Welcome to our Ask Phil series, where each week our lead Tax Attorney, Philip Hwang will be answering your questions about various tax topics such as IRS enforcement, liens and levies, tax scams, and more. With Phil’s extensive background as a tax attorney, you won’t want to miss this valuable information!
Today, Phil discusses liens, including when to worry about them and how to get them removed.
What is a Tax Lien?
A lien is a legal claim against all of your property when you fail to pay a tax debt. A lien is private information only known to you and the IRS. That is until they file a Notice of Federal Tax Lien. This essentially means that the IRS alerts all creditors that they have the first claim over all of your assets, from property to vehicles to bank accounts. At this point, the federal tax lien becomes public information, meaning that anyone can find out about your tax debt. This can affect your access to credit, business opportunities, and even employment.
How to Get a Lien Removed
Once a federal tax lien is in place, the best way to get it removed is to pay your tax debt in full. Once the balance is paid in full, the IRS typically releases the lien within 30 days. However, sometimes other options may be available. For example, a process called lien subordination allows creditors to outrank the IRS. This basically makes it possible for you to refinance your home. It’s important to note that this does not remove the tax lien attached to your property. To find out if you’re eligible for lien subordination, you should file IRS Form 14134, Application for Certificate of Subordination of Federal Tax Lien, with the help of a knowledgeable tax professional.
Tune in next Friday as Phil covers the important topic of penalties and interest!
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Tax withholding is a concept that many individuals encounter throughout their lives, whether as employees, freelancers, or business owners. Withholding too little tax from your paychecks can result in a tax bill during tax time, while withholding too much tax can result in smaller paychecks than necessary. That being said, understanding tax withholding is crucial because it directly affects your income, tax liability, and financial planning. Here is a breakdown of withholding.
What is tax withholding?
Withholding is essentially the amount of income tax that your employer deducts from your paycheck. This amount is then sent to the IRS on your behalf. This is because the IRS requires taxes to be paid as income is earned. Withholding allows us to do this easily and efficiently without risking owing a large tax bill later. How much income tax is deducted is up to you as withholding can be adjusted at any time. However, there are other types of taxes that are deducted from your paycheck including Social Security tax, Medicare tax, and state or local taxes.
How does tax withholding work?
When you start a new job, your employer will ask you to fill out IRS Form W-4, Employee’s Withholding Certificate. This form will ask for information, including your name, address, social security number, and filing status. If you have dependents, multiple jobs (including your spouse’s), or other adjustments, you can also note them on the form. Once you sign and date the form, you can give it to your employer, and they will withhold taxes accordingly. Remember, a new Form W-4 can be submitted at any time. In fact, a new W-4 should be submitted each time you experience a life change that requires more or less taxes withheld. For example, having a child, getting married, or getting a second job might require your withholding to be updated.
How does withholding work for self-employed individuals?
If you are self-employed or do contract work, you do not have an employer to withhold taxes for you, but this does not mean you are exempt from paying income taxes. Instead, you are required to pay quarterly estimated taxes. Figuring out how much to pay can be tricky. You can use IRS Form 1040-ES to calculate your estimated tax payment and pay this amount to the IRS through check, cash, money order, credit card, or online. Four separate payments are due throughout the year according to a quarterly schedule. For 2024, these due dates are:
April 15, 2024
June 17, 2024
September 16, 2024
January 15, 2025
There are a few exceptions to this. You may pay all of your estimated taxes early. You are also not required to make a payment until you earn income that will result in owed tax. It’s crucial to make any necessary payments because if you do not, you may be hit with penalties.
Why is withholding important?
As you can see, tax withholding is extremely important because it directly impacts your income, tax liability, and financial planning. If you’re still not sure if you are withholding the correct amount, think back to your most recent tax refund or tax bill. If you had to pay a large tax bill, you likely need to increase your withholding to help minimize your taxes owed. However, if you got a larger than normal tax refund, you likely need to reduce your it. While you might think getting a huge tax refund is ideal, this is essentially an interest-free loan on your own money. That extra money might have been better spent during the year. Tax withholding can get complicated, but Optima can help.
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. This is especially true 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. They will then 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. This allows you to meet immediate needs for cash. Many tax refund loan companies do not charge any upfront fees or interest. This fact makes it a potentially cheaper alternative than other short-term loans. The application process for tax return loans is often simple and involves little documentation. So, it could be 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.
Saving for higher education tuition can be overwhelming. However, it can be a little easier with the help of a college savings account. By saving earlier and more efficiently, you can increase your savings for education, whether it is for your children, a family member, or even yourself. One of the most popular types of college savings accounts is a 529 plan because of its tax benefits. Here is an overview of 529 plans, including what they are, how they work and other important information.
What is a 529 plan?
A 529 savings plan is a tax-sheltered investment account created exclusively for qualified higher education expenses. These plans are named after Internal Revenue Code Section 529 and are offered by states or educational institutions. Like a Roth 401(k) or Roth IRA, 529 plans enable families to invest after-tax contributions that not only grow tax-free but can be withdrawn tax-free if the funds are used to pay for qualified expenses.
What is a qualified higher education expense?
Qualified higher education expenses include tuition, fees, books, computers, equipment, internet services, and room and board for students who are at least half-time. Any withdrawals made to pay for these expenses must happen in the same year the expense is incurred. The IRS has also recently allowed 529 plan funds to pay for up to $10,000 of K-12 tuition as well as up to $10,000 in student loan debt. Purchases made with 529 plan funds that are not qualified expenses will be subject to a 10% penalty, plus regular income taxes.
Another thing to keep in mind when making withdrawals from your 529 plan is that you’ll want to avoid “double-dipping.” In other words, you are not allowed to use more than one tax benefit for the same expense. For example, if you used $3,000 from your 529 plan to pay for your child’s tuition, you may not also use this same expense to qualify for an education tax credit, like the American Opportunity Tax Credit. This is also the case if someone else paid for your child’s tuition with their own 529 plan. Another example is if your child receives a tax-free scholarship of $10,000 to put towards their $15,000 tuition bill. Because $10,000 was received, you may only withdraw up to $5,000 for this expense. Withdrawing more will result in a penalty.
What are the tax advantages of 529 plans?
Contributions to 529 plans are made with after-tax dollars, which means they are not federally tax-deductible. Some states allow you to deduct contributions. 529 plans, however, do grow tax-free, which means any earnings generated are not taxed, as long as the funds are ultimately used for qualified education expenses. This means your investments can grow faster with less effort on your part. Investing in a tax-deferred account, like a 529 plan, can yield thousands of dollars more than a taxable account.
529 plans can also be great for estate planning. For tax purposes, contributions to a 529 savings plan are considered completed gifts. Individuals can reduce their taxable estate and perhaps reduce estate taxes by contributing to a 529 plan. This is especially advantageous for those with significant assets who want to pass wealth down to future generations while minimizing the impact of taxes on their estates. These contributions are not taxed unless they exceed the annual gift tax exemption amount of $17,000 (in 2023).
What else should I know about 529 plans?
Sometimes, things don’t go as planned. If the funds are no longer necessary for higher education, but you still have leftover money, you have a few options. You can change the beneficiary on the account to another family member. You can also make yourself the beneficiary if completing higher education is a goal for you. Your 529 college plan can also be converted to a 529 ABLE plan, a savings account for people with disabilities. Finally, beginning in 2024, you will be able to roll over up to $35,000 of 529 funds into a Roth IRA, as long as the account has been open for at least 15 years.
Like Roth accounts, 529 plans have a lot of tax advantages. However, it’s crucial to follow all tax laws when making withdrawals and reporting education expenses during tax time. Keeping good records of qualified expenses and the amount of tax-free money received can help ensure that you stay compliant. As you can imagine, improper usage of this tax-deferred account can result in penalties that can cause financial hardship. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Before 2021, college athletes had a few ways to earn money. These were typically from scholarships, grants, part-time jobs, or possibly even help from their parents. Since then, the National Collegiate Athletic Association (NCAA) has allowed these athletes, including high school level athletes, to engage in NIL, or Name, Image, and Likeness, activities. This has created many financial opportunities for college athletes. However, it has also created more responsibilities for these first-time tax filers. Here, we will break down NIL income, including what types exist and how to report it during tax time.
What is NIL Income?
NIL income is the revenue earned by high school and collegiate athletes through the use of their name, image, and likeness. How much these athletes can earn typically depends on their social media presence, the sport they play and other factors. Currently, basketball and football players earn the most NIL income compared to other sports. The top NIL earner in 2023 is none other than 18-year-old basketball star Bronny James, son of superstar LeBron James. His NIL valuation is between $6.8 million and $7.6 million. Both his NIL valuation and social media following of nearly 13 million are comparable to many professional athletes who have been in the game much longer. While all this sounds fantastic for the emerging superstar, NIL income is taxable, meaning he and his fellow NIL earners will have financial responsibilities during tax time.
How is NIL Income Earned?
NIL income can be earned through various ways, including:
Guest appearances
Autograph signings
Sponsorships
Endorsements
Content creation
NFTs
Gifts
Vacations
Apparel and athletic equipment
How is NIL Income Taxed?
To avoid surprises during tax season, it’s critical to understand the tax implications of NIL income. NIL income earners are technically considered independent contractors, which means they would receive Form 1099-NEC at the beginning of each year if they earned at least $600 in NIL income the previous year. This includes crypto payments. If they were paid through a third-party payment network, like Venmo or PayPal, they will instead receive Form 1099-K. Gifts or free items with values of $600 or more will be reported on Form 1099-MISC. If they also worked a job that gives Form W-2, this income should also be reported. Remember, the IRS receives all 1099s and W-2s from employers, so all income should be reported on your tax return if you are an NIL income earner.
If an NIL earner has net income of $400 or more, they must file a tax return. Since they are considered self-employed, they will also need to pay estimated quarterly tax payments if they expect to owe $1,000 or more in taxes. In addition, they will be responsible for paying self-employment taxes, which equals 15.3% of their income.
Tax Help for NIL Earners
Earning money for your name, image, and likeness is an amazing opportunity for high school and college athletes. However, paying taxes on this income may not always be a first instinct which can lead to financial troubles. A good way for these earners to save money during tax time is to take advantage of tax-deductible expenses available, including plane fare, hotel bills, vehicle expenses, marketing and agency fees, and more.
Meanwhile, there are also education tax credits and the student loan interest deduction for those who qualify. Also, keep in mind that each state has their own set of tax rules and regulations. It is critical to become acquainted with your state’s specific rules in order to understand how NIL income is taxed and what deductions or credits may be available to you. Keeping good records, planning ahead, staying informed, and consulting with a knowledgeable tax professional can make the biggest difference in this complex process.
If You Need Tax Help, Contact Optima Tax Relief Today for a Free Consultation
