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The 1099-K Reporting Threshold Is Delayed – Now What?

the 1099-k reporting threshold is delayed now what

In December 2022, the IRS announced that the new reporting thresholds for Form 1099-K have been delayed. The new thresholds are part of the American Rescue Plan of 2021, which will require Form 1099-K to be issued by well-known third-party settlement organizations (TPSOs) for any aggregate transactions of $600 or more. Here’s an overview of what this means for your taxes. 

Old 1099-K Thresholds vs. New 1099-K Thresholds 

Prior to the American Rescue Plan of 2021, taxpayers would only receive Form 1099-K if they earned an aggregate amount of $20,000 in over 200 transactions for goods and services. The plan changed the reporting requirements by drastically lowering it to any payments exceeding $600. Beginning January 1, 2023, TPSOs were supposed to be required to report third-party network transactions paid in 2022 that exceed $600 through an annual Form 1099-K. However, due to concerns about lack of guidance, the existing tax return backlog, and taxpayer confusion, the IRS will delay the requirement until 2024. In other words, the original $20,000 and 200 transaction threshold will remain in place through the rest of 2023.  

What This Means for Taxpayers 

It is a lot more common for taxpayers to also be freelancers or small business owners now, especially those who receive payments for goods and services via third-party payment networks. These can include PayPal, Venmo, Amazon, Square, Cash App, Stripe and many more. 1099-Ks are only generated for payments associated with goods and services, so taxpayers should not worry about receiving one for personal expenses paid via these apps. For example, you might collect rent from your roommates through Venmo, which you then send to your landlord. This is a personal expense, and you will not receive a 1099-K. However, if you are the landlord collecting rent through a third-party payment network, you should expect to receive a 1099-K.  

If you are a freelancer or small business owner who collects payments with a third-party payment app, you should use the delay to become more familiar with the new reporting rules that will take effect in 2024. You can also ensure that any transactions you receive through apps like Venmo or PayPal are correctly classified as a personal transaction and not a business transaction for goods and services. With the new rules taking effect, a single large transaction of $600 accidentally marked as a business transaction could trigger Form 1099-K to be generated. While this issue is correctable, it has to be done with the third-party payment network directly and the IRS will expect to see the reported income on your return until a correction is sent to them. This process could be time-consuming and cause further delays in processing your return. 

Tax Relief for Freelancers and Small Business Owners 

If the new rules go into effect and the IRS’s numbers do not match up with your own, you risk triggering an IRS audit, which can lead to unmanageable stress. You’ll want to avoid owing taxes now more than ever as IRS interest rates have recently increased, making your balance more expensive, especially with interest and penalties. Taxpayers should also note that this delay does not change any rules regarding taxable income. If you earn money through freelancing or your small business, you should report all income on your tax return, even if you did not receive a 1099-K. Our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call Optima Tax Relief at 800-536-0734 for a free consultation. 

Common IRS Penalties & How to Avoid Them

common irs penalties and how to avoid them

Owing the IRS doesn’t just stop with your tax balance. If your tax obligations are not met, you could face penalties that can make your debt even more unmanageable. Here are some of the most common IRS penalties and how to avoid (or reduce) them. 

Failure to Pay 

The Failure to Pay penalty is charged if you do not pay taxes owed by the due date. The 0.5% penalty is applied to any unpaid taxes for every month or partial month the tax is not paid. However, it will not exceed 25% of your unpaid taxes. There are some scenarios in which this penalty can increase or decrease. For example, if the IRS sends a notice with an intent to levy, you have 10 days to pay your tax. If you do not, the Failure to Pay penalty increases to 1% per month or partial month. However, if you set up a payment plan, the penalty is reduced to 0.25% per month or partial month.  

Failure to File 

If you don’t file by the tax deadline, or the requested extension deadline, you will be charged with a Failure to File penalty. This penalty is 5% of your unpaid tax for every month or partial month that your return is late. Like the Failure to Pay penalty, it caps out at 25% of your balance. The best way to avoid this penalty is to file on time. If you can’t file, or don’t have the money to pay your balance, by the April deadline, you should request an extension. The deadline to file your 2022 tax return is April 18, 2023. Taxpayers should note that for tax returns due after January 1, 2020, and more than 60 days late, there is a minimum penalty of either $435 or 100% of the owed tax, whichever is less. 

Underpayment of Estimated Tax 

If you don’t withhold enough taxes throughout the year, you need to make quarterly estimated tax payments. If you don’t pay the correct amount of estimated tax, or if you pay late, you may be penalized. Estimated payments are due every April 15th, June 15th, September 15th and January 15th. The penalty can change quarterly but as of Q1 of 2023, individuals are charged 7% on underpaid tax while large corporations are charged 9%. You can avoid this penalty by meeting one of two requirements: 

  • Pay 90% of the tax you owe for the current year in four equal estimated payments, or through paycheck withholding 
  • Pay 100% of last year’s tax bill, before withholding or tax credits. If you have an AGI of more than $150,000, you should pay 110%.  

Accuracy-Related Penalty 

If you don’t report all your income, or if you claim deductions or credits you don’t qualify for, you could be given an accuracy-related penalty. The two types of this penalty are: 

  • Negligence or Disregard of the Rules of Regulations Penalty: This penalty is common among those who do not follow tax laws or are careless when preparing their return. Examples include not reporting all income or not checking tax deductions that result in a refund that seems too good to be true. 
  • Substantial Understatement of Income Tax Penalty: This penalty is given to those who understate their tax liability by 10% of the tax required to be shown on your return or $5,000, whichever is greater.  

Both of these accuracy-related penalties charge 20% of the portion of underpaid tax that resulted from negligence, disregard, or understated income.  

Penalty Relief for Reasonable Cause 

In some cases, the IRS may remove or reduce penalties if you acted in good faith with reasonable cause. These situations are determined by the IRS on a case-by-case basis. Some valid reasons for not filing or paying taxes might be because of a natural disaster, inability to obtain records, death, or certain system issues. The IRS may also reduce accuracy-related penalties if you made an effort to correct the issue or seek help about your error. You may qualify for First Time penalty abatement if you have been and are currently compliant with your taxes.  

Get Help Avoiding and Reducing IRS Penalties 

Remember, the IRS charges interest on penalties and interest will continue to increase your balance until it’s paid in full. Since interest on underpayments begin on the tax due date, it’s important to act as quickly as possible to resolve your tax issue. If you can pay your balance in full, you should do so immediately. If you cannot afford to, you should look into options including payment plans or tax relief. Our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call Optima Tax Relief at 800-536-0734 for a free consultation. 

What is the IRS Fresh Start Program?

what is the irs fresh start program

A new year could mean a financial fresh start. The IRS Fresh Start program was created to help struggling taxpayers and small businesses. In 2023, taxpayers are still asking how the program works. Here are some key details about the program. 

The History of the Fresh Start Program 

The Fresh Start Initiative was established in 2011 to give first-time tax offenders leniency and the opportunity to solve their tax issues through consolidated tax bills and payment arrangements Shortly after launching the program, the IRS made it easier to remove federal tax liens and allowed taxpayers to come to more favorable payment arrangements with the IRS. One year after that, the IRS gave more taxpayers access to the Offer in Compromise (OIC) program.  

Changes to Federal Tax Liens and Installment Agreements 

The IRS used to file tax liens on balances above $5,000. The Fresh Start program increased the tax balance limit to $10,000. It also gave taxpayers the chance to withdraw their lien, which then helped those taxpayers access more credit. 

 Streamlined installment agreements (SLIAs) were also expanded in 2011 that allowed more favorable terms for the taxpayer and helped avoid tax liens. This allowed taxpayers with debt of up to $50,000 to be set up with a SLIA, up from the previous $25,000 cap. Further, the term length was increased from 60 months to 71 months. The simple installment agreement is preferred for most taxpayers since it does not require giving the IRS extensive documents detailing financial situations.  

Changes to the OIC Program 

The OIC program is very sought after by taxpayers with a large tax debt balance. An Offer in Compromise is essentially an agreement between the IRS and taxpayer that settles the owed tax debt for a lesser amount. However, offers are not accepted if the IRS thinks that the taxpayer is capable of paying the balance in full. In 2012, the IRS allowed greater access to the OIC program by revising how it calculates taxpayer future income, allowing taxpayers to repay student loans and past-due state and local taxes, expanding the allowable living expense amount, and reducing the offer amount for those who qualify for an OIC. It’s important to note that the IRS does not accept OICs often. In fact, the IRS only accepted about a third of OIC applications from 2010-2019.  

Tax Help for Those Who Owe 

The Fresh Start program can really help taxpayers who owe the IRS but don’t necessarily have the funds to pay their debt. Working with an experienced tax relief company can help ease the process. If you are wondering if you are eligible for the Fresh Start program, let Optima Tax Relief help. Contact us today at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

IRS Interest Rate Increases for Q1 of 2023

irs interest rate increases for q1 of 2023

While the Fed continues to increase interest rates, other entities are adjusting their own rates accordingly, the IRS included. In fact, the first quarter of 2023 has already seen a rise in IRS interest rates that took effect January 1, 2023. Here’s what it means for taxpayers. 

How much did rates increase? 

Both overpayment and underpayment rates with the IRS increased from 6% to 7%. These rates are per year and are compounded daily. The rate for overpayments corporations is 6%. If the corporation’s overpayment exceeds $10,000, the excess payment will accrue interest at a rate of 4.5%. However, if a corporation underpays, it will be charged interest on the balance due at a rate of 9%.   

How will this affect taxpayers? 

Taxpayers receive an overpayment credit when their tax payments exceed what they owe. In other words, the rate increase will be good for those still waiting for past refunds. If a taxpayer is still missing their tax refund for 2022, they will receive 7% interest from the IRS, beginning January 1, 2023. The IRS adds interest to a tax refund if it takes more than 45 days after the filing deadline to process a return and refund. As of November 18, 2022, there were still over 3 million unprocessed individual 2022 tax returns. This figure does not include unprocessed returns from the previous tax years. 

Tax Relief for Those Who Owe 

The rate increase will be good news for those still waiting to receive their 2022 tax refunds. However, this is bad news for those who owe a tax balance. If a taxpayer owes taxes but does not pay the balance in full, the remaining balance will be charged underpayment interest. Because underpayments just became more expensive, it is essential to pay off your tax debt as quickly as possible to avoid even more interest charges. Now more than ever, neglecting your tax bill can be very costly due to the interest rate increases accompanied by the regular penalties for underpayment. Optima Tax Relief and our team of qualified and dedicated tax professionals can help if you have tax debt. If you need tax help, call us at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals. 

Tax Checklist for Moving States

tax checklist for moving states

A new year means new beginnings for taxpayers, and sometimes that means moving to a new state. One of the things that taxpayers commonly overlook when moving states is taxes. It’s important to note that not all states have the same tax laws. Some states do not have state income tax while others may tax your retirement income. Here’s a quick tax checklist for moving states.  

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 
  • Nevada 
  • South Dakota 
  • Texas 
  • Tennessee 
  • Washington 
  • Wyoming 

Florida does not tax personal income but does tax certain business assets. New Hampshire does not tax W-2 wages but does tax certain investment and business income. California, Hawaii, New Jersey, Oregon and Minnesota currently have the highest income tax rates.  

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. Give Optima a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.

An Overview of Property Taxes

an overview of property taxes

Property taxes are paid on property owned, either by an individual or a legal entity. How much property tax you are required to pay is determined by the local government where the property is located. Typically, the assessed taxes are used to fund things like water and sewer improvements, education, road construction, and public services like law enforcement and fire protection. Here is a brief overview of property taxes and what they mean for your taxes. 

How is property tax calculated? 

The amount of property tax you are required to pay depends on the value of your property, including the land and buildings sitting on it, as well as your assessed property value and the county’s projected mill tax. A mill tax rate is the sum of all tax rates levied on your property value.  

The mill tax is multiplied by the property value to calculate your assessed value of your property, which is then used to find the fair market value of your property. This figure is multiplied by an assessment rate to calculate your tax bill.  

Your property tax bill may be higher or lower than your neighbor’s. For example, if your plot of land is larger or if your home’s assessed value is higher, your tax bill will be higher than your neighbor’s. In some rare cases, your neighbor’s property may fall in a different jurisdiction with a lower mill tax rate, resulting in a smaller tax bill.  

Who must pay property taxes? 

Typically, most owners of property must pay property taxes, whether they are an individual or legal entity. However, there are some groups or property types that are exempt. These include senior citizens, those with disabilities, and military veterans. Additionally, there is a homestead exemption that reduced property tax bills. The rules for exemption vary by state or municipality so it’s best to check with your local and state government. Also note that the agencies that collect property taxes will not always notify you if you do qualify for an exemption and you may need to apply for it on your own.  

What happens if I do not pay property taxes? 

Put simply, failing to pay property taxes can result in a lien on your home. A lien is a legal claim against your property that can be used as collateral to repay the debt owed. If you still do not pay off the balance, the taxing authority can legally sell your home, or sell the tax lien. In this case, the purchaser of the lien can have your home foreclosed or use other methods to obtain the deed to your property. The consequences vary by state.  

Tax Relief for Homeowners 

It goes without saying that all property owners should stay on top of their property tax bills. Failing to pay can have serious financial consequences but choosing to pay can also have other financial benefits during tax time. Homeowners who itemize their deductions can deduct property taxes paid on a primary residence and any other real estate owned. You can deduct up to $10,000 in state and local income taxes, which includes property taxes. If you need tax help, call us at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.