Tax Planning

Tax Filing Help: Deducting Medical and Dental Expenses

pub502-147x147Going to the doctor or to the dentist is almost never an enjoyable experience. Nonetheless, even if you’re in excellent health, you are still likely to accumulate medical and dental expenses – if only for insurance premiums and checkups. In some cases, you can recover at least some of your expenses through credits and deductions on your federal income tax returns. However, depending on your circumstances, recent changes in the tax code may make it more difficult for you to qualify for tax relief. If you have questions, the professionals at Optima Tax Relief can help you decipher which benefits you are entitled to and how to claim them.

Increase in the Adjusted Gross Income (AGI) Threshold

Before January 1, 2013, wage earners were allowed to deduct medical and dental expenses that exceeded 7.5 percent of their adjusted gross income (AGI). However, from 2013 forward, the AGI threshold for most taxpayers to deduct medical and dental expenses has increased to 10 percent. Taxpayers who are married with at least one spouse age 65 or older may still use the 7.5 percent threshold to claim medical and dental expense deductions until December 31, 2016. Beginning in 2017, the AGI threshold for claiming medical and dental expenses increases permanently to 10 percent for all taxpayers who are wage earners.

deductionsAllowable Medical and Dental Expenses

Although the increase in the AGI threshold is steep, the list of allowable expenses to claim as medical and dental expenses is extensive. Insurance premiums, office visits, vision correction, chiropractic care, physical therapy and mental health treatments are all deductible. Even transportation to and from the hospital or doctor’s office can be deducted, including public transportation costs, parking and tolls. Taxpayers who use their personal cars to travel to and from their homes to receive treatment may deduct 24 cents per mile on their federal income tax returns for 2014. On the other hand, elective cosmetic surgery (reconstructive or corrective plastic surgery is deductable) and Medicare tax payments for self-employed taxpayers are not allowable deductions.

Wage Earners Must Itemize

Wage earners who take the standard deduction cannot claim an additional deduction for medical and dental expenses. Instead, wage earners must itemize their deductions by filing Form 1040, commonly called the “long form” along with Schedule A to claim those expenses that exceed 10 percent of AGI (or 7.5 percent taxpayers eligible for the temporary exemption). Taxpayers may claim expenses paid for themselves, their spouses and children or other individuals claimed as dependents.

Rules for Self-Employed Taxpayers

Self-employed taxpayers are generally exempt from the AGI threshold requirement, and can claim eligible medical and dental expenses even if they take the standard deduction. To claim the deduction, self-employed taxpayers should file Form 1040 along with Schedule C, Profit or Loss from Business, Schedule C-EZ, Net Profit from Business, or Schedule F, Profit or Loss from Farming. Although self-employed taxpayers are not required to meet the AGI threshold, they are still prohibited from double-dipping. This means that expenses paid through a HSA are not deductible. In addition, self-employed taxpayers cannot claim deductions for medical or dental expenses for any month that they would have been eligible for subsidized health care coverage by an employer, former employer, spouse’s employer or ex-spouse’s employer.

calculateCalculating Your Medical and Dental Expense Deduction

Besides meeting the AGI threshold, taxpayers are only entitled to deduct medical and dental expenses that are not reimbursed or otherwise accounted for. This means that expenses that were paid through a Health Savings Account (HSA) or Flexible Spending Arrangement (FSA) cannot be deducted, because withdrawals from HSAs or FSAs to cover medical and dental expenses are almost always tax-free. Taxpayers are also prohibited from deducting expenses that are covered by their insurance or paid for by their employers such as worker’s compensation claims.

Deductions can only be claimed for expenses paid during the previous calendar year. However, if you mailed a check or posted a credit or debit card payment on December 31, you can include that payment even if it doesn’t actually post until the new year. Therefore, be sure to keep your receipt or other proof of when the payment was made. If you are unsure about whether a specific expense qualifies for the medical or dental expense deduction, a tax professional, such as an attorney from Optima Tax Relief, can determine whether or not the expense in question is deductible.

10 Tax Preparation Tips For The Self Employed

https://www.optimataxrelief.com/why-irs-audit/Being your own boss. Calling your own shots. Making your own quarterly payments to cover your income taxes, other obligations. Tax preparation is a necessary evil for nearly everyone who earns an income, but for the self employed, the task can be particularly challenging.

Tax Preparation Tips For The Self Employed

By following a few prudent tips, you can minimize the hassle of tax preparation, leaving you more time to pursue your business and career aspirations.

1. Determine If You Are Truly Self Employed

The IRS has established three categories that determine whether workers are independent contractors or employees: behavioral, financial and nature of relationship. In general, if you provide services for more than one client, choose when and where you work and cover your own costs for equipment, you are an independent contractor. If that isn’t the case for you, perhaps you are not truly self employed. Some companies misclassify workers as contractors to avoid providing benefits and to dodge other obligations. If you believe that you have been misclassified as a contractor, file Form SS-8 with the IRS to obtain a definitive determination of your status.

2. Adjust Exemptions from Wage Income to Reduce Quarterly Payments

Making quarterly estimated income tax payments is one of the more strenuous chores imposed on self employed workers. But if you work for an employer either part-time or full-time while working for yourself, you can reduce the amount of your quarterly income tax payments. If done right, you might be able to nix this chore altogether. Adjust your exemptions so that sufficient taxes are deducted from your wages to cover what you would otherwise pay in estimated installments.

3. Consult Your Previous Year’s Tax Return for Guidance

Failure to pay enough in quarterly estimated payments can result in significant tax penalties. Your previous year’s tax returns can help you generate an estimate for what you should pay in quarterly estimated installments. The IRS is also fairly lenient with taxpayers who make honest miscalculations.

There is no underpayment penalty if your unpaid tax obligation totals $1,000 after your estimated payments are accounted for. There’s also no penalty if your estimated payments total at least 90 percent of your current year’s tax obligations or 100 percent of your previous year’s tax obligations, whichever is smaller.

4. Don’t Forget Local Taxes and Fees

Many municipalities impose taxes and licensing fees on self employed workers and small business owners. This is especially likely if your business generates foot traffic or if you provide tangible goods to your clients. Check out local municipal and county ordinances to avoid missing critical payments.

5. Consider Whether Incorporating Your Business Makes Sense

For many entrepreneurs, operating as sole proprietors is the most viable option for conducting business. Sole proprietors file regular Form 1040 income taxes, reporting their business expenses on Schedule C as an attachment. But corporations are taxed at a lower rate than individuals, and they enjoy separate legal status. This would shield your personal assets against adverse legal and financial consequences related to business activities. On the other hand, forming a corporation or limited liability company (LLC) is more complex and expensive than operating as a sole proprietorship.

Consulting with a tax professional can help you make the right determination for your business.

6. Maintain Accurate Records for Business-Related Expenditures

The equipment and supplies that you purchase for your business represent legitimate tax deductions. You can write off unpaid invoices if you can demonstrate that you have suffered adverse consequences and have made good faith efforts to collect what is owed to you. Business-related travel and entertainment also represent legitimate tax write-offs. But you must be able to document your expenses by retaining your receipts and maintaining accurate business and financial records.

7. Don’t Be Spooked by Audit Fears

You may have read or heard that certain deductions such as the home office deduction represent red flags for the IRS that trigger audits. As a result, you may shy away from claiming such tax credits and deductions. While the wish to avoid an audit is understandable, it is foolish to forego legitimate tax deductions and credits. Even if the IRS does request further documentation or even a full tax audit, as long as you can verify your claim, you have nothing to worry about.

8. Claim Health Insurance Deductions and Credits

Under the Affordable Care Act, individuals and households with incomes between 100 percent and 400 percent of the federal poverty rate are eligible to get tax credits when they buy eligible individual health insurance coverage through state or federal exchanges. These credits can be applied directly to insurance premiums if claimed when filing federal income tax returns. Self employed individuals may also deduct 100 percent of the premiums that they pay for health insurance coverage for themselves, their spouses and dependents.

The four following conditions must apply:

  1. You have net profit on Schedule C, Schedule C-EZ or Schedule F for Form 1040
  2. You recorded net earnings from a partnership on Schedule K-1 for Form 1065
  3. You figured net self employment earnings on Schedule SE by an alternate method
  4. You have a W-2 for an S corporation where you hold more than 2 percent shares

9. Don’t Neglect Depreciation

If your business invests in expensive equipment, depreciation can represent a significant area for tax breaks. The IRS allows you to write off part of the value of big ticket items like photocopy machines or a new laptop each year to amortize the upfront costs of such major tools. The IRS.gov website includes instructions on how to properly calculate depreciation. Many commercial tax preparation programs also allow you to include depreciation along with other business-related items on your return.

10. Need Help? Tax Preparation Costs are Tax Deductible

Many self employed individuals outsource their tax preparation tasks to an accountant. If you are among that number, you may be able to deduct the cost of tax preparation as a business expense. The experts at Optima Tax Relief can relieve you of the burden of preparing your tax returns, along with answering your tax-related questions.

If you’ve been around the “self-employment tax” block a few times, you probably recall telling yourself that next year, you’ll do better. You’ll save all the receipts, track all the mileage, put away money for retirement. Well, next year is right now. Check out these mid-year tax strategies for more ways to prepare for next year’s tax season.

Save Tax Green By Going Green

If you are eco-conscious, you probably sort your disposables for recycling, wash your clothes in cold water, carry reusable shopping bags to the grocery or perform other environmentally-friendly actions. But did you know that you may also be eligible to receive tax credits and deductions from Uncle Sam? While tax breaks for going green are not nearly as generous as they were in past years, it is still worth your while to investigate possible savings from the IRS for projects that you plan to carry out anyway.

Make Home Improvements

Did you recently replace one or more drafty windows or reinforce the insulation on your home? If so, you may qualify for tax credits through the Non-Business Energy Property Credit, which covers 10 percent of costs associated with purchasing and installing qualified energy-efficient insulation, doors, metal and asphalt roofs and windows.

The credit is also available for non-solar heating, ventilating and air conditioning (HVAC) systems, biomass stoves and non-solar water heaters. A maximum of $200 in credits can be claimed for window installation, with a $500 lifetime limit in total credits. The credit can only be applied to improvements made on your existing primary residence located within the United States. The Non-Business Energy Property Credit expired at end of December, 2013; new projects will not qualify unless Congress votes to renew the credit.

Update to Energy Efficient Appliances

Have you resorted to showering with cold water to save money on your utility bills? Perhaps you should consider installing an energy-efficient solar hot water heater.The Residential Energy Efficient Property Credit covers up to 30 percent of the cost of purchasing and installing a solar hot water heater, along with costs associated with solar electricity arrays, residential wind turbines and geothermal heat pumps.

There is no upper limit to the amount of tax credits you can claim, and the credit is applicable to new and existing residential construction. You can also claim up to 30 percent of the cost of installing residential fuel cells and microturbine systems up to a limit of $500 under the program. The Residential Energy Efficient Property Credit remains in effect through the end of December 2016, so you have plenty of time to make those improvements.

Optima Tax Relief has more about how you can get credit for making your home energy efficient in this post.

Green Up Your Ride

If you missed out on the recent Cash for Clunkers program, you may still have a chance to collect tax breaks for buying an energy-efficient car – as long as the car you buy is either a plug-in hybrid or an all-electric model. The Plug-In Electric Drive Vehicle Credit (IRC 30D) applies to four-wheeled passenger vehicles acquired by individuals and businesses after December 31, 2009. Some two-wheeled and three-wheeled vehicles acquired after December 31, 2011 and before January 1, 2014 also qualify for the program. Tax credits for non-plug-in hybrids, diesel-powered vehicles and alternative fuel vehicles (AFVs) expired at the end of 2010.

You may claim $2,500 for all eligible vehicles. In addition, for a vehicle that draws what the IRS calls “propulsion energy” from a battery with a capacity of at least 5 kilowatt hours, you may claim an additional $417. You may claim an additional $417 for each additional kilowatt hour capacity up to a maximum credit of $7,500.

The IRS will begin phasing out the credit over a one-year period beginning with the calendar quarter following a calendar quarter during which a specific manufacturer sells at least 200,000 qualifying vehicles in the United States. (The clock starts after December 31, 2009). During the first two quarters of the phase-out period, individuals who purchase qualifying vehicles may claim 50 percent of the applicable credit; during the second two quarters of the phase-out period, taxpayers may claim 25 percent of the applicable credit. No credit may be claimed after the end of the phase-out period.

As of January 2014, there is little danger of sales triggering the phase-out stage of the Plug-In Electric Drive Vehicle Credit program. The most popular plug-in electric car, the Chevrolet Volt, has sold approximately 56,000 units since it was introduced to the consumer market in December 2010. (Chevy representatives made an announcement at the 2014 Detroit Auto Show that mass production of the all-electric Volt has been suspended; instead, the car will be reclassified as a “niche” model targeted for specific audiences, much like the iconic Corvette.) The Ford Focus electric model had sold just under 21,000 cumulative units in the United States as of November 2013, according to the IRS website.

How to Claim Your Tax Breaks

To claim tax breaks for home improvements and energy-efficient appliances, file Form 5695, Residential Energy Credits.

To claim tax breaks under the Plug-In Electric Drive Vehicle Credit program, individual taxpayers submit Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit along with their federal income tax returns. Under the American Recovery and Reinvestment Act (the “stimulus”), individuals who purchase qualified vehicles during 2010 or later may apply the credit toward payment of the Alternative Minimum Tax (AMT), if they are subject to the tax. To claim the credit for vehicles purchased for business use, submit Form 3800, General Business Credit.

Going green doesn’t reap the same rewards it used to, but there’s still money on the table if you’ve made any of these changes. Don’t let these tax credits fall through the cracks!

Photos: Flickr, Al.com

Tax Tips to Lower Taxes on Lotto Winnings

Who wins after every lotto draw? The taxman does, of course! Optima Tax Relief wants to help you save by providing tips for lowering taxes on your lotto winnings.

How Much Are Lotto Winnings Taxed?

Not only is the lottery a tax on people who are bad at math –US lotteries generally only pay out 60% of the money players bet. The chances of winning a large lottery, such as the Powerball, is one in 175 million and the lucky winner actually has to give the IRS and state tax revenue agencies a big chunk of the prize, every time.

How big a chunk? The taxman’s share could be anything from 40% to 60%, depending on how the winner decides to cash in the prize and if they live in a state that taxes lotto winnings. The same applies even if you win a small prize, win on a game show, or participate in a community raffle.

What to do after winning the lottery

So how does paying taxes on lotto winnings work? And if you do happen to win the lottery, what is the smartest way to minimize your tax burden?

Lump Sum Vs. Annuity Payments

The first tax decision lottery winners have to make is whether to receive their prize as a lump sum or have it paid out in yearly installments, called an annuity. If you win a $10 million prize with the New York State Lottery, for instance, you get to choose between $10 million over 26 yearly payments of approximately $250,000 or a lump sum of a little less than $5 million. The full prize is only for those who choose the annual payments.
Those who choose the lump sum get the cash value in bonds that the lottery would have had to buy in order to pay $10 million over 25 years.

From a tax perspective, choosing annual payments will keep you in a much lower tax bracket, which will reduce the amount of tax you have to pay. As of 2013, taxpayers with an income between $183,251 and $398,350 pay 33 cents on the dollar to the IRS. Those with an income of more than $400,000 have to pay nearly 40 cents on the dollar, which doesn’t even include state taxes.

Similarly, business owners whose profits swing dramatically from one year to the next may benefit from spreading taxable income over multiple years.

However, there is a strong likelihood that taxes will continue to go up over time and negate the tax benefit of annuities. Also, if you choose the lump sum, you could invest the entire amount and put those lotto winnings to work, which — if your investments go well — could more than compensate for the higher initial lump sum tax rate.

“When deciding upon a lottery payment option it ultimately depends on the unique situation,” says Harry Langenberg, Managing Partner at Optima Tax Relief, who points out winners of big jackpots will be in the highest bracket either way. “If you’re a wise investor, it makes sense to take it all at once.”

Set Up a Trust

A smart move for lottery winners is to set up a trust. In states that permit it, creating a trust allows you to collect your winnings anonymously, which can avoid a lot of unsolicited attention from scammers and opportunistic long-lost friends and relatives. A well-designed trust can also allow for tax-free growth of assets, as well as reduce estate taxes for married couples.

Trusts are not just a good idea for lottery winners and the ultra-wealthy. Even families with a moderate income can reap the benefits from setting up a trust. For instance, trusts allow you to specify how and when your children inherit your estate, which can help them use their inheritance more wisely. You can also use trusts to provide funds for particular purposes, like for education and health care, or to allocate monies for a favorite charity.

Pay Taxes Like a Millionaire

Sadly, lottery winners often end in financial ruin due to bad investment choices, greedy relatives and friends, misjudging the cost of taxes or the costs of maintaining the stuff they buy. This trap can be avoided by investing all winnings in a low-risk mutual fund and living off the interest. For example, if you invest a $250 million dollar windfall in bonds and a diversified mutual fund, you could easily generate $4 million a year after taxes.

Even investing a more modest $1 million lottery prize could earn you $50,000 a year, assuming your portfolio yields a 5% interest. Earning a living from your investments, as opposed to owning a business or working for a salary is the reason ultra-wealthy people like Mitt Romney and Warren Buffet pay a lower tax rate than their secretaries. Capital gains, or the money you generate from investing in stocks and bonds, are taxed differently than regular income. This is particularly true if you avoid the trap of trying to time the stock market and hold on to your shares and bonds for the long haul. As of 2013, the long-term capital gain tax rate is 15% for taxpayers with incomes in the 25% to 33% tax brackets.

Lottery as Voluntary Taxation

The words of John Fielding, the 18th-century English satirist, hold true today.

A Lottery is a Taxation,
Upon all the Fools in Creation;
And Heav’n be prais’d,
It is easily rais’d,
Credulity’s always in Fashion;
For, Folly’s a Fund,
Will never lose Ground;
While Fools are so rife in the Nation

The quip that lotteries are a taxation on people who are bad at math is not a joke. According to The Tax Foundation, a non-partisan tax research group based in Washington, D.C., lotteries are not just a controversial way to fill state coffers, they are an actual tax. The use of lotteries to finance the government is nothing new. In 1892, A.R. Spofford, Librarian of Congress, described lotteries as the kind of voluntary tax the most reputable citizens would engage in — as part of their civic duty — to help with the financing of schools, hospitals, and courthouses.

Today, lotteries have lost most of their patriotic component, although some lotteries are centered around charities, but they still are a significant component of state revenue. As with property taxes, lottery tax can be avoided altogether by refraining from buying a ticket.

Photo: pirateyjoe

Tax Deductions for Professional Gamblers

What could be better than winning $8.3 million at the World Series of Poker next week?

Not paying taxes on all $8.3 million.

Since a federal court ruling two years ago, there are tax deductions for professional gamblers similar to those for self-employed contractors and small businesses. Expenses like travel, meals, and lodging can be cut from their total income.

This means that if a professional player won $1 million and showed business expenses of $100,000 million during the year – he would only pay taxes on $900,000.

Are You a Professional Gambler?

So how do you prove to the IRS that you’re a professional gambler? Show that you treat the game like a business all year long; that you play to make a profit, not to have fun with your friends.

The federal tax code uses nine guidelines to determine what qualifies as professional gambling, and what doesn’t. Here are a few of those guidelines adapted from an article last year in the Journal of Accountancy.

Gambling Guidelines

  • Make a profit. Everyone loses money sometimes. But if you never win or profit, it’s hard to suggest that you make a living by gambling. This is the same way the IRS distinguishes between a small business and a hobby.

  • Keep records of the time you spend practicing and competing. Maintaining books and records show that you’re not just a casual gambler, you can prove that you’re a professional.

  • Study hard. Prepare for each tournament with a poker expert. This will show you consider gambling your job, and that improving your game is part of professional development.

  • Don’t have an entourage. Since gambling is usually for fun, you have to show that you are not playing for pleasure, but for a living. It is better to go by yourself. If you want family and friends to keep you company, don’t include them in your business expenses.

“Like most tax issues, accurate and proper tax planning is key. With a sensitive issue, such as professional gambling, having your tax strategy be IRS ready will be vital in keeping your winnings in your pocket.  Winning against the Internal Revenue Service is possible, as long as you hold the right cards in your hand.” –Andrew Park, Enrolled Agent at Optima Tax Relief.

How to Report Gambling Winnings?

Gambling winnings are reported through IRS Form W-2G. Depending on how much you win and the type of gambling you undertake, you may receive this form directly from the “payer” or organization from which you won the money. If the payer withholds federal income tax from your winnings, you will receive a Form W-2G. This form, according to Robert W. Wood of Forbes.com, works just like a 1099 Interest Form that you receive as part of tax time preparation forms. He reminds everyone the IRS also receives a copy of the Form W-2G and reminds winners to keep it handy for tax time to ensure full compliance!

If gambling winnings do not meet the following thresholds set by the IRS for the respective type of gambling, it must be reported as “Other income.”

Bingo or slot machines:  $1,200
Keno:  $1,500
Poker Tournament:  $5,000 (excluding wager or buy-in amounts)
“Other” gambling winnings:  $600

“Other” gambling winnings are those that do not include poker tournaments, slot machines, bingo, and keno – and the payout is at least 300 times the wager amount).

What if My Winnings don’t Meet the Above Thresholds?

No matter how much income is generated from gambling, it must be reported if you receive a Form W-2G or not. If your winnings do not meet the threshold, you must report your income under the “Other Income” line on the Form 1040 U.S. Individual Income Tax Return.

What do I Do if I Lose Money From Gambling?

Gambling losses may be deducted. Deductions are permitted up to the winning amount. Losses must be reported, as an Itemized Deduction, on Schedule A, separately from any winnings.

How are Winnings and Losses Substantiated?

The IRS requires proof of losses and winnings. In case of an audit and to maintain the integrity of your income tax return, the IRS recommends keeping all records related to winnings and losses. Items to substantiate gambling transactions include tickets, receipts, checks, and IRS Form W-2G (if given). Maintaining a notebook or other written documentation is highly suggested to keep winnings and losses separate and organized.

What Expenses Can Be Deducted?

Like most small businesses, professional gamblers can deduct expenses that the IRS considers “ordinary and necessary” to “carrying on any trade or business.” The website ProfessionalGamblerStatus.com provides a long list of tax deductions for professional gamblers you can deduct, ranging from internet connections (if you play online), to flights, car trips, and meals when you travel to tournaments.

List of Possible Deductions

  • Internet Costs, if you regularly play online
  • Home office expenses
  • Tax advice
  • Subscriptions to gambling magazines and newspapers
  • Gaming fees, chat room fees
  • Club membership fees and dues
  • Clerical and record-keeping expenses
  • Travel and meal costs during tournaments
  • Wages paid to relatives or employees for their assistance

You can also deduct money used to hire a poker coach or someone to keep track of your results. The payment just needs to be “a reasonable allowance for salaries or other compensation for personal services actually rendered,” according to the IRS.

To comply with the laws, make sure you don’t look like you’re trying to take advantage of the system. For instance, taking a taxi and flying coach would arouse less suspicion than renting a private jet and a stretched limo. That also applies for high rollers, who are often offered complimentary hotel rooms, buffets, and rides by casinos. Don’t try to pass those off freebies as expenses.

So what if you’re not a professional but you drive 60 miles, eat lunch, and have a great day at the track? Since you’re not a professional gambler, you can’t deduct any expenses. But you still have to pay taxes on your winnings.

Photo: Play Among Friends

IRS Form 1040-ES & Estimated Tax for Individuals

You’re self-employed, which means that you no longer have to punch a clock or make that daily commute to spend the day in a cubicle. However, along with the freedom to set your own schedule comes the responsibility to make sure Uncle Sam gets his cut – and receives what you owe in a timely fashion.

That means either setting aside funds from your earnings to cover your tax obligation next April, or paying quarterly estimated taxes. Regardless of which strategy you take, the IRS has developed a worksheet to use to calculate how much you should set aside – IRS Form 1040-ES: Estimated Tax for Individuals.

Using IRS Form 1040-ES: Estimated Tax for Individuals

The IRS makes it easy (or at least as easy as paying taxes can be) to satisfy your federal income tax obligations by making quarterly estimated income tax payments. To begin making estimated payments, first download IRS Form 1040-ES, Estimated Tax for Individuals from the IRS website. For more details on how to complete the form, download Publication 505, Tax Withholding and Estimated Tax. The form is a PDF document that you can fill in and save with your information at any point.

Expected Wages

To calculate your expected wages for the coming year, obtain a copy of your prior year’s tax returns and locate the figure for your adjusted gross income to use as a starting point to estimate your income for the coming year. Subtract either your itemized deductions from your return or the standard deduction (whichever is larger) from your adjusted gross income. If the resulting amount is negative, adjust the total to zero. The result is an estimate of your wages for the coming year.

Calculate Estimated Tax

Once you’ve finished this calculation, use the included Tax Rate Schedule to calculate your estimated tax and enter the figure on the appropriate line of IRS Form 1040-ES. If you are subject to Alternative Minimum Tax (AMT), include the amount generated from IRS Form 6251 on IRS Form 1040-ES as additional tax. Subtract any credits you’re entitled to, such as the Earned Income Credit or deductions for use of your vehicle for business, medical or charitable purposes.  The result is your estimated tax.

Self-Employment Taxes

Use the resulting figure as the starting point to estimate your self-employment taxes. First, multiply your expected wages for the coming year by 92.35%, or .9235, and enter the result on line 3 of IRS Form 1040-ES. Multiply the figure on line 3 by 2.9% or .029 and enter the result on line 4 of IRS Form 1040-ES. Subtract your expected wages for the coming year from $113.700 (the maximum income subject to Social Security taxes).  If the result is zero or less, enter 0 on line 9 of IRS Form 1040-ES, and skip to line 10 on the form. If the result is zero or greater, compare this figure to the figure on line 3, and multiply the smaller result by 12.4% or .124 and enter the result on line 9 of Form 1040-ES. Add the figures from line 4 and line 9 together and enter the result on line 10. Multiply the figure on line 10 by 50% or .50 to obtain your estimated self-employment tax.

After you’ve completed all these calculations, add the estimated tax to the estimated self-employment tax. If the result is $1,000 or more, divide the total by four to determine your quarterly estimated payments. If the figure is less than $1,000, the IRS does not require you to make quarterly estimated payments. But before you throw your calculator across the room in frustration for having wasted so much time, consider this: you’ve generated a good estimate of how much you should set aside to cover your tax obligations.

Set Aside Funds

Whether or not you are obliged to make quarterly tax payments, you will still need to set aside funds to cover your income tax obligations. If you have a paid-wage job in addition to self-employment, you can ask your employer to deduct more from each paycheck to make the process automatic. If not, set up a “pay yourself first” account with your financial institutions, and commit to making regular deposits into the account until you collect the funds you need for each quarter.

By following this strategy, you’ll be far less stressed when you file next year’s federal income tax returns. If you still need assistance, feel free to give us a call.

Photo: Philip Taylor PT

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7 Most Outrageous Tax Deductions

Think only celebrities and big corporations get away with outrageous tax deductions? We’ve put together a few reasonable ones you can take advantage of next year, and a few of the more outrageous tax deductions for fun.

1. Put your pup to work! Employing man’s best friend to protect your company grounds can offer some leeway with the IRS. Since the animal is considered part of the “protection” or security system for your place of business, some of your pooch’s care costs may be written off come tax time.

2. Enlarging your deduction — taken to the next level. In 1988 a stripper wrote off her breast enlargement surgery as a business expense. At first the tax courts denied her the deduction. Immediately she appealed the decision and sure enough, her implants were considered a business expense allowing her the tax deduction.

3. Getting a prescription for cash. Does your doctor feel you need to drastically improve your health in order to stay alive? Well the IRS wants you alive and kicking in order to keep up with your tax payments. If your doctor signs off on the purchase of remedies in order to drop some weight, you may be able to write the concoctions off as an expense on next year’s tax return.

4. Stick ’em up! No one escapes the IRS when there’s cash involved. Even criminals in the pen must pay tax on their bounty; ironically, they may be able to write off lawyer expenses as a tax deduction. Who are the real criminals here?

5. Smoke and mirrors. Lately, everyone seems to be trying to live a healthier lifestyle. Many smokers have decided to quit, if not for health reasons, then for the steep increase on cigarette taxes. Smoking cessation devices, patches, or other quit-smoking aids can indeed be written off at tax time. Take advantage of this and you may see some payback for cigarette taxes you paid last year.

6. Music to your ears. Signing junior up for clarinet lessons may not be such a bad idea after all. If your child has an over-bite it is scientifically proven that playing certain wind instruments can correct the problem. Junior practicing clarinet may keep you up at night, but writing off that lesson can help you sleep like a baby during tax time.

7. Moving on up. You made it. You finally got that big promotion and are moving to the city to rake in the dough and live the high life. As many people already know, you can write off your moving expenses when relocating for a job. If you have pets, moving can become a bit more costly especially if there is a plane ride in your pup’s future. Since this is considered a moving expense, you pet’s airfare is a write off as well.

At Optima Tax Relief we can help you take advantage of some of these legal, but outrageous tax deductions. Contact us for more information on how to keep more cash in your pocket and out of the IRS’s hands.

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How to Obtain a Prior Year Tax Return

When you file your taxes, keeping a copy of the final return is highly recommended but sometimes not possible, or forgotten. Having that copy, though, is often required for many financial decisions. Reasons include answering questions related to an IRS audit or investigation, or on a student loan or mortgage application. If you cannot find or did not save a copy of a prior year tax return, we can help you.

Optima Tax Relief has compiled a guide to help you obtain your tax returns quickly and easily:

What Can I Request?

Upon request, taxpayers are able to obtain a tax return transcript and a tax account transcript.

Tax return transcripts contain most of the line items from your initial tax return along with line items from schedules and forms accompanying the initial filing. Changes made through amended returns, will not show up on this type of transcript.

Tax account transcripts document any modifications made by the filer or the IRS to the original tax return, including any adjustments and amendments. This document has information such as your return type, your adjusted gross income, taxable income and what your marital status is.

How Can I Request Transcripts?

Transcripts are free and can be requested via the web, over the phone or by mail. Using the IRS’s website, www.IRS.gov, requests are made using the “Order a Transcript” tool. Phone requests are made by calling (800) 908-9946 and following the prompts.

Individuals requesting a 1040A, 1040 or 1040EZ tax return transcript must fill out IRS Form 4506T-EZ, otherwise known as the Short Form Request for Individual Tax Return Transcript.

Individuals or businesses requesting a tax account transcript must complete IRS Form 4506T, also known as Request for Transcript of Tax Return.

How Far Back Can I Request Transcripts?

Transcripts are free, and available for the present year and each of the three years prior.

How Long Will It Take to Receive My Tax Return?

It normally takes 5-10 calendar days to receive your information if you request your tax information via online or over the phone. If you request your tax information by mail, it can take up to 30 calendar days.

What If I Need the Actual Copy of the Tax Return I Filed?

If you regularly use an online preparation software like TaxACT or TurboTax, retrieving old returns should be relatively easy. If not,  taxpayers can request and receive the actual paperwork they filed directly from the IRS. The current year’s paperwork and up to the past six years are available.

Individuals requesting this information must mail $57 per tax year and IRS Form 4506, Request for Copy of Tax Return. Turn-around time generally takes up to 60 calendar days.

What if I Live in a Federally Declared Disaster Area?

For taxpayers living in disaster areas, determined by the Executive Branch of the United States, the IRS may permit these individuals to request tax return paperwork. To see if you are eligible and your location qualifies, check out the IRS’ website www.IRS.gov and look for the “Disaster Relief” section. This section spells out all eligibility and application criteria.

It’s good practice to have prior year tax returns and other tax-related documents stored in a safe place and “in an orderly fashion” for a few years. You always want to be prepared in case of an audit!

Kid-Friendly Tax Breaks

Couples are often struggling to make ends meet. Add a few kids to the mix, and the expenses become endless. It seems that there is a never-ending stream of costs associated with having kids: diapers and childcare, clothing, and everyday essentials. Before you know it, field trips, extra-curricular activities, and school events add to that tally.

The Wall Street Journal estimates that the average family will spend around $300,000 raising a child to adulthood, and that number doesn’t even include college costs. Fortunately, there are some kid-friendly tax breaks that will help you recoup a little of your money, or at least get your tax bill down to a manageable level each year.

Child and Dependent Care Credit

If you have children under the age of 13 this tax credit can help with child care costs–but there are a few rules involved. To claim this credit, you must be either working or looking for a job during child care. The cost of summer camp or other programs can also be included.

Run a small business and work for yourself? You can still claim this credit. Keep good records by tracking your hours, income and expenses, and file them in case the IRS ever questions the deduction. Under normal circumstances, this shouldn’t raise any red flags. The credit is worth as much as $3000 for one child or up to $6000 for more than one child. Note: If your family earns more than $43,000 a year, you will only be allowed to claim 20 percent of the deduction.

Adoption Credit

If you are thinking about adopting a child, you can drastically reduce the cost of adoption with the Adoption Credit. In 2012, the adoption tax credit for costs directly associated with adoption was $12,650. Although you can only claim as much as you owe in taxes, you can space the deduction out and claim part of it the following year. This is a large credit and the IRS will likely look at the return closely. It is a good idea to keep meticulous records and a paper trail, and have a tax specialist look over your return. When claiming this deduction, you must file with a paper return instead of an electronic one.

Child Tax Credit

If your child is under 17, you probably qualify for up to a $1,000 Child Tax Credit. Read our checklist to see if your child qualifies. You can claim the credit for each child in your household who is eligible.

Earned Income Tax Credit

For those with a low income, the Earned Income Tax Credit (EITC) can really help come tax-time. If you qualify, you can earn a credit of $3,169 for one child, $5,236 for two children and $5,891 for three or more children. As of 2012, the income for married filing jointly with one child cannot exceed $42,130. The amount goes up slightly if you have more children. This information can change a bit from year-to-year, so it’s always best to refer back to IRS publication 596 or contact Optima Tax Relief  for the latest updates. In addition to claiming this credit on your federal return, some states also offer an EITC credit.

Hire Your Child

If you own your own business and they’re under 18, you can further reduce costs by hiring your child to work for you. Most of the time, you won’t have to worry about holding out FICA or Social Security from their wages. The IRS tends to watch this carefully, so be sure the child is old enough to perform the work assigned, that the work is necessary to your business and that you are paying a fair wage (minimum wage is a good bet). Pay your child with a check and not cash so that you have a paper trail if ever questioned. That check can go into a savings account for your child, a Roth IRA in his name or into a special fund that pays out when he reaches adulthood.

Have your child fill out a W-4 before employment because you’ll need to send him a W-2 at the end of the tax year. According to MarketWatch, your child can earn up to $6,100 a year as of 2013 without worries of owing federal taxes. This is another way to shelter some of your income while helping your child save for college or a rainy day fund.

Higher Education

Once your child turns 18, you’ll lose the Child Tax Credit and many other tax breaks. But if you are still supporting your teenager by paying for expenses like food, rent, and/or their college education, there’s good news–you can recoup some of these costs.

The American Opportunity Tax Credit, good through 2017, allows you to claim $2500 per child per each of the first four years of his college career. Your adjusted gross income must be less than $90,000 for single filers and $180,000 for those filing as married-filing-jointly. You may also be able to claim some of the interest paid on student loans with the Student Loan Interest Deduction.

These kid-friendly tax credits can greatly reduce your tax bill at the end of the year. You’ve got enough expenses as it is, so take advantage of these deductions whenever possible.  Although most won’t send up red flags, the IRS does keep a careful eye on some of these deductions because others have abused the system. Don’t let that scare you off from claiming a deduction you are qualified to take.

Five Tax Credits that Can Reduce Your Taxes

A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.

3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.

4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.

Make sure you qualify before claiming any tax credit. You can always visit IRS.gov to learn about the rules. The free IRS publications mentioned are also available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:

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