Taxes & Your Savings

Which Income Types Are Not Taxable?

which income types are not taxable

Taxes are an integral part of our financial lives, but not all income is subject to taxation. Understanding which income types are taxable and which are not can help you make informed financial decisions and potentially reduce your tax burden. In this article, we’ll explore various income sources that are not taxable, shedding light on some lesser-known exemptions. 

Gifts and Inheritance 

Gifts and inheritances are generally not considered taxable income for the recipient. If your wealthy aunt leaves you a sizable inheritance, you won’t have to pay income tax on that windfall. However, some exceptions and nuances may apply. For example, there is a federal estate tax for very large estates, but it generally doesn’t affect the average person. 

Life Insurance Proceeds 

The death benefit paid out by a life insurance policy to a beneficiary is typically not subject to income tax. This is true for both term and permanent life insurance policies. However, if you cash in your life insurance policy while you’re still alive and receive more than the total premiums paid, the excess amount may be taxable. 

Scholarships and Grants 

Scholarships and grants used for qualified education expenses, such as tuition, books, and fees, are usually not taxable. However, if you use the funds for non-qualified expenses like room and board, they may become taxable income.  

Child Support Payments 

Child support payments received from your ex-partner are not considered taxable income. On the flip side, the parent making these payments generally cannot deduct them from their taxable income. 

Return of Capital 

If you sell an investment, like stocks or real estate, for the same amount you originally paid or less, the proceeds are considered a return of capital and are not subject to income tax. However, any gains from the sale of investments are typically taxable, unless they qualify for specific capital gains tax exclusions or reductions. 

Municipal Bond Interest 

Interest income from municipal bonds is typically exempt from federal income tax. In some cases, it may also be exempt from state and local taxes if you reside in the issuing state or locality. This tax advantage is designed to encourage investment in local infrastructure projects. 

Disability Benefits 

Disability benefits, whether from a private insurance policy or a government program like Social Security Disability Insurance (SSDI), are generally not taxable. However, there are exceptions when disability benefits can become taxable, such as if you receive substantial additional income from other sources while receiving disability payments. 

Roth IRA Distributions 

Distributions from Roth Individual Retirement Accounts (IRAs) are usually not taxable as long as certain conditions are met. Generally, you must be at least 59½ years old and have held the account for at least five years. Contributions to a Roth IRA are made with after-tax dollars, so qualified withdrawals are tax-free. 

Conclusion 

Understanding which income types are not taxable is essential for managing your finances and optimizing your tax liability. While many types of income are taxable, these exemptions can offer financial relief and peace of mind. However, tax laws can be complex and subject to change, so it’s wise to consult with a tax professional or financial advisor to ensure you’re correctly interpreting and applying these rules to your specific situation. By staying informed and making strategic financial decisions, you can legally minimize your tax obligations and keep more of your hard-earned money. For a full list of taxable and nontaxable income types, you can view IRS Publication 525. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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My Tax Refund is Late. Now What?

my tax refund is late. now what?

Tax season can be both a stressful and eagerly anticipated time of the year. Many people look forward to receiving their tax refunds, as it often represents a financial boost. However, what happens when your tax refund is late? This delay can be frustrating, but it’s essential to stay calm and take the right steps to resolve the issue. In this article, we’ll provide you with a step-by-step guide on what to do if your tax refund is late. 

Check Your Filing Status and Timing 

The first thing you should do is verify your tax return’s filing status and timing. Ensure that you filed your return accurately and on time. Delays can occur if there are errors on your return or if you filed it close to the tax deadline. 

Use the “Where’s My Refund?” Tool 

The IRS offers a convenient online tool called “Where’s My Refund?” that allows you to track the status of your refund. Visit the official IRS website (irs.gov) and enter your Social Security Number, filing status, and the exact amount of your expected refund. This tool will provide you with the most up-to-date information about your refund’s status. 

Wait Patiently 

The IRS processes millions of tax returns each year, and it can take time to review and approve refunds. Patience is key during this process. Keep in mind that the IRS typically issues most refunds within 21 days of receiving a tax return. However, during peak filing times or due to special circumstances (like changes in tax laws), delays can occur. 

Contact the IRS 

If your refund is significantly delayed beyond the expected timeframe, it’s time to contact the IRS. You can reach out to them through their toll-free hotline at 1-800-829-1040. When you call, have your tax return information, including your Social Security Number and the exact amount of your expected refund, ready. Be prepared to explain your situation and ask for assistance in resolving the delay. 

Verify Your Contact Information 

Sometimes, delays can occur because the IRS is trying to reach you for additional information or clarification. Make sure your contact information on your tax return, such as your address and phone number, is accurate. Failure to respond to the IRS’s requests can lead to further delays. 

Consider the Possibility of a Review 

In some cases, the IRS may need to review your tax return more thoroughly. This can happen if there are discrepancies or red flags in your return. While it can be nerve-wracking, it’s essential to cooperate with any requests for additional information promptly. This review process can extend the time it takes to receive your refund, but it’s a necessary step to ensure the accuracy of your return. 

Check for Offset or Debt 

In certain situations, the IRS may withhold your refund to offset debts you owe, such as past-due child support, unpaid student loans, or outstanding tax debts. If this is the case, you will receive a notice explaining the offset and the remaining balance of your refund, if any. 

Conclusion 

While a delayed tax refund can be frustrating, it’s essential to remain patient and proactive in resolving the issue. By following these steps, you can maximize your chances of getting your refund as quickly as possible. Remember that timely and accurate filing, using the IRS’s online tools, and effective communication with the IRS are your best allies in ensuring a smooth refund process. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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How to Request a Tax Transcript From the IRS

how to request a tax transcript from the irs

When it comes to financial matters, accurate documentation is key. The IRS maintains various types of transcripts that provide a detailed record of your tax-related activities. Whether you need transcripts for tax filing, loan applications, or personal financial planning, understanding how to request IRS transcripts is crucial. In this guide, we’ll walk you through the process step by step. 

Step 1: Determine the Type of Transcript You Need 

The IRS offers several types of transcripts, each serving a specific purpose. The most common ones include: 

  • Tax Return Transcript: This transcript shows most line items from your tax return, including your Adjusted Gross Income (AGI). 
  • Tax Account Transcript: It displays basic information such as your filing status, payment history, and any adjustments made to your return. 
  • Record of Account Transcript: This comprehensive transcript combines both the Tax Return and Tax Account transcripts. 
  • Wage and Income Transcript: This transcript includes information from your W-2s, 1098s, 1099s, and 5498s.  

Step 2: Choose the Request Method 

The IRS offers multiple ways to request transcripts: 

  • Online Request: Visit the IRS website and use the “Get Transcript Online” tool. You’ll need to provide personal information, including your Social Security Number (SSN), date of birth, and access to your email account to verify your identity. 
  • Phone Request: Call the IRS Transcript Request line at 1-800-908-9946. Follow the automated prompts to provide your information and request the desired transcript type. This method also requires identity verification. 
  • Mail Request: Visit the IRS website and use the “Get Transcript by Mail” tool. You’ll need to provide personal information, including your Social Security Number (SSN), date of birth, and mailing address.  
  • Request Through Form 4506-T: Fill out Form 4506-T, Request for Transcript of Tax Return, available on the IRS website. Mail it to the address specified in the instructions. 

Step 3: Verify Your Identity 

Regardless of the method you choose, the IRS requires you to verify your identity to ensure the security of your personal information. This is done to prevent unauthorized access to your transcripts. Be prepared to provide personal details, such as your SSN, date of birth, and mailing address. 

Step 4: Review and Submit Your Request 

If you’re using the online tool, carefully review the information you’ve entered before submitting your request. For phone requests, listen closely to the automated prompts and follow the instructions. In the case of a mail request, ensure that you’ve accurately filled out Form 4506-T. 

Step 5: Receive and Review the Transcripts 

Once the IRS processes your request, you’ll receive the transcripts either online, by mail, or both, depending on your chosen delivery method. Review the transcripts carefully to ensure they contain the information you need. If you identify any discrepancies or errors, contact the IRS for assistance. 

Conclusion 

Requesting IRS transcripts might seem like a daunting task, but with the right guidance, it’s a straightforward process. Remember to choose the appropriate transcript type, select a suitable request method, and be prepared to verify your identity. Whether you’re preparing for tax season, applying for loans, or managing your personal finances, having access to your IRS transcripts can provide valuable insights and peace of mind. Optima Tax Relief is the nation’s leading tax resolution firm and can help you with your tax debt. 

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

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AGI vs. MAGI

agi vs magi

Most taxpayers are used to seeing the term adjusted gross income, or AGI, when filing their tax returns. This is mostly due to the fact that your AGI dictates which tax credits and deductions you qualify for. While the term modified adjusted gross income, or MAGI, is not heard as often, it too plays a big role in determining eligibility for some tax credits and deductions. Here’s a breakdown of AGI and MAGI and how they affect your taxes. 

What is AGI? 

The IRS defines adjusted gross income (AGI) as gross income minus adjustments. To break this down even further, gross income is the sum of your wages, dividends, capital gains, business income, retirement distributions, interest earned, and other income. The IRS allows you to reduce this figure by subtracting certain allowable deductions including, but limited to: 

  • Self-employed health insurance payments 
  • Half of self-employment taxes 
  • IRA plan contributions 
  • Self-employed retirement plan contributions 
  • Health savings account (HSA) deductions 
  • Tuition and fees 
  • Student loan interest 

How does AGI affect my taxes? 

Your AGI is important because it will determine your eligibility for several tax credits, such as: 

  • The Child Tax Credit 
  • The Earned Income Tax Credit 
  • The American Opportunity Tax Credit 
  • The adoption tax credit 
  • The Lifetime Learning Credit 
  • The Child and Dependent Care Credit  

When it comes to tax deductions, your AGI will also play a major role. For example, the amount of cash contributions made to charity you can deduct is generally up to 60% of your AGI. In addition, you can deduct medical expenses that exceed 7.5% of your AGI. That said, your AGI, combined with the number of eligible deductions, will greatly determine if it’s best to itemize your deductions rather than taking the standard deduction.  

What is MAGI? 

Modified adjusted gross income (MAGI) is your adjusted gross income after adding back certain tax deductions. These deductions can include: 

  • Student loan interest 
  • Half of self-employment tax 
  • Some tuition expenses 
  • Passive loss or income 
  • IRA contributions 
  • Tuition and fees 
  • Foreign earned income exclusion 
  • Foreign housing exclusion 
  • Rental losses 
  • Non-taxable social security payments 
  • Adoption exclusions 
  • Losses from publicly traded partnerships 

Some of these tax deductions can be uncommon so your MAGI may not differ from your AGI much.  

How does MAGI affect my taxes? 

Your MAGI may not be listed on your tax return like your AGI, but your MAGI does help determine your eligibility for some tax deductions. Most notably, it determines how much of your IRA contributions are deductible, if any and up to the $6,500 limit. The rules for how much you can deduct based on your MAGI are as follows: 

Single, or Head of Household  MAGI of $73,000 or less  Full deduction
Single, or Head of Household  MAGI of $73,001 to $82,999  Partial deduction 
Single, or Head of Household  MAGI of $83,000 or more  No deduction 
Married Filing Jointly, or Qualified Widow  MAGI of $116,000 or less  Full deduction
Married Filing Jointly, or Qualified Widow  MAGI of $116,001 to $135,999  Partial deduction 
Married Filing Jointly, or Qualified Widow  MAGI of $136,000 or more  No deduction 
Married Filing Separately  MAGI of less than $10,000  Partial deduction 
Married Filing Separately  MAGI of $10,000 or more  No deduction 

 

Additionally, your MAGI may determine your eligibility for premium tax credits that help lower your health insurance costs and the amount of student loan interest you may deduct. 

Tax Help from the Nation’s Leading Tax Resolution Firm 

Taxes can get complicated, even more so when you owe the IRS. Figures like AGI and MAGI can play a big role in your tax savings, so understanding how they both work is critical. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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1099s Explained: FAQs

1099s explained faqs

Form 1099 is more common than ever with many taxpayers turning to side hustles for extra income. Now that we have a good understanding of what types of 1099s there are and what they are used for, we can review some of the most frequently asked questions about them. Here are some of the most frequently asked questions about IRS Form 1099. 

What if I mistakenly received a 1099? 

If you received a 1099 by mistake, or if your 1099 has an error on it, you should report the error to the payer immediately. If you’re lucky, they’ll be able to correct the error before sending a copy to the IRS. On the other hand, if they already have sent the 1099 to the IRS, you’ll need to request they send a corrected form. Spotting an error quickly will give you the best chance at avoiding further complications. That said, knowing which 1099s to expect in advance, and knowing the expected amount shown on them, can help you catch mistakes early on. 

Do I need to report every 1099 I receive? 

Every 1099 you receive should be considered in your tax return. This is because the IRS also receives a copy of each of your 1099s as well. For example, you must include all income earned through 1099-NEC, 1099-MISC, 1099-K, 1099-DIV, and others that report income. However, let’s say you receive 1099-S after the sale of your home. Remember, if the property was your primary residence for two of the five years before the sale, then up to $250,000 of the profit is exempt from taxes. This amount increases to $500,000 for married couples filing jointly. In this scenario, the transaction is not reportable. However, you will need to submit a written certification stating why you are exempt from capital gains on the transaction. Be sure to always consult with a knowledgeable tax professional about your reporting requirements. 

What’s the difference between a 1099 and a W-2? 

A 1099 form reports any income earned outside of regular employer income. It is commonly received by independent contractors, gig workers, and investors. A W-2 reports wages earned through an employer for the year. The biggest difference between the two forms is that the W-2 shows any taxes withheld from your wages, while the 1099 does not. That doesn’t mean you’re off the hook though. If you earn income through 1099s, you should be making estimated tax payments each quarter since the IRS requires taxes to be paid as income is earned. Failing to pay estimated taxes on 1099 income can result in penalties, interest and surprise tax bills.  

What changes are coming for the 1099-K? 

Previously, taxpayers only received a 1099-K, Payment Card and Third-Party Network Transactions, if they received over $20,000 in aggregate payments over 200 transactions through third-party payment networks, like Venmo or PayPal. For the 2023 tax year, the 1099-K reporting threshold was drastically reduced down to just $600 in aggregate payments. The IRS is expecting many more taxpayers to receive a 1099-K by the January 31st deadline, but with some hiccups along the way. For example, you may mistakenly receive a 1099-K for non-business transactions, like collecting rent money from a roommate or receiving a friend’s portion of a dinner bill. In this case, it is up to you to contact the filer to request a corrected form.  

What if I have more questions about 1099s? 

We can’t stress enough just how complex 1099s can be. With a couple dozen 1099 types and each with their own set of rules, it’s best to consult a tax professional for insight on your own personal tax situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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1099s Explained: Types

1099s explained types

Now that we know the basics of IRS Form 1099, we can take a closer look at the different types of 1099s you can receive. Remember, if you received any income outside your employer, you might receive a 1099. While most types of Form 1099 are not commonly received, there are a handful that you are likely to come across at some point. Here’s an overview of the different types of Form 1099.  

1099-MISC: Miscellaneous Income 

The 1099-MISC is an IRS form used to report $600 or more in miscellaneous income that you received during the tax year. Some examples of payments that require a 1099-MISC form include rent, prizes and awards, medical and health care payments, crop insurance proceeds, attorney payments, and more.  

1099-NEC: Nonemployee Compensation 

The 1099-NEC form is used to report non-employee compensation, including independent contractors, freelancers, sole proprietors, and self-employed individuals. If you received $600 or more in non-employee compensation during the tax year, you should receive a 1099-NEC. This form is used to report payments made for services rendered, such as consulting fees, professional services, and other types of compensation. 

1099-INT: Interest Income 

Form 1099-INT is used to report any interest income you earned during the year. If you earned more than $10 in interest income, the financial institution is required to send you and the IRS a Form 1099-INT. Interest income can include any earned from high-yield savings accounts, U.S. savings bonds, municipal bonds, and more. 

1099-DIV: Dividends and Distributions 

Form 1099-DIV is used to report dividends and distributions that are paid to you during the tax year, as well as any federal income tax withheld. This can include ordinary dividends, which are paid out of a company’s earnings and profits, qualified dividends, capital gain distributions, and non-dividend distributions. It does not include any dividends that you accrued through tax-sheltered retirement accounts. You will typically receive a 1099-INT if you received at least $10 in dividend income.  

1099-K: Payment Card and Third-Party Network Transactions 

Form 1099-K is meant to track payments made through third-party networks, such as PayPal or Venmo. For the 2023 tax year, you would receive a 1099-K if you earned at least $600 in payments. Since 1099-Ks report gross income, you should be sure to deduct any expenses you had to use third-party payment networks to receive payments.  

Other Types of 1099s 

  • 1099-A, Acquisition or Abandonment of Secured Property: reports foreclosures on properties. You may be liable for capital gains tax and income tax for any unpaid foreclosed mortgage balances.  
  • 1099-B, Proceeds from Broker and Barter Exchange Transactions: reports the sale of stock, bonds, and other securities through a broker, as well as barter exchange transactions. These transactions must be reported even if you had a loss or broke even. 
  • 1099-C, Cancellation of Debt: reports discharged, forgiven, or canceled debt. This can include your property foreclosure or forgiven credit card debt but typically excludes debt discharged in bankruptcy. You will need to claim the amount reported on your 1099-C as taxable income.  
  • 1099-CAP, Changes in Corporate Control and Capital Structure: reports the amount of cash, stock, or property received after a significant change in the company’s control or capital structure. 
  • 1099-G, Certain Government Payments: reports payments you received from government agencies, including unemployment, tax refunds, taxable grants, and more.  
  • 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments: reports any advance payments of qualified health insurance payments you received. If you qualify for trade adjustment assistance (TAA), alternative TAA (ATAA), reemployment TAA (RTAA), or Pension Benefit Guaranty Corporation (PBGC), you might see this form. 
  • 1099-LTC, Long Term Care and Accelerated Death Benefits: reports payments made under a long-term care insurance contract. This includes accelerated death benefits, or benefits received before death because the policyholder has been deemed terminally ill by a doctor.  The amount shown on the 1099-LTC are generally tax-free but are required to be reported to the IRS. 
  • 1099-LS, Reportable Life Insurance Sale: reports the amount paid to you from a life insurance sale. 
  • 1099-OID, Original Issue Discount: reports $10 or more of income received when bonds, notes, or certificates of deposit (CDs) are sold at a discount from their maturity value.  
  • 1099-PATR, Taxable Distributions Received from Cooperatives: reports at least $10 in patronage dividends and other distributions from a cooperative (co-op) in the prior year. 
  • 1099-Q, Payments from Qualified Education Programs: reports total withdrawals from qualified tuition programs (QTPs) like 529 plans or Coverdell educational savings accounts. This amount may be taxable, depending on how the funds were used. 
  • 1099-QA, Distributions from ABLE Accounts: reports distributions from an Achieving a Better Life Experience (ABLE) Account for special needs individuals with a disability. These funds are not taxable if you used them to support a disabled individual. 
  • 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.: reports distributions from annuities, profit-sharing plans, retirement plans, IRAs, insurance contracts, or pensions. You should consult with a tax professional about whether you will owe tax on these distributions. 
  • 1099-S, Proceeds from Real Estate Transactions: reports the sale or exchange of real estate. If the property was your primary residence for two of the five years before the sale, then up to $250,000 of the profit is exempt from taxes. This amount increases to $500,000 for married couples filing jointly.  
  • 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA: reports distributions made from a health savings account (HSA), Archer Medical Savings Account (Archer MSA), or a Medicare Advantage Medical Savings Account (MA MSA). Distributions can be taxable if they were used to pay for qualified medical expenses, if they were not rolled over in some cases, if excess contributions were made, and other scenarios. You should consult with a tax professional about whether you will owe tax on these distributions. 
  • 1099-SB, Seller’s Investment in Life Insurance Contract: reports the sale of a life insurance policy like the 1099-LS. The difference is that the original issuer of the policy files a 1099-SB after they receive the 1099-LS. You should consult with a tax professional if you receive either of these forms. 

Tax Help for Those Who Receive 1099s 

The list of 1099s and the accompanying filing requirements can quickly become very complicated. You should always consult with a tax professional if you are unsure about your tax filing requirements. Remember, even if you do not receive a 1099 for income earned, it’s still your responsibility to include it in your taxable income. Not doing so can be a major red flag to the IRS and can result in an audit. 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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1099s Explained: The Basics

1099 explained the basics

Receiving a 1099 is becoming more and more common with the rise in small businesses, side hustles, and the desire for a second stream of income. With the additional income comes a different tax filing process. If you receive a 1099, it’s because you earned a certain amount of income from a non-employer and like most income, 1099 income is taxable. Here’s a breakdown of the basics of the IRS 1099 form. 

What is a 1099? 

IRS Form 1099 is actually a collection of tax forms, and not just one single form. If you receive these forms, it means that the sender paid you a certain amount of money, usually at least $600, in the previous year. These funds could be from income you received as an independent contractor, rental income, dividend payouts, and more. If you receive a 1099 form, so did the IRS, which means it’s your responsibility to report the income on your tax return.  

Who receives a 1099? 

There’s a long list of individuals who can receive a 1099. Among many other scenarios, you’ll likely receive a 1099 if you: 

  • Are a freelancer or independent contractor 
  • Received $600 or more for rent, prizes, awards, and other types of payment 
  • Received $10 or more in royalties or broker payments 
  • Received $600 or more via third-party apps like Venmo or PayPal 
  • Received unemployment compensation 

What are the most common types of 1099s? 

We’ll break down each type of 1099 in our next post, but here are the most common ones: 

  • 1099-DIV: Dividends and Distributions 
  • 1099-G: Certain Government Payments 
  • 1099-INT: Interest Income 
  • 1099-K: Payment Card and Third-Party Network Transactions 
  • 1099-MISC: Miscellaneous Income 
  • 1099-NEC: Nonemployee Compensation 
  • 1099-R: Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc. 

What if I don’t receive a 1099 for income I earned? 

1099s are usually sent out by January 31st each year, or February 15th for some. If you do not receive a 1099 for income worked, you are not off the hook for reporting this income to the IRS. You are still responsible for paying taxes on that income. If you are still waiting for a 1099 after the deadline, reach out to the payer responsible for sending it and request a copy be sent to you. Be sure to give yourself enough time to request and receive the 1099 copy to avoid submitting a late tax return.  

Tax Help for Those Who Receive Form 1099 

Overall, understanding the 1099 form is important for anyone who receives income from sources other than an employer. By properly reporting all income received on the form, individuals can avoid penalties and ensure that they pay the correct amount of taxes on their income. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations. 

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

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What You Need to Know About Tax Refund Loans

what to know about tax refund loans

It’s no secret that tax refunds are the best part about filing taxes each year. However, the wait times for receiving a tax refund can be unexpectedly long if the IRS has a backlog of unprocessed returns. Enter tax refund loans. You may have heard or read this term while filing this year. But what are they? How do they work? What are the pros and cons of opting for a tax refund loan? Here, we will break down these key questions to help you decide if they are worth considering. 

What are tax refund loans? 

Sometimes referred to as refund anticipation loans (RALs), tax refund loans are intended to provide borrowers with an advance on their anticipated tax refund amount. Borrowers can obtain a portion of their refund virtually immediately rather than waiting for the standard processing time. They usually become available at the beginning of the year through February. Luckily, these loans are easy to qualify for and usually do not require a credit check. 

How do tax refund loans work? 

Typically, a borrower can request a tax refund loan from their tax preparer if they offer this service. Some tax preparation companies do require a minimum refund amount, ranging from $250 to $500. If approved, your tax preparer will open a temporary bank account on your behalf and inform the IRS to send your tax refund to this account. Then you will be issued a loan via paper check, prepaid card, or direct deposit into a personal bank account. Once your tax refund is processed by the IRS and deposited into your temporary account, your tax preparer will then deduct any fees associated with the loan and the tax preparation itself, plus loan interest. The remaining refund will be sent to you.  

What are the pros of tax refund loans? 

Tax refund loans provide you with instant access to a portion of your anticipated tax refund, allowing you to meet immediate needs for cash. Many tax refund loan companies do not charge any upfront fees or interest, making it a potentially cheaper alternative than other short-term loans. The application process for tax return loans is often simple and involves little documentation, making it a practical choice for people in need of finances right away. 

What are the cons of tax refund loans? 

First, access to a tax refund loan means having to pay for tax preparation fees. This would be a con specifically for those who have simple tax situations that may be used to filing for free. Also, while some tax refund loan companies do not charge upfront costs, they may charge high interest rates or fees, which can considerably diminish the amount of your real tax refund. Taking out a loan against your tax refund presumes that you will receive a refund from the IRS. However, if your refund is less than expected or if you owe taxes, you may end up in a terrible financial situation of owing a lender. 

Should I consider a tax refund loan? 

The value of a tax refund loan is determined by your specific financial status and needs. If you need money right away for an emergency and don’t have any other options, a tax return loan could be a temporary answer. However, the related costs, such as high interest rates and fees, must be carefully considered, and whether the benefits outweigh the potential negatives. If you’re still unsure, you can always speak to a qualified tax professional about your specific 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 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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