy Credits 

Homeowners can also claim tax credits by making some energy efficient upgrades to their home. Specifically, the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit are great tax credits for those who recently made home improvements that help conserve energy. Some examples include energy-efficient windows, exterior doors, furnaces, air conditioners, solar panels, and more.  

Mortgage Interest Credit 

The IRS allows lower-income and moderate-income taxpayers to claim the Mortgage Interest Credit if they received a mortgage credit certificate (MCC) from their state or local government. An MCC is usually given to first-time homeowners, and it allows you to claim the credit of up to $2,000 of the mortgage interest paid per year. Taxpayers should note that this credit is completely separate from the mortgage interest deduction that uses Form 1098. The Mortgage Interest Credit can be claimed using Form 8396. 

Tax Help for Homeowners 

The tax benefits of homeownership can provide notable savings and financial advantages. By familiarizing yourself with the tax deductions and credits available, making informed decisions about how to file your taxes can be a little easier. However, navigating complex tax rules and regulations can be overwhelming. Therefore, it’s highly recommended to consult with a qualified tax professional who can provide specific guidance tailored to your individual situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.  

Contact Us Today for a Free Consultation 

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What is Imputed Income?

what is imputed income

While you may not have heard of the term “imputed income,” chances are that you might be receiving it from an employer. Imputed income is essentially non-cash goods or services that you receive from your employer as a form of income. It’s important to know how much imputed income you receive because it is taxable, which means it can come with certain tax implications. Here’s an overview of imputed income and how it works. 

What is considered imputed income? 

Imputed income is essentially any non-cash items or services that you receive from your employer. Imputed income is expressed as the cash value of the non-cash perks you receive at work. The total amount of imputed income is typically reported on an employee’s W-2 under “Wages, Tips and Other Compensation.” The more common examples of perks or “fringe benefits” that contribute to imputed income include: 

  • Company vehicles: If you use a company car for work, this can be considered imputed income. However, only your personal use of the car is taxed as a fringe benefit. The amount taxed will depend on the fair market value of the car and the total miles driven for personal use compared to total miles driven that year. If you use a company car for personal use, you should actively log mileage and the purpose of each trip.  
  • Gym memberships: Some companies give their employees free gym memberships to encourage wellness. This fringe benefit should be reported as income during tax time. This is true even if the gym membership is paid for through your employer-sponsored health insurance provider. If the gym is at the same location of the work property and is not only available to employees, then it is excluded from imputed income.  
  • Education assistance: Some employers reimburse employees for higher education tuition, as long as the program of study is related to their area of work. If the amount granted to the employee exceeds $5,250, the excess will be considered taxable imputed income. 

What is not considered imputed income? 

Typically, things like company cell phones, meals, some employment discounts, accident benefits, awards worth less than $1,600 in value, and health savings accounts are not considered imputed income.  

How do I report imputed income? 

Your employer should withhold taxes on your imputed income and then report it on your W-2. If your employer does not withhold taxes from your imputed income, they are still responsible for reporting the income. This means you are responsible for paying the tax on the income at tax time. If you’re unsure about whether you currently receive any form of imputed income, you should seek help from a knowledgeable tax preparer. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations. 

Contact Us Today for a Free Consultation 

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IRS Tax Form Library

irs tax forms

Did you know there are hundreds of IRS tax forms? Luckily, you’ll only need to know a handful of them if your tax situation is simple. However, because your tax situation can change year to year, it’s a good idea to learn about other common IRS tax forms you may not have used before. Here is a list of 50+ IRS tax forms you might need to file your taxes. 

Form 1040 and Schedules 

  • Form 1040, U.S. Individual Income Tax Return: used by U.S. taxpayers to file an annual income tax return 
  • Form 1040-SR, U.S. Tax Return for Seniors: an optional alternative to using Form 1040 for taxpayers who are age 65 or older 
  • Form 1040-X, Amended U.S. Individual Income Tax Return: used to amend or fix a submitted tax return 
  • Form 1040-ES, Estimated Tax for Individuals: used to figure and pay your estimated tax 
  • Schedule A, Itemized Deductions: used to figure your itemized deductions 
  • Schedule B, Interest and Ordinary Dividends: used in some scenarios when you’ve earned taxable interest or dividends 
  • Schedule C, Profit or Loss from Business (Sole Proprietorship): used to report income or losses from a business you operated or a profession you practiced as a sole proprietor 
  • Schedule D, Capital Gains and Losses: used to report capital gains and losses for the year 
  • Schedule E, Supplemental Income and Loss: used to report income or loss from rental real estate, royalties, partnerships, S corporations, estates, trusts, and residual interests in real estate mortgage investment conduits (REMICs) 
  • Schedule EIC, Earned Income Credit: used to give the IRS information about your qualifying child(ren) 
  • Schedule F, Profit or Loss From Farming: used to report farm income and expenses 
  • Schedule H, Household Employment Taxes: used to report household employment taxes if you paid cash wages to a household employee and the wages were subject to social security, Medicare, or FUTA taxes, or if you withheld federal income tax 
  • Schedule J, Income Averaging for Farmers and Fishermen used to figure your income tax by averaging, over the previous 3 years, all or some of your taxable income from your farming or fishing business 
  • Schedule R, Credit for the Elderly or the Disabled: used to figure the credit for the elderly or the disabled 
  • Schedule SE, Self-Employment Tax: used to figure the tax due on net earnings from self-employment 
  • Schedule 8812, Credits for Qualifying Children and Other Dependents: used to figure your child tax credits 

Application Forms 

  • Form SS-4, Application for Employer Identification Number: used to apply for an Employer Identification Number (EIN), a nine-digit number assigned to sole proprietors, corporations, partnerships, estates, trusts and other entities for tax filing and reporting purposes 
  • Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return: used to request an automatic extension of time to file a U.S. individual income tax return 
  • Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns: used to request an automatic 6-month extension of time to file certain business income tax, information, and other returns. 
  • Form W-7, Application for IRS Individual Taxpayer Identification Number: used to apply for an IRS individual taxpayer identification number (ITIN) 

Income and Payment Reporting Forms 

  • Form W-2, Wage and Tax Statement: used to report wages paid to employees and the taxes withheld from them 
  • Form 1098, Mortgage Interest Statement: used to report mortgage interest of $600 or more received by you during the year 
  • Form 1098-T, Tuition Statement: used to report tuition payments received and payments due from the paying student 
  • Form 1098-E, Student Loan Interest Statement: used to report the amount of interest you paid on student loans in a calendar year 
  • Form 1099-B, Proceeds from Broker and Barter Exchange Transactions: used to report any gains and losses from stock and bond transactions made throughout the tax year 
  • Form 1099-C, Cancellation of Debt: used to report canceled debt, which is generally considered taxable income 
  • Form 1099-DIV, Dividends and Distributions: used to report dividends and other distributions to taxpayers and to the IRS 
  • Form 1099-G, Certain Government Payments: used to report payments received from federal, state, or local governments, such as unemployment benefits, tax refunds, grants, etc. 
  • Form 1099-INT, Interest Income: used to report interest income you received, any taxes withheld, and if any of the interest is tax-exempt 
  • Form 1099-K, Payment Card and Third Party Network Transactions: used to report payments and transactions from online platforms, apps or payment card processors 
  • Form 1099-MISC, Miscellaneous Income: used to report miscellaneous compensation such as rents, prizes, medical payments, and others 
  • Form 1099-NEC, Nonemployee Compensation: used to report self-employment or contract work, such as freelance work or rideshare driving 
  • Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.: used to report distributions from annuities, profit-sharing plans, retirement plans, IRAs, insurance contracts, or pensions 
  • Form 1099-S, Proceeds from Real Estate Transactions: used to report the sale or exchange of real estate 

Business Forms 

  • Form 1120, U.S. Corporation Income Tax Return: used to report income, gains, losses, deductions, credits of domestic corporations. 
  • Form 1120-S, U.S. Income Tax Return for an S Corporation: used to report the income, gains, losses, deductions, credits, etc., of a domestic corporation or other entity for any tax year covered by an election to be an S corporation 
  • Form 2106, Employee Business Expenses: used to deduct ordinary and necessary expenses for your job 
  • Form 4562, Depreciation and Amortization (Including Information on Listed Property): used to record the depreciation and amortization of property you’ve purchased for your business 
  • Form 8829, Expenses for Business Use of Your Home: used to figure the allowable expenses for business use of your home on Schedule C   
  • Form 941, Employer’s Quarterly Federal Tax Return: used to report income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks 

Tax Resolution Forms 

  • Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship: used to request an extension of time under Internal Revenue Code section 6161 for payment of tax due 
  • Form 11277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien: used to request a tax lien removal. 
  • Form 12153, Request for a Collection Due Process or Equivalent Hearing: used to request a Collection Due Process (CDP) or Equivalent Hearing (EH) with the IRS Independent Office of Appeals 
  • Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals: used to obtain current financial information necessary for determining how a wage earner or self-employed individual can satisfy an outstanding tax liability 
  • Form 433-B, Collection Information Statement for Businesses: used to obtain current financial information necessary for determining how a business can satisfy an outstanding tax liability 
  • Form 656, Offer in Compromise: used to apply for an Offer in Compromise (OIC) 
  • Form 843, Claim for Refund and Request for Abatement: used to claim a refund or request an abatement of certain taxes, interest, penalties, fees, and additions to tax 
  • Form 8857, Request for Innocent Spouse Relief: used to request relief from tax liability, plus related penalties and interest, when you believe only your spouse or former spouse should be held responsible for all or part of the tax 
  • Form 911, Request for Taxpayer Advocate Service Assistance: used to request taxpayer assistance if you have been unable to resolve your tax issues through normal channels 
  • Form 9423, Collection Appeal Request: used to request an appeal of a notice of federal tax lien, levy, seizure, or termination of an installment agreement. 
  • Form 9465, Installment Agreement Request: used to request a monthly installment plan if you cannot pay the full amount you owe shown on your tax return 

Tax forms can be difficult to understand on your own. If you need tax help, the experts at Optima Tax Relief can assist. With over a decade of experience helping taxpayers, Optima is equipped to take on the most complicated tax situations. 

Contact Us Today for a No-Obligation Free Consultation 

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How to Report Foreign Income

how to report foreign income

Did you know that foreign income is still taxed by the United States? Millions of Americans who earn money abroad or plan to earn money abroad should be aware of their tax obligations. The United States is currently one of the only countries in the world that taxes based on citizenship, and not residency. However, there are some exclusions and foreign tax credits that can reduce your tax liability. Needless to say, reporting foreign income can be tricky. Here’s an overview of how to report foreign income at tax time. 

What is Foreign Income? 

First, let’s clearly define foreign income. Foreign income is any income you receive overseas. This can include the following:  

  • Foreign wages: Foreign wages are wages paid to you for services rendered or goods sold. This can mean being employed by a foreign company or being self-employed but working abroad. 
  • Foreign interest and dividends: Foreign interest is money earned through foreign bank accounts. Foreign dividends are payouts from foreign-earned stocks.  
  • Foreign real estate: Foreign rental income is income earned on a property you rent out located in a foreign country. Alternatively, if you sell a property that is located outside the United States, you’ll need to report the gains or losses on the sale during tax season.   

How Do I Report Foreign Income on My U.S. Tax Return? 

If you earned foreign income, you would need to report it on Form 1040 when filing your tax return. You may also need to file other tax forms depending on what type of income you earned. For example, if you earned foreign interest and dividends, you’d report these on Schedule B of Form 1040. Foreign business income is reported on Schedule C. Most capital gains are reported on Schedule D. Rental property income is reported on page 1 of Schedule E. In more complicated tax situations, there could be additional forms to file, like Form 8938, Statement of Specified Foreign Financial Assets or Form 114, Report of Bank and Financial Accounts. You should speak to a qualified tax preparer about which forms your specific tax situation requires.  

What is the Foreign Tax Credit? 

Some taxpayers might worry about paying taxes twice on the same income. The Foreign Tax Credit (FTC) is one of two safeguards that help American taxpayers avoid this issue. This credit allows American expats, or U.S. citizens who live abroad, to offset foreign taxes paid abroad dollar-for-dollar. For example, if you’re an American expat who paid income taxes to the foreign country where you reside, the FTC gives you a tax credit to use on your U.S. income tax return. To claim this credit, you must be the following requirements: 

  1. The tax must be imposed on you. This means that if your resident country does not require income taxes to be paid, you do not qualify for the FTC.  
  1. You must be the one who paid or accrued the tax. This means if you have not paid the tax or accrued it, you do not qualify for the FTC.  
  1. The tax must be the legal and actual foreign tax liability. This means that if the tax is not legal, and you are not required to pay it, you do not qualify for the FTC. 
  1. The tax must be an income tax. This means that if the tax is another type of tax besides income tax, you do not qualify for the FTC. The IRS has specific rules on what they deem to be a foreign income tax. Be sure to check with your tax preparer for clarification. 

Calculating your maximum FTC can be tricky, but essentially you can divide your foreign taxable income by your total taxable income (including U.S. income). Then take this quotient and multiply it by your U.S. tax liability. For example, if you earned $50,000 in Spain and another $10,000 in U.S. income, you’d have a total taxable income of $60,000. Let’s also assume you had a U.S. tax liability of $12,000. You would take your foreign income of $50,000 and divide it by your total taxable income of $60,000 to get 0.83. You would then multiply 0.83 by your U.S. tax liability of $12,000 to get your maximum FTC of $10,000.  

Additionally, the FTC can carry over to the next tax year or carry back to a previous tax year. Unused FTC amounts can be carried over for up to 10 years. Taxpayers can claim the FTC by filing Form 1116.  

What is the Foreign Earned Income Exclusion? 

The other safeguard that helps American taxpayers avoid paying taxes twice on the same income is the Foreign Earned Income Exclusion (FEIE). The FEIE allows you to exclude all or some of your foreign earned income on your U.S. tax return, including salaries, wages, bonuses, commissions, and self-employment income. It does not include passive or investment income. The FEIE is available to U.S. expats who meet one of the following requirements: 

  • Work outside the United States as an employee 
  • Work outside the United States in a self-employed or partnership structure 
  • Pass the Bona Fide Residency Test. This requires being overseas for work for longer than one year and having a permanent place of work in the foreign country. 
  • Pass the Physical Presence Test. This requires living outside the United States for 330 full days out of the year.  

U.S. taxpayers must use Form 2555 to claim the FEIE and can exclude up to $112,000 of foreign income for the 2022 tax year. Married couples filing jointly can exclude up to $224,000 as long as both spouses meet either the bona fide residency test or the physical presence test.  

Help Reporting Foreign Income 

Reporting foreign income can get complicated very fast. While this article covers several topics related to foreign income, it really is just the tip of the iceberg and applies to most simple tax situations. American taxpayers who live in the country, as well as expats, who earn foreign income should seek best practices regarding foreign income from reliable and knowledgeable tax professionals. If you need tax help, Optima can assist.  

Contact Us Today for a No-Obligation Free Consultation 

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How to Fill Out a W-4

how to fill out a w-4

Many taxpayers are reporting smaller refunds this year. While many cases can be credited to tax credits returning to pre-pandemic levels, several others could be because of an outdated Form W-4. Unbeknownst to some, a W-4 needs to be updated whenever certain life changes occur. If it is not updated, you may not have enough tax withheld during the year, resulting in a smaller refund at tax time. However, the recent 2020 changes to the W-4 form have confused some taxpayers. Here’s a breakdown of how to fill out a W-4. 

What is a W-4? 

Formally known as the Employee’s Withholding Certificate, a W-4 is an IRS tax form that helps employers calculate how much tax to withhold from an employee’s paycheck. While the form is most commonly filled out by an employee upon starting a new job, it can be submitted at any time of the year. An accurate W-4 will help you avoid overpaying or underpaying your taxes during the year.  

When Should I Fill Out a W-4? 

You should fill out a W-4 each time you start a new job. This is true even when the new job is a second job or gig work, meaning you will have multiple W-4s if you have multiple jobs. You should also fill out a new W-4 when you experience a life change that can trigger a tax liability. For example, getting married or divorced should result in a new W-4 being submitted to your employer. Having a child, claiming a new dependent or removing a dependent are other scenarios in which you might want to adjust your withholding.  

How To Fill Out a W-4 

Step 1: First, you’ll enter your personal information, such as your full name, address, Social Security number (SSN), and tax-filing status. Your tax-filing status is very important here as it will determine which tax credits and deductions you might qualify for during tax time. Technically, you can stop at this step and sign the W-4. Your employer will withhold at a default rate. However, this may not result in the right balance of a decent-sized paycheck and tax refund. 

Step 2: For most, this is the trickiest section of the W-4. If you need clarification, you should seek help from your Human Resources department at work. Here you’ll need to choose your tax withholding according to the number of jobs and combined income you have, including self-employment. This also includes your spouse if you file jointly. 

  • If you have multiple jobs, the W-4 for the highest paying job should have Steps 2 through 4(b) filled out. The W-4s for all other jobs can have Steps 2 through 4(b) blank. This will ensure accurate tax withholding. 
  • If you have multiple jobs, and the earnings for both are roughly equal, you can choose to check box 2(c). You will need to make sure the W-4s for both jobs have this box checked.  
  • If you want to omit the fact that you have a second job, you can choose to withhold a certain amount of tax from your paycheck on line 4(c). If you do not want to have additional tax withheld, you can opt to make estimated payments to the IRS instead. 

Step 3: If you earn under $200,000, or $400,000 for married couples filing jointly, you can claim your dependents by following Step 3 on the W-4. If you are filing jointly, make sure only one of you claims these child-related tax credits through withholding. If you try to claim this credit on both forms, too little tax will be withheld, and you could have a tax bill at tax time. In general, it is recommended that the highest-earning job claims the child-related tax credits on Form W-4. Taxpayers should note that they are not required to claim dependents here if they would rather have more taxes withheld from their paychecks to reduce their tax bill. 

Step 4: Here you will make other adjustments, including other income you receive outside of work, deductions other than the standard deduction, and extra withholding. You might want extra tax withholding if you are self-employed and want taxes withheld from these earnings.  

Step 5: Sign and date the complete W-4. This step is required for the form to be accepted.  

Additional Help With a W-4 

These steps should help you successfully fill out a W-4, resulting in the appropriate amount of tax withheld from your earnings. Some taxpayers might be interested in altering their W-4 in order to have more taxes taken out of their paycheck to receive a larger tax refund at tax time. To do this, you can reduce the number of dependents on your W-4 or add extra withholding on line 4(c). Alternatively, if you want fewer taxes withheld, you can increase the number of dependents, reduce the number on line 4(a) or 4(c), or increase the number on line 4(b). Beware though, as this can result in a tax bill at tax time. Taxpayers should always ensure that they are adjusting their W-4 when necessary to avoid unwelcome surprises at tax time. If you need tax help, Optima Tax Relief and our team of knowledgeable tax professionals are here to assist you. 

Contact Us Today for a Free Consultation 

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Why is My Refund Smaller This Year?

why is my refund smaller this year

The average tax refund so far in 2023 has been just over $1,960, which is about 11% lower than last year. Tax professionals are warning taxpayers of potential “tax refund shock” and urge them to prepare for smaller tax refunds in 2023. Here’s a breakdown of what caused the decrease in the average tax refund amount. 

Tax Credits Are Back to Pre-Pandemic Level 

According to IRS data, American taxpayers saw an increase in their tax refunds in 2021, from an average of $2,549 to an average of $2,815. 2022 saw an even larger increase with an average tax refund of $3,252. These amounts can be credited to the COVID-era tax credits related to children, dependents, charitable deductions, and more. However, the IRS issued a statement urging taxpayers to prepare for lower refunds in 2023 due to the end of stimulus payments and changes to charitable contribution deductions. 

The Child Tax Credit (CTC) provided up to $3,600 per qualifying child in 2021 for working parents with certain qualifications. In 2022, the credit was reduced to $2,000 per qualifying child but still helped American families. However, the payments only went to families that earned enough income to owe taxes, so only the poorest U.S. households benefitted from the credit. This could be devastating to families relying on the credit, especially after data showed the CTC lifted nearly 3 million children out of poverty in 2021 at its peak level. 

In addition, the Child and Dependent Care Expenses Tax Credit (CDCTC) returned to a maximum of $2,100 in 2022, a huge decrease from 2021 levels of $8,000. This credit was especially helpful to parents and guardians who had daycare, babysitting, or other care provider expenses. 

The Earned Income Tax Credit (EITC) dropped from 2021 levels of $1,500 to just $560, but up to $6,935. Certain charitable donations are also no longer deductible up to $600 as it was in previous years. 

The United States saw a massive trend of layoffs in 2022. However, severance payments were taxable this year, unlike during the pandemic-era layoffs. Finally, the end to COVID-19 stimulus payments also meant no way to claim credits for stimulus payments. 

The issue here is that the end of these helpful tax breaks comes during a time of the highest inflation the U.S. has seen in four decades, making it difficult for taxpayers to rely on their tax refunds for financial relief as they normally do. Nearly one third of Americans rely on their tax refunds to make ends meet. 

How Can I Increase My Tax Refund Next Year? 

While some people prefer to keep more of their paychecks during the year, others prefer to have a greater tax refund once a year. One way to do this is to have more taxes withheld from your paycheck. You can submit a new W-4 to your employer at any time during the year. It’s important to note that your W-4 should be reviewed and resubmitted when you have a personal or financial change in life. Other than this adjustment, you can take advantage of traditional IRA contribution deductions or max out your Health Savings Account (HSA) contributions. With just a short amount of time before the April 18th tax filing deadline, you’ll want to ensure that you file a complete and accurate return as soon as possible. If you need tax help, Optima is here to assist. Contact us for a free, no-obligation consultation with one of our knowledgeable tax professionals today. 

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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 contract 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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