Taxes & Your Savings

What is FICA Tax?

what is fica tax

You may notice several deductions on your paycheck, such as federal income tax, state taxes, and Social Security. The Federal Insurance Contributions Act (FICA) tax is a critical component of these deductions. While the FICA tax may appear complex at first, understanding its purpose and ramifications can help you make sound financial decisions. This blog post will go into detail on the FICA tax, its components, and how it affects your salary. 

What is FICA Tax? 

The FICA tax is a mandatory payroll tax that is deducted from the earnings of American workers. It is an abbreviation for the Federal Insurance Contributions Act, which was passed in 1935 in order to provide social welfare programs such as Social Security and Medicare. The major purpose of the FICA tax is to provide financial stability for retired and disabled people as well as healthcare benefits to eligible residents. Most employees have a total of 15.3% deducted from their paychecks for FICA tax, but they are only responsible for paying half, while their employers are responsible for the other half. 

FICA Tax: Social Security 

The Social Security tax accounts for the majority of the FICA tax, accounting for 12.4% of your wages, half paid by you and half paid by your employer. The Social Security program, which pays retirement, disability, and survivor benefits, is funded by this tax. It is crucial to note, however, that the Social Security tax has an income cap. You no longer pay Social Security tax for that year if your wages surpass the cap. In 2023, FICA tax is only collected on the first $160,200 of earnings but this figure may change annually.  

FICA Tax: Medicare 

The Medicare tax, which amounts to 2.9% of your income, half paid by you and the other half paid by your employer, is the smallest element of the FICA tax. This tax supports the Medicare program, which provides vital healthcare benefits to people 65 and older, as well as certain disabled people. Unlike the Social Security tax, there is no income limit for the Medicare tax, so all of your wages are taxed. 

An additional 0.9% Medicare tax is placed on incomes above a particular level for high-income individuals. This threshold is set at $200,000 for single filers and $250,000 for married couples filing jointly in 2023. This Medicare tax is intended to help pay for the Affordable Care Act and the Medicare program. Employers are not required to pay this tax.  

FICA Tax Exemptions 

These rules apply to the majority of workers but there are some exceptions. For example, self-employed individuals are responsible for paying the full 15.3% FICA tax since they do not have an employer to split the cost. On the other hand, there are a few groups that are exempt from paying the tax altogether. This includes college students who work on the campus in which they study, some nonimmigrants and nonresident aliens, and some religious groups. However, it’s important to note that opting out of this tax also means opting out of receiving Social Security and Medicare benefits.  

How to Calculate FICA Tax 

As mentioned earlier, you are only responsible for half the required 15.3% FICA tax, or 7.65%. To find out how much you will pay in FICA taxes per year, you can multiply your gross income (up to $160,200 in 2023) by 7.65%. If you are self-employed, you should multiply your gross income (up to $160,200 in 2023) by 15.3%. Keep in mind that you may need to add in the additional 0.9% if you are a high earner. In any case, you should always be mindful of how much taxes you are paying throughout the year in order to avoid a surprise tax bill during tax season. Things like switching jobs or working multiples jobs at a time can result in overpaying or underpaying FICA tax. Optima Tax Relief has over a decade of experience helping taxpayers with all kinds of tax situations. 

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

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What Medical Expenses Are Tax Deductible?

what medical expenses are tax deductible

Tax deductions can drastically reduce your total tax liability and allow you to save money. While medical bills can be a significant hardship for many individuals and families, it is critical to understand that certain medical expenses are tax deductible. Understanding the eligibility criteria and documentation requirements will help you in optimizing your deductions and possibly lowering your tax payment. In this post, we will look at medical expenses that are tax deductible. 

Tax Deductible Medical Expenses 

You might be surprised to hear that the IRS lists over 80 medical expenses that you can deduct from your taxes. While the full list of eligible expenses can be found on IRS Publication 502, some common expenses include: 

  • Acupuncture 
  • Ambulance services 
  • Braille reading materials 
  • Costs incurred to accommodate your home to a disabled condition 
  • Costs incurred to install special equipment in your vehicle that accommodates a disabled condition 
  • Chiropractor 
  • Contact lenses 
  • Dental treatment 
  • Eye exams 
  • Fertility treatment 
  • Hearing aids 
  • Lab fees 
  • Medicines 
  • Nursing home expenses 
  • Physical exams 
  • Psychiatric care 
  • Transplants 
  • X-rays 

Medical Expenses That Are Not Tax Deductible 

You should always be aware of the medical expenses you may not deduct during tax time including but not limited to: 

  • Cosmetic surgery (some limitations apply) 
  • Funeral expenses 
  • Future medical care 
  • Maternity clothes 
  • Nonprescription drugs and medicines 
  • Nutritional supplements 

How to Claim Medical Expense Deductions 

In order to deduct medical expenses on your tax return, you will need to itemize your deductions. That being said, it is really only worth doing if your medical expenses exceed the standard deduction. The 2022 standard deduction is $12,950 for a single filer and those who are married but filing separately, $25,900 for married couples filing jointly, and $19,400 for heads of households. These figures are set to increase for tax year 2023 to the following:  

  • Single Filers, Married Couples Filing Separately: $13,850 
  • Married Couples Filing Jointly: $27,700 
  • Heads of Households: $20,800 

If it seems itemizing your deductions would save you money than taking the standard deduction, you can deduct your qualified medical expenses using Schedule A. Keep in mind that you may only deduct unreimbursed medical expenses paid during the year previous. In addition, you can only deduct expenses that exceed 7.5% of your adjusted gross income (AGI). For example, if your AGI is $45,000, then the first $3,375 (7.5% of $45,000) of qualified medical expenses cannot be deducted. Anything that exceeds $3,375 can be deducted. Assuming you had $10,000 of unreimbursed medical expenses for the year, you would be allowed to deduct $6,625 of it on your tax return. 

If you do decide to deduct medical expenses during tax time, be sure to keep adequate records of your expenses during the year. Keep receipts, invoices, statements, and any other relevant documentation that validate your medical expenses. Not doing so can result in financial loss, risk of audits, and dealing with the IRS. If the IRS has reached out to you about your tax situation, we can help. 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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How Going Green at Home Can Save You Money During Tax Time

how going green at home can save money during tax time

With all the talk of the new electric vehicle (EV) tax credits, it’s a good time to remind you that you can also claim tax credits by making some energy efficient upgrades to your home. The Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit are up for grabs if you recently made qualified updates to your home that help conserve energy. Here’s a breakdown of two home energy tax credits, who qualifies for them, and how to claim them during tax time. 

Energy Efficient Home Improvement Credit 

Beginning January 1, 2023, the Inflation Reduction Act allows taxpayers to claim up to $3,200 for the year the improvements were made. Improvements made to upgrade energy efficiency are qualified expenses, including: 

  • Exterior doors, windows, skylights  
  • Insulation 
  • Central air conditioners 
  • Water heaters 
  • Furnaces and hot water boilers 
  • Heat pumps 
  • Biomass stoves and boilers 
  • Home energy audits of a primary residence 

Renters and homeowners of primary residences and second homes may also claim the tax credit as long as the property is used as a residence. Landlords, on the other hand, cannot claim the tax credit. The residence must be existing or for an addition or renovation to an existing home. Qualified taxpayers may claim 30% of their expenses, up to $1,200 for energy property costs and some home improvements that upgrade energy efficiency. Up to 30% of your expenses, up to $2,000 may be claimed per year for qualified heat pumps, biomass stoves or biomass boilers. This tax credit may not be carried to future tax years and is nonrefundable. In other words, your savings cannot exceed the amount of tax you owe. 

Residential Clean Energy Credit  

The Residential Clean Energy Credit can be claimed for 30% of the expenses of new, qualified clean energy improvements in your home, as long is it was installed between 2022 and 2033. These qualified expenses include: 

  • Solar electric panels 
  • Solar water heaters (must be certified by the Solar Rating Certification Corporation or comparable organization) 
  • Geothermal heat pumps (must meet Energy Star requirements) 
  • Wind turbines 
  • Fuel cells  
  • Battery storage technology (must have capacity of at least 3 kilowatt hours) 

You may claim this tax credit as long as the upgrades were made to an existing home or to a newly constructed home. The credit must be claimed in the tax year that the improvements were installed and not just purchased. This credit is nonrefundable, meaning your savings cannot exceed the amount of tax you owe. Additionally, there is no annual or lifetime limit on the amount credited to you, except for improvements made to fuel cells, as this provision will begin to phase out in 2033. Some of the expenses listed above only qualify if the home is used as your primary residence so you should confirm with a qualified tax preparer about the limitations of this credit.  

How to Claim the Energy Efficient Home Improvement and Residential Clean Energy Credits 

Both green tax credits can be claimed using IRS Tax Form 5695, Residential Energy Credits. Part I allows you to claim the Residential Clean Energy Credit while Part II of the form allows you to claim the Energy Efficient home Improvement Credit. The most important thing when claiming any tax credit is to confirm you are eligible to claim it. Once you confirm your eligibility, be prepared to keep adequate records of any purchases and expenditures to substantiate your claim. Claiming a tax credit that you are not eligible for can result in receiving an IRS notice. If you have received an IRS notice, Optima Tax Relief can help.  

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

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How to Avoid Payroll Fraud

how to avoid payroll fraud

Payroll fraud is an unfortunate reality that continues to haunt businesses, causing significant financial losses and harming their reputation. This fraudulent act occurs when an individual manipulates the payroll system to get money or benefits to which they are not entitled. Payroll fraud can threaten any company, from small firms to large multinational corporations. Here’s an overview of what payroll fraud is and how to avoid it. 

What is payroll fraud? 

Payroll fraud includes a wide range of fraudulent actions, such as ghost employees, faked overtime claims, unlawful salary rises, commission manipulation, and unauthorized perks. Employees, management, or even outside parties who exploit payroll process flaws can be liable. Here are some of the most common types of payroll fraud. 

  1. Ghost Employees: A ghost employee is someone who is added to your payroll in order to collect a salary even though they are not employed by your organization. While this can be done accidentally, more often than not it’s done fraudulently to collect a paycheck for a nonexistent employee. 
  1. Timesheet and Overtime Fraud: Another prevalent type of payroll fraud is inflating hours worked or claiming overtime when it is not due. Employees that are dishonest may conspire with superiors or coworkers to alter time records, resulting in excessive payouts.  
  1. Wage Manipulation: Unauthorized raises, bonuses, or commissions can be exploited by dishonest personnel with payroll system access. They fraudulently raise their own pay by changing salary figures. 
  1. Misclassifying Employees: Employers are required by the IRS to correctly classify their personnel. Some employers illegally categorize W-2 employees as 1099 employees in order to avoid paying taxes or providing health care coverage. 
  1. Expense Fraud: In some cases, employees may be authorized to be reimbursed for expenses, and take advantage. Inflated, false, duplicate or personal reimbursement claims all contribute to payroll fraud. 

How do I avoid payroll fraud? 

Payroll fraud is difficult to eliminate entirely. This is because sometimes it occurs unintentionally. However, with strict policies, it can be limited and detected early. Some ways to avoid payroll fraud include: 

  1. Having strict internal controls: Payroll is not an area in the company in which many people should have a hand in. While there should be multiple personnel involved in the payroll process, their roles and duties should be clearly defined and audited on a regular basis to ensure a healthy checks and balances system. 
  1. Having regular and surprise audits: Audit payroll records on a regular basis to identify any inconsistencies or discrepancies. Inconsistencies, such as duplicate entries, unapproved changes or excessive overtime claims, should be prevented. 
  1. Using a modernized payroll system: Use current payroll software that has fraud detection tools. Advanced systems can detect unusual trends, duplicate entries, or abrupt changes in employee data, providing useful insights for further research. 
  1. Hiring trustworthy employees: When employing new personnel, do extensive background checks and verification procedures. Confirm their identification, job history, and qualifications to lessen the risk of recruiting individuals who have a history of fraud. 

Payroll fraud is a major source of fraud within companies. In fact, most financial loss in organizations comes from within rather than from outside third parties. If you have a business, it’s important to avoid payroll fraud at all costs, as it can result in financial hardship as well as punishment by the IRS. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations, whether they are individuals or businesses.  

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

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How long can the IRS Audit my Taxes?

IRS Audit taxes

For most taxpayers, the worst thing that can happen after filing their taxes is having the IRS notify them that their tax return is being audited. What most people do not realize is that there is a time frame for how long the IRS can audit an individual and that taxpayers have a right to dispute an audit if they have proper substantiation. Here is everything you need to know if you are going through an audit.

Typically, the IRS has about three years from the date that a tax return was filed to charge you or assess additional taxes. The three-year timeframe is called the assessment statute of limitations. Tax returns that are flagged typically end up going into audit or the individual will receive notification from the IRS stating that some information on their return was underreported. This notice is called a CP2000.

The IRS procedural policy states that an IRS agent will be required to open and close an audit within 26 months after a tax return has been filed. The IRS strictly adheres to its guidelines to ensure that the audit and other processing needs are complete within the three-year timeframe.

For audits that start a few months after a return is filed, the IRS will typically freeze any refunds. The IRS will have to pay interest on refunds that are sent out late, which is why the IRS will attempt to resolve its audit quickly. Once a taxpayer answers the questions regarding their tax return with accuracy, then their refund will be released and sent out.

Audits that happen immediately after filing a tax return typically contain tax credits, earned income tax credits, and the child tax credit. The IRS usually wants to verify the filing status, dependents, and other return items before sending your refund.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Going Green can get You a Bigger Tax Refund

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Going green has tax benefits that could potentially reduce your total tax bill when filing your taxes. More taxpayers are taking advantage of these tax incentives by buying alternative vehicles, using Energy Star products or installing energy equipment in their home. Here are the top green tax credits you should be claiming.

  1. Clean energy vehicle savings

Although tax credits for most hybrid vehicles have expired, there are still ways that taxpayers can take advantage of having an alternative vehicle. 

There are certain vehicles that could qualify under the Alternative Motor Vehicle Tax Credit. The amount of the credits vary based on the make, model and year of the vehicle that a taxpayer is attempting to claim. Additional requirements to be aware of before claiming the tax credit are:

  • The car was purchased before 2017.
  • You are the original owner of the vehicle.
  • You drive your car primarily in the U.S.

For those who purchased a plug-in electric vehicle, you could be eligible for the Qualified Plug-In Electric Drive Motor Vehicle Credit. The credit applies to new electric vehicles bought after December 31, 2009. In order to qualify for the credit you will need the following:

  • The vehicle must have been purchased new.
  • The vehicle must have been made by an eligible manufacturer under the Clean Air Act.
  • Have at least four wheels.
  • Have the ability to be driven on highways and public streets.
  • Have a weight rating of less than 14,000 pounds.
  • Purchased an electric motor that uses a rechargeable battery to generate at least 5 kilowatt hours of capacity.

Tax credits for both of these can range from $2,500 to $7,500 based on the vehicle’s battery capacity and the overall size of the vehicle.

  • Make a donation for a smaller tax bill

Taxpayers who make charitable contributions such as cellphones, game consoles, computers or any other qualifying electronic donation, can write it off based on the fair market value. In order to be eligible for the tax credit, you must have the following:

  • A donation that is valued at less than $500, no forms will be required to be filled out.
  • Charitable deductions exceeding $500 must be submitted with Form 8283, which lists the name of the organizations and types of donations made with your tax return. 
  • Keep a receipt for your files.
  • Use Energy Star products

The Energy Star program of the U.S. Environment Protection Agency and the U.S. Department of Energy helps taxpayers save money when they go green. Taxpayers should be advised that not all Energy Star products qualify for the incentive and some tax breaks for energy expired in 2011. There are still a few credits available through 2021 for certain energy programs that have been mentioned above.

If you need tax help, contact us for a free consultation.

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Is there a Deduction Limit on Charitable Donations?

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

If you’re debating whether or not to donate to charity, it’s important to understand the tax benefits and tax-saving opportunities that could be available to you. Here’s a breakdown of what you need to know when understanding what you could qualify for when it comes to charitable donations.

Some donations may not be eligible for deductions. In order to make a donation, it must be to a charity with a tax-exempt status determined by the IRS. This means that charitable donations cannot be made to friends, relatives, or groups that do not fall under the tax exempt status. The list of approved organizations are the following:

  1. A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals.
  2. A church, synagogue, or other religious organization.
  3. A war veterans’ organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions.
  4. A nonprofit volunteer fire company.
  5. A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services).
  6. A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes.
  7. A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.

Some contributions may lead to only a partial credit. For particular donations, a taxpayer will only receive a portion of a credit. For example, if you purchase a shirt that is a part of a charitable cause, the entire price of the shirt is not deductible. The fair market value must be determined and subtracted from the cost of your purchase in order to determine the amount of your donation.

When determining how much of a charitable donation you would like to make, it is important to know there is a limit on all donations you make throughout the tax year. Total charitable contributions are generally limited to no more than 50% of your adjusted gross income. 

If you need tax help, contact us for a free consultation.

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