Most of the woes associated with the IRS involve money. If you are audited, the most probable outcome is that you will owe more money to the IRS. In the worst case scenarios, an audit results in your owing a lot more money. But you almost never face criminal charges.
An IRS criminal investigation is an entirely different ball of wax. The IRS pursues about 3,000 prosecutions each year for tax fraud and tax evasion. If the IRS launches a criminal investigation against you, you not only face a potentially substantial tax bill, but also possible jail time. One of your first moves should be to obtain the services of a skilled, experienced attorney who specializes in tax law.
The Knock at the Door
Your first encounter with the criminal investigation unit of the IRS may involve a knock on your door, followed by an intimidating encounter with two or more agents dressed much like K and J from the Men in Black movies. By the time this encounter takes place, the IRS has completed several steps of its investigation process and is convinced that the case against you is solid. Your best move under these circumstances is to say absolutely nothing.
Areas of Potential Criminal Prosecution
The IRS website lists the following areas of possible criminal prosecution. Some areas of criminal prosecution such as abusive tax schemes and nonfiler enforcement are more likely to apply to individuals. Others, such as money laundering and employment tax evasion, are more likely to be committed by corporations and criminal operations.
Abusive Return Preparers
Abusive Tax Schemes
Bankruptcy Fraud
Corporate Fraud
Employment Tax Evasion
Financial Institution Fraud
Gaming Related Fraud
General Tax Fraud
Healthcare Fraud
Insurance Fraud
Money Laundering
Mortgage and Real Estate Fraud
Narcotics Related Financial Fraud
Nonfiler Enforcement
Public Corruption
Questionable Tax Refunds
How Criminal Investigations Are Initiated
Those stories you read about neighbors ratting each other out to the IRS? That actually does happen. The IRS is happy to accept tips about possible tax fraud or tax evasion from family members and associates. A revenue agent or revenue collection officer may also initiate a criminal tax investigation if something about your return seems fishy. A U.S. Attorney or even your local law enforcement department may also provide tips to the IRS about possible fraudulent or criminal tax activity. Social media is also another resource.
Primary Investigation
Of course, the IRS isn’t supposed to go off half-cocked based on an accusation made by someone with a long-standing grudge. Instead, any tips or information is subject to what the IRS calls a primary investigation. The agent makes an initial judgment on whether to proceed with further investigation. If the decision is in favor of pursing criminal charges, the tax agent’s supervisor has the opportunity to sign off on the investigation or stop it in its tracks. If the supervisor gives the go-ahead, then the case is brought to the special agent in charge – the head of the office. That person makes the determination of whether to go ahead with a “subject criminal investigation” based on one or more of the categories listed above.
Criminal Investigation
Once the IRS has obtained the go-ahead, the actual criminal investigation proceeds much like you think it would. The IRS gathers documents and affidavits from third parties, including your family, friends and professional associates to support its case. Other forms of investigation include search warrants, subpoenas of bank records and other financial data and covert surveillance.
Recommendations for Prosecution
After the investigation phase of the process is complete, the IRS special agent and his or her supervisor review the evidence that has been gathered. A determination is made whether to “discontinue” the case or proceed with prosecution. If the decision is made to prosecute, the special agent prepares a report which is reviewed by each of the following four IRS officers, in order:
The supervisory special agent, aka the front line supervisor for the special agent
Centralized Case Review – a criminal investigation review team
The Criminal Investigation (CI) assistant special agent in charge
The CI special agent in charge
If the CI special agent in charge gives the go-ahead to prosecute, the recommendation is forwarded to either of two final levels of review. Just as with any of the earlier stages of investigation, the IRS may decide that there is insufficient evidence to proceed with an actual prosecution. But once an investigation clears one of the two stages listed below, you are destined to receive that ominous knock on your door.
The Department of Justice, Tax Division (for tax investigations)
The United States Attorney (for all other criminal financial investigations)
Guilty or Not Guilty
You might have gathered by now that the IRS is meticulous about pursuing criminal cases against alleged tax cheats, and you would be right. But that does not mean that mistakes never happen or that actual prosecution is inevitable. You have the right to seek a conference with IRS agents at each stage of the process — if you are actually aware that the IRS is pursuing prosecution against you. You also have the right to request dismissal of the case either before or after a grand jury indictment, or to appeal a conviction.
If the IRS Has You in Its Sights
If you know that the IRS will find tax fraud or tax evasion, your best bet is to come clean. If you do so before a prosecution is underway, you can often avoid the criminal process altogether. The IRS allows taxpayers to make voluntary disclosures of unreported income or other tax obligations. The procedures vary according to whether your unlawful tax conduct involves domestic or international maneuvers. Your attorney can provide the best advice on whether – and how to make a voluntary disclosure.
Moving to a new state is often an exciting adventure, but amidst the hustle and bustle of relocation, it’s easy to overlook important details, such as how the move will impact your taxes. State tax laws vary widely, and failing to understand and plan for these differences can result in unexpected financial consequences. To help you stay ahead of the game, here’s a comprehensive tax checklist for anyone considering a move to a different state.
Check the Income Tax Rate
When researching where to move, finances are sure to be a top priority to keep in mind. Sometimes this means choosing a state that has a lower cost of living. Another thing to consider is the state income tax rate. Certain states do not tax any income. These include:
Alaska
Florida
Nevada
South Dakota
Texas
Tennessee
Washington
Wyoming
New Hampshire does not tax W-2 wages but does tax certain investment and business income. However, this tax will be eliminated in 2025. California, Hawaii, New York, New Jersey, Oregon and Minnesota currently have the highest income tax rates.
Check Property Tax Rates
Property tax rates can vary widely from state to state, and even within states, they can vary by county or municipality. It’s essential to research the specific property tax rates in your new location to accurately budget for homeownership expenses. Some states, like New Jersey and Illinois, are known for having particularly high property tax rates. Others, such as Hawaii and Alabama, have comparatively lower rates. Before purchasing a home in your new state, research recent property sales in the area to get an idea of the market value and potential property tax implications.
High property tax rates can impact the affordability of homeownership. This is especially true for those on fixed incomes or with limited financial resources. When considering a move to a new state, factor in the property tax implications alongside other housing-related expenses, such as mortgage payments, insurance, and maintenance costs. Property taxes are generally deductible on federal income tax returns, subject to certain limitations. However, the deduction for state and local taxes, including property taxes, is capped at $10,000 per year for individuals or married couples filing jointly.
Check Sales Tax Rates
Sales tax rates are another critical consideration when moving to a new state, as they can impact your day-to-day spending habits and overall cost of living. Sales tax rates can vary significantly from state to state and even within states. While some states have a single statewide sales tax rate, others allow local jurisdictions to impose additional sales taxes, resulting in varying rates within the same state.
Certain goods and services may be exempt from sales tax in some states. Common exemptions include groceries, prescription medications, and clothing. Additionally, some states impose special sales tax rates on specific items, such as gasoline, alcohol, tobacco, and prepared meals. Be aware of these special rates and how they may impact your budget. Sales tax rates can have a significant impact on the overall cost of living in a particular state. Higher sales tax rates may make goods and services more expensive, reducing your purchasing power and impacting your budget. When considering a move to a new state, factor in the sales tax rate alongside other cost-of-living expenses.
Check Your Filing Requirements
If you lived in two or more states during a year, you would need to check the filing requirements for each state. The requirements are typically listed on the state’s tax authority website. In most cases, you’ll need to file a return in all states you lived in during the tax year. To do this, you’ll need to calculate your earnings in each state and determine the percentage of your income that was earned in each state. You’ll need to file the relevant tax forms in each state, usually as a resident or part-year resident. It’s important to note that two different states legally cannot tax the same income, so moving states does not necessarily mean you will pay more taxes.
There may be some scenarios in which you moved states, but still work in your old state. In this case, you would likely need to file a tax return in the state where you live, as well as a nonresident tax return in the state where you work. You may also want to check the tax laws in your new state. Finding out how your new state handles itemized deductions, state tax deductions, or federal tax changes can help you avoid unexpected issues during tax time.
Check Which Income Types Are Taxable
If you have multiple sources of income, it is vital to check how the income will be taxed in your new state. Interest and dividend income is typically taxed by the state in which you are a permanent resident. In addition, some states require estimated tax payments on some incomes. Not knowing the rules or deadlines for these can result in underpayment penalties.
Investments that are tax-exempt in your old state may suddenly be taxable in your new state. While all states do not require you to pay taxes on federal bonds, not all states have the same definition of a federal bond, meaning some tax bonds and others do not. Retirement income is also taxed differently in certain states, so if you are moving because of retirement, you may want to check the tax laws surrounding retirement income first.
Check Your Eligibility for Moving Expense Deductions
The 2017 Tax Cuts and Jobs Act (TCJA) eliminated the moving expense deduction for taxpayers, unless they are active-duty military members. However, this act is set to expire beginning in 2026.
Tax Relief for Those Moving States
It goes without saying that filing taxes after moving states can become very complex, especially if you have several income sources. Sometimes the new state you move to may not be your first choice, like when you’re an active-duty military member or are relocating for a job. In other cases, you may have the option to choose which state you want to relocate to. In these cases, researching tax laws in your new state can save a lot of time, money and stress during tax time. It may be best to seek the help of a credible tax preparer or professional to look at your tax situation. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
In the world of taxation, income is broadly categorized into two main types: earned and unearned income. Earned income is derived from active participation in a trade or business. Conversely, unearned income encompasses various sources that don’t require direct effort or labor. This article explores the concept of unearned income, its sources, and how it is taxed.
What is Unearned Income?
Unearned income refers to any income not generated from active participation in a trade or business. Instead, it stems from investments, royalties, rents, dividends, interest, pensions, and other sources. The recipient doesn’t actively work to earn the income. It contrasts with earned income, which includes wages, salaries, and self-employment earnings.
Sources of Unearned Income
Let’s review some of the most common sources of unearned income and how they are taxed, if at all.
Investments
Income from investments such as stocks, bonds, mutual funds, and real estate rentals constitutes a significant portion of unearned income. This can include capital gains from selling investments at a profit, dividends from stocks, and interest from bonds or savings accounts. Profits from the sale of investments, such as stocks, bonds, or real estate, are taxed as capital gains. The tax rate on capital gains ranges from 0-20% and depends on several factors. These include the holding period of the investment and the taxpayer’s income tax bracket. Generally, long-term capital gains, from assets held for more than a year, are taxed at lower rates than short-term capital gains.
Dividend income is taxed at different rates depending on whether it is classified as qualified or ordinary dividends. Qualified dividends are taxed at the capital gains tax rates, which are typically lower than ordinary income tax rates. Ordinary dividends are taxed at the individual’s ordinary income tax rate. Interest income from sources such as savings accounts, CDs, and bonds is typically taxed at the individual’s ordinary income tax rate. However, certain types of municipal bonds may be exempt from federal income tax and, in some cases, state and local income tax.
Royalties
Individuals who own intellectual property rights, such as patents, copyrights, or trademarks, receive royalties when others use or license their creations. This passive income stream is a classic example of unearned income. Royalties and annuity payments are generally taxed as ordinary income. However, certain portions of annuity payments may be considered a return of the principal investment and are therefore not taxable.
Rents
Income generated from owning and renting out real estate properties, whether residential or commercial, falls under unearned income. Landlords receive rental payments from tenants, providing a steady stream of income without active involvement in day-to-day operations. Rental income is subject to taxation at the individual’s ordinary income tax rate. Landlords are also allowed to deduct certain expenses related to renting out the property, such as mortgage interest, property taxes, maintenance costs, and depreciation.
Pensions and Annuities
Retirement income, including pensions and annuities, is often classified as unearned income. These payments are typically received after years of employment and represent a form of deferred compensation. Pensions and annuities are generally taxable at the federal level, although the taxation may vary depending on the specific circumstances and the type of plan. For example, if you contributed to the pension plan with pre-tax dollars, the entire amount of your pension payments is usually subject to income tax when you receive them. However, if you made after-tax contributions to the pension plan, a portion of your pension payments may be tax-free.
Alimony and Child Support
Payments made by one spouse to another as part of a divorce settlement (alimony) or for the support of children (child support) are considered unearned income for the recipient. However, they are typically not taxable for the recipient nor deductible for the payer.
Lottery Winnings
Windfalls such as lottery winnings, gambling winnings, or prizes from contests are considered unearned income and may be subject to taxation depending on the amount and jurisdiction. In addition, lump-sum winnings may be taxed at a higher rate than periodic payments.
Employee Benefits
Some employee benefits, such as employer-provided health insurance, life insurance, and certain fringe benefits, are considered unearned income. However, the tax treatment of these benefits varies depending on the specific benefit and applicable tax laws.
Inheritance
Inherited assets, including money, property, or investments, are considered unearned income for the beneficiary. However, inheritance tax laws vary by jurisdiction, and in many cases, inherited assets may not be subject to income tax for the recipient.
Tax Planning Strategies for Unearned Income
Given the various sources and tax implications of unearned income, individuals can employ several strategies to minimize their tax liabilities.
Tax-Advantaged Accounts: Investing in retirement accounts such as 401(k)s, IRAs, or Roth IRAs can help defer or avoid taxes on investment gains, dividends, and interest income.
Tax-Loss Harvesting: Selling investments at a loss to offset capital gains can reduce taxable income from investments. However, it’s essential to be mindful of wash sale rules and other tax implications.
Asset Location: Placing investments with higher tax burdens, such as bonds generating interest income, in tax-advantaged accounts can optimize tax efficiency.
Qualified Dividends: Investing in stocks that pay qualified dividends can result in lower tax rates on dividend income compared to ordinary income tax rates.
Estate Planning: Utilizing trusts, gifting strategies, and other estate planning tools can help minimize estate taxes and transfer unearned income to heirs more efficiently.
Tax Help for Those with Unearned Income
Unearned income plays a significant role in the financial landscape, providing individuals with passive streams of income from various sources. Understanding the sources and taxation of unearned income is crucial for effective tax planning and wealth management. By leveraging tax-efficient investment strategies and taking advantage of available tax deductions and credits, individuals can optimize their financial situation and minimize their tax liabilities on unearned income. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
Disposable income serves as a key economic indicator. It reflects the financial health and spending power of individuals and households. It represents the money available after taxes, providing a glimpse into how much individuals can spend, save, or invest. However, taxes play a significant role in shaping disposable income, influencing spending patterns and economic behaviors. In this article, we break down the concept of disposable income, explore its significance, and examine how taxes impact its utilization.
What is Disposable Income?
Disposable income (DI) refers to the amount of money individuals or households have available for spending and saving after paying taxes to the government. It is the income remaining once taxes, including income tax, payroll tax, and any other deductions, have been subtracted from gross income. Essentially, it is the money that individuals can freely allocate to consumption, savings, investments, or debt repayment.
Significance
Understanding disposable income is crucial for assessing an individual’s or household’s financial well-being. It serves as a barometer for consumer spending, which is a significant driver of economic growth. Higher DI generally correlates with increased consumer spending. This in turn stimulates demand for goods and services, leading to economic expansion.
Moreover, it influences saving and investment behaviors. Individuals with higher disposable income can save more for emergencies, retirement, or large purchases. Additionally, it enables individuals to invest in assets such as stocks, bonds, real estate, or retirement accounts, fostering wealth accumulation and financial security over the long term.
Impact of Taxes on Disposable Income
Taxes have a direct impact on disposable income, as they reduce the amount of money available for consumption and saving. In addition to federal income taxes, there is also state income tax, which varies across the country with different rates, deductions, and exemptions affecting DI differently.
Income Tax
Income tax is a significant contributor to reducing DI. It is imposed on earned income, including wages, salaries, bonuses, and investment income such as interest and dividends. Progressive income tax systems levy higher tax rates on higher income levels, leading to a greater reduction in disposable income for high earners.
Payroll Taxes
Payroll taxes, which fund social insurance programs such as Social Security and Medicare, also diminish disposable income. These taxes are typically withheld from employees’ paychecks by employers. Payroll taxes are comprised of a fixed percentage of wages up to a certain limit. While payroll taxes are regressive, meaning they impose a higher burden on low-income earners, they still impact DI for all workers.
Consumption Taxes
Consumption taxes, such as sales tax or value-added tax (VAT), are levied on goods and services at the point of purchase. Unlike income taxes, which are based on earnings, consumption taxes affect spending directly, reducing disposable income with each transaction. The regressive nature of consumption taxes means that they can disproportionately impact low-income individuals, who may spend a higher proportion of their income on taxable goods and services.
Use in Taxes in Disposable Income
While taxes reduce DI, how individuals allocate their remaining funds can have tax implications as well. Several strategies can help minimize tax liabilities.
Retirement Contributions
Contributing to retirement accounts such as 401(k) plans or individual retirement accounts (IRAs) can reduce taxable income while simultaneously saving for the future. Contributions to these accounts are often tax-deductible, lowering current tax obligations and potentially increasing disposable income.
Tax-Advantaged Investments
Investing in assets with favorable tax treatment, such as municipal bonds or certain retirement accounts, can shield investment income from taxes or defer tax liabilities. This helps preserve more DI for the present.
Tax Credits and Deductions
Taking advantage of available tax credits and deductions can reduce overall tax liabilities, effectively increasing disposable income. Common tax credits include the Earned Income Tax Credit (EITC) and the Child Tax Credit, while deductions such as mortgage interest or charitable contributions can lower taxable income.
Tax Help in 2024
DI serves as a vital metric for assessing financial well-being and economic vitality. Taxes play a crucial role in shaping DI, influencing spending, saving, and investment decisions. Understanding the impact of taxes can empower individuals to make informed financial choices, optimizing their resources and maximizing their financial freedom. By employing tax-efficient strategies and leveraging available resources, individuals can effectively manage their disposable income, enhancing their economic security and prosperity. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Inheriting assets can be a bittersweet experience. While it often signifies the passing of a loved one, it can also provide financial stability and opportunities for the future. However, along with the emotional and financial aspects of inheritance come tax implications, especially regarding inherited accounts. Understanding how taxes apply to inherited accounts is crucial for effective estate planning and financial management. In this article, we’ll explore the complexities of taxes on inherited accounts and explore strategies to navigate them.
SECURE Act
It’s important to know that taxes on inherited accounts is an extremely complex topic. This topic was made even more confusing by the 2019 SECURE Act and 2022’s SECURE Act 2.0. To put it simply, the SECURE Act focuses on a few key areas to improve retirement plans.
Expanded Access: Requires employers to allow long-term part-time employees who work at least 500 hours per year for three consecutive years to participate in their employer’s 401(k) plan.
Increased RMD Age: The age at which individuals must start taking required minimum distributions (RMDs) from their retirement accounts was raised from 70½ to 72. It was raised to 73 in 2023. This change allows individuals to keep their retirement funds invested for a longer period, potentially increasing their savings.
Birth or Adoption Expenses: Allows penalty-free withdrawals of up to $5,000 from retirement accounts for expenses related to the birth or adoption of a child. While the withdrawal is penalty-free, income tax still applies to the distribution.
Elimination of “Stretch” IRAs: Eliminates the “stretch” IRA provision for most non-spouse beneficiaries. Previously, non-spouse beneficiaries could stretch distributions from inherited IRAs over their lifetimes, allowing for potentially significant tax-deferred growth. Now, most non-spouse beneficiaries are required to withdraw the entire inherited IRA balance within 10 years of the original account holder’s death, potentially accelerating tax liabilities.
Knowing these provisions is key to understanding taxes on inherited accounts. The way a surviving spouse is taxed is different from the way a child or relative is taxed. Similarly, non-relatives are taxed differently. Knowing what your options are if you inherit an account can save you time, money, and a headache.
Types of Inherited Accounts
Keeping the SECURE Act in mind, we can now look at the different types of inherited accounts. Inherited accounts come in various forms, including retirement accounts like Individual Retirement Accounts (IRAs), employer-sponsored retirement plans such as 401(k)s, taxable investment accounts, and other financial assets. Each type of account may have different tax implications for beneficiaries. In most scenarios, you may inherit IRAs, employee-sponsored retirement plans, and investment accounts.
Traditional and Roth IRAs
Perhaps the most important factor that determines options when inheriting accounts is your relationship to the deceased. When inheriting a traditional IRA, beneficiaries typically must pay income tax on distributions they receive. The tax is based on the beneficiary’s individual tax rate. However, if the deceased had already begun taking required minimum distributions (RMDs), the beneficiary may need to continue taking them based on their life expectancy.
In contrast, inheriting a Roth IRA usually offers tax advantages. Qualified distributions from a Roth IRA are tax-free, so beneficiaries can potentially enjoy tax-free growth on inherited assets. However, non-qualified distributions may be subject to taxes and penalties. For example, if the Roth account is less than 5 years old at the time of withdrawal, the withdrawal may be subject to income tax.
Non-Spouse Beneficiaries
If you inherited an account from a parent, relative, or anything other than a spouse, your options are more limited. For example, you cannot roll inherited IRA funds into an IRA in your name. Also, if you plan to take RMDs using the life expectancy method, you must meet one of the following requirements:
You inherited the funds from someone who died in 2019 or earlier
You are chronically ill or disabled
You are more than 10 years younger than the deceased account owner
You are a minor child of the deceased account owner. If this is the case, you must use the life expectancy method until you reach age 18.
If you don’t meet any of these criteria, you can spread the withdrawals over a 10-year period. Alternatively, you can withdraw over 5 years or take a lump sum withdrawal.
Employer-Sponsored Retirement Plans
Similar to traditional IRAs, beneficiaries of employer-sponsored retirement plans like 401(k)s may need to pay income tax on distributions they receive. You could take a lump sum distribution, but it will be taxed as ordinary income. You could also roll the funds into your own 401(k) or IRA. If you do this, you’ll follow the same withdrawal rules. For instance, you be penalized for early withdrawals, and you must start taking RMDs by age 73. If you choose to transfer the funds into an inherited IRA account, you can make early withdrawals. On the other hand, you don’t need to move the funds at all. You can leave it in the account and take RMDs when required. However, if you are over 59½ and your spouse began taking RMDs before they passed, you can continue those withdrawals or delay it until you reach age 73 without any penalty.
Non-Spouse Beneficiaries
Once again, non-spouse beneficiaries have less options than spouses. You have three options for this type of account.
Transfer funds into an inherited IRA: This option requires the funds to be completely withdrawn within 10 years. If the money was pre-tax, you’ll pay tax on the withdrawals. If you convert a pre-tax 401(k) into a Roth IRA, you’ll likely owe taxes at the time of conversion. Withdrawing from a Roth 401(k) or converting the account to a Roth IRA has no tax implications.
Take a lump sum payment: This option generally results in a large tax bill. If you inherit a pre-tax 401(k), you’ll pay at your ordinary tax rate. If it’s a Roth 401(k), there are no tax implications.
Leave the funds and withdraw over 10 years: You can leave the funds in the original account, but you still need to meet the 401(k) 10-year rule.
Inherited Stock
Inheriting taxable investment accounts generally involves capital gains taxes. When beneficiaries sell inherited assets, they may incur capital gains tax based on the difference between the asset’s value at the time of inheritance and its value at the time of sale. However, inheriting assets also offers a “step-up” in basis, which can reduce capital gains taxes by resetting the cost basis to the asset’s value at the time of the original owner’s death.
Here’s an example. Let’s assume you sell inherited stocks one year after inheriting them. The stocks were worth $100,000 when you inherited them, and you sold them for $120,000.
Capital Gain = Sale Price – Fair Market Value at Inheritance
Capital Gain = $120,000 – $100,000 = $20,000
If your capital gains rate is 15%, you’d owe $3,000 in capital gains tax.
Capital Gains Tax = Capital Gain × Capital Gains Tax Rate
Capital Gains Tax = $20,000 × 0.15 = $3,000
Tax Help for Those Who Inherited Accounts
Inheriting accounts comes with both financial opportunities and tax obligations. Understanding the tax implications of inherited assets is crucial for maximizing their value and minimizing tax liabilities. By implementing strategic tax planning strategies and seeking professional guidance, beneficiaries can navigate the complexities of taxes on inherited accounts effectively. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.
