We often discuss federal taxes here, from tax filings to deductions and credits. However, it’s important to note that federal taxes are typically only one half of a taxpayer’s responsibility. In addition to filing and paying federal taxes each year, taxpayers must also stay on top of their state tax responsibilities if they have any. Here we will discuss the different types of state tax systems, as well as the 2023 state income tax rates and brackets.
State Tax Systems
Not every state taxes their residents the same. In fact, some states don’t tax at all. These states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire does not tax regular income, but it does have a 5% tax on dividend and interest income. All other states either use a flat tax system or a progressive tax structure.
Flat Tax System
The flat tax system is the simpler of the two and involves one tax rate for most types of income. The factor that could change state to state is which income is considered taxable. Some states alternatively tax according to AGI instead of taxable income. States that have a flat tax rate in 2023 are:
Arizona – 2.5% of taxable income
Colorado – 4.4% of taxable income
Idaho – 5.8% of taxable income
Illinois – 4.95% of taxable income
Indiana – 3.15% of taxable income
Kentucky – 4.5% of taxable income
Michigan – 4.05% of taxable income
New Hampshire – 4% on dividends and interest income only
The remaining states use a progressive tax system, in which higher incomes are taxed at higher rates. In 2023, states that use a progressive tax system are:
State
Tax Rates
Number of Brackets
Alabama
2%-5%
3
Arkansas
2%-4.9%
3
California
1%-12.3%
9
Connecticut
3%-6.99%
7
Delaware
0%-6.6%
7
District of Columbia
4%-10.75%
7
Georgia
1%-5.75%
6
Hawaii
1.4%-11%
12
Iowa
4.4%-6%
4
Kansas
3.1%-5.7%
3
Louisiana
1.85%-4.25%
3
Maine
5.8%-7.15%
3
Maryland
2%-5.75%
8
Massachusetts
5%-9%
2
Minnesota
5.35%-9.85%
4
Mississippi
0%-5%
2
Missouri
1.5%-4.95%
8
Montana
1%-6.75%
7
Nebraska
2.46%-6.64%
4
New Jersey
1.4%-10.75%
7
New Mexico
1.7%-5.9%
5
New York
4%-10.9%
9
North Dakota
1.1%-2.9%
5
Ohio
0%-3.99%
5
Oklahoma
0.25%-4.75%
6
Oregon
4.75%-9.9%
4
Rhode Island
3.75%-5.99%
3
South Carolina
0%-6.4%
3
Vermont
3.35%-8.75%
4
Virginia
2%-5.75%
4
West Virginia
3%-6.5%
5
Wisconsin
3.54%-7.65%
4
Conclusion
Taxpayers should ensure that they stay on top of their state tax obligations as well as their federal. We often hear horror stories about what happens if the IRS begins to take collection action against you, but state tax agencies can be just as intimidating. Like the IRS, your state’s department of revenue can levy and penalize you. In addition, they can revoke or refuse to renew any state-issued licenses, including driver’s licenses and professional licenses you may need to operate a business. If you’re behind on your state taxes, Optima Tax Relief can help.
As the golden years approach, seniors and retirees face a new set of financial challenges, with tax planning becoming increasingly important. Understanding the tax implications of retirement income sources, investments, and deductions can significantly impact a retiree’s financial well-being. In this blog post, we’ll explore some valuable tax tips specifically designed for seniors and retirees, helping them navigate the complex tax landscape and make the most of their hard-earned money.
Know Your Retirement Income Sources
Before diving into tax planning, it’s crucial for seniors and retirees to identify their sources of income during retirement. Common income streams may include Social Security benefits, pensions, 401(k) or IRA distributions, annuities, investment income, and part-time employment. Knowing where your money comes from will enable you to plan effectively for tax obligations.
Understand How Tax Filing Changes
Did you know that after turning 65, you and/or your spouse can get a higher standard deduction. The 2023 standard deduction for those 65 and older is $1,850 more if you file single or head of household and an additional $1,500 per qualifying individual if you are married or a surviving spouse. These increases also apply to blind taxpayers. Taxpayers who are both 65 or older and blind will receive double the extra amount. In addition, being 65 years or older allows a taxpayer to use Form 1040-SR. While Form 1040-SR uses the same set of instructions and schedules as Form 1040, it is printed with larger text, potentially making it more accessible for seniors and retirees. It also includes the additional amount in the standard deduction.
Understand Social Security Taxation
For many retirees, Social Security benefits serve as a vital income source. However, depending on your total income, a portion of your Social Security benefits may be taxable. According to the IRS, only up to 85% of your Social Security benefits may be taxed. To determine your taxable Social Security benefits, calculate your combined income, which includes your adjusted gross income (AGI), non-taxable interest, and half of your Social Security benefits. Refer to the IRS guidelines or consult a tax professional for assistance in understanding your specific tax obligations related to Social Security benefits.
Embrace Tax-Advantaged Retirement Accounts
For retirees who have yet to withdraw funds from their retirement accounts, such as Traditional IRAs or 401(k)s, they can benefit from tax-deferred growth. However, after turning 72 (due to recent legislation changes), retirees must start taking required minimum distributions (RMDs) from these accounts, which are subject to income tax. Additionally, consider Roth IRA conversions strategically to minimize future tax burdens and leave a tax-free legacy for heirs.
Leverage Health Savings Accounts (HSAs)
If you have a high-deductible health insurance plan, consider contributing to a Health Savings Account (HSA). HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. Seniors can utilize their HSA funds to cover eligible medical costs in retirement, providing substantial tax savings.
Take Advantage of Catch-Up Contributions
For seniors who aim to boost their retirement savings before they retire, catch-up contributions are a valuable tool. Individuals aged 50 and above can contribute additional funds to their IRAs and workplace retirement accounts, allowing them to save more while reducing their taxable income. In 2023, you may contribute an additional $7,500 to a 401(k), 403(b), most 457 plans, and a government Thrift Savings Plan. Those who participate in SIMPLE plans can contribute $3,500 in catch-up contributions.
Deduct Medical Expenses
Medical expenses can quickly add up for seniors, making them potential tax deductions. If your total medical expenses exceed a certain percentage of your adjusted gross income, you may qualify for a deduction. Keep records of all qualifying medical costs, including doctor visits, prescription medications, long-term care expenses, and insurance premiums, to take advantage of these deductions.
Tax Help for Seniors and Retirees
As seniors and retirees embark on their new journey of financial freedom, understanding the intricacies of tax planning becomes paramount. By following these tax tips and consulting with a qualified tax professional, retirees can make informed decisions, optimize their savings, and minimize tax-related stress. Optima Tax Relief is the nation’s leading tax resolution firm.
The IRS has $1.5 billion in unclaimed tax refunds for tax year 2019 and the deadline to file is approaching quickly. Optima CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on how to find out if you’re eligible for a tax refund and how to claim it before time runs out.
Life can be challenging when facing both financial difficulties and health issues. Many taxpayers ask themselves, “Can I get disability if I owe back taxes?” For individuals experiencing a debilitating condition while also owing back taxes, the situation can seem overwhelming. However, it’s essential to know that there are options available to help ease the burden. In this article, we will explore the process of obtaining disability benefits while managing tax debt, providing a comprehensive guide to assist those in need.
Understanding Disability Benefits
Disability benefits are designed to provide financial support to individuals who are unable to work due to a severe medical condition. These benefits can be crucial for maintaining a basic standard of living and accessing medical care. Two primary types of disability benefits are commonly available: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).
Social Security Disability Insurance (SSDI)
SSDI is a federally funded program that provides financial assistance to individuals who have worked and contributed to Social Security but can no longer maintain gainful employment due to a disability. To qualify for SSDI, an applicant must meet specific criteria set by the Social Security Administration (SSA):
You are under 66 years old
You are receiving treatment for medical condition
You cannot work because of your medical condition
You are not currently working, or you work part-time with a low pay rate
You are not expected to recover or work within one year
You worked and paid taxes for several years before your medical condition
Supplemental Security Income (SSI)
SSI is another federal program that provides assistance to disabled individuals with limited income and resources, regardless of their work history. Eligibility for SSI depends on the applicant’s financial need, age, disability status, and citizenship or residency status. To qualify, you must:
Be under 66 years old
Be receiving treatment for medical condition
Not be able to work because of your medical condition
Not be currently working, or you work part-time with a low pay rate
Not be expected to recover or work within one year
Have less than $2,000 in assets (single filers) or less than $3,000 (married couples), and you or your spouse must not have any other significant income
Applying for Disability Benefits with Tax Debt
While owing back taxes can complicate your financial situation, it generally does not disqualify you from receiving disability benefits. However, it’s essential to understand the potential impact on your benefits.
SSDI and Tax Debt
If you have unpaid tax debt that includes Social Security taxes, you may not be eligible for SSDI. This is because in order to qualify for SSDI, you need to have paid Social Security taxes for at least five of the last ten years. If you haven’t paid enough tax, you may not qualify for these benefits, even if your medical condition is serious. If you already receive SSDI, the IRS can garnish your pay, including up to 15% of your SSDI benefits, to pay off your tax debt.
SSI and Tax Debt
You can still apply for SSI benefits even if you owe back taxes. As of October 2015, the IRS no longer levies SSI benefits.
Tax Help for Social Security Recipients
Navigating disability benefits while owing back taxes can be a complex journey. However, it’s crucial to understand that these challenges are not insurmountable. By staying informed about your rights, seeking professional advice, and addressing tax debt proactively, you can improve your financial situation and focus on your health and well-being. Remember, help is available, and with the right approach, you can overcome these obstacles and find stability in challenging times. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses the most common tax forms every taxpayer should know about.
Tax Form 1040 or 1040-X
The well-known U.S. Individual Income Tax Return, Form 1040 is what you will use to report both your income and deductions to determine your tax liability every tax year. Form 1040-X, Amended U.S. Individual Income Tax Return, allows taxpayers to correct a previously submitted 1040, make specific elections after the tax deadline, or change an amount adjusted by the IRS.
Tax Form W-2
If you’ve ever earned money from an employer, you have probably received a W-2, Wage and Tax Statement. This critical document for wage earners includes your income earned in the previous year, as well as taxes withheld, and helps you file your federal and state tax returns. It may also include any benefits you received through your employer. If you changed jobs mid-year, worked more than one job as an employee, or if your employer was acquired by another company mid-year, you may receive multiple W-2s.
Tax Form 1099-NEC
A 1099-NEC will report your income earned as a freelancer or independent contractor. Businesses will distribute this form if they make payments to you totaling $600 or more. Non-employee income can also include fees, benefits, commissions, and other sources of income paid to you.
Tax Form W-4
Whenever you begin employment with a new employer, you will fill out a W-4, Employee’s Withholding Certificate. This form basically tells your employer how much taxes to withhold from your paycheck. Withholding too little can result in a big tax bill, while withholding too much can result in smaller than necessary paychecks. That said, it’s important to ensure that your withholding is always correct.
Tax Form W-9
Form W-9, Request for Taxpayer Identification Number and Certification, helps verify your tax information so your employer, or other paying entity, can report your earnings to the IRS. This form is for both employees and self-employed individuals.
Remember these tax forms when it’s time to file. Don’t miss next week’s episode where Phil will discuss private collection agencies. See you next Friday!
Social Security, a cornerstone of America’s safety net, has been providing financial support to millions of retirees, disabled individuals, and surviving family members for decades. However, as our society undergoes demographic shifts and economic challenges, it has become increasingly evident that the current system requires substantial reform to remain viable for future generations. So, what’s going on with Social Security reform lately? Here we will break down why reform is becoming necessary and what political leaders are suggesting we do to improve the current situation as of July 2023.
The Challenge with Social Security
The Social Security program was established in 1935 during a different era when life expectancy was lower, birth rates were higher, and the ratio of workers to retirees was far more favorable. Now, some of the latest projections show that the programs combined funds could run out in 2034. Today, the system faces numerous challenges that threaten its long-term viability, including:
Aging Population: The baby boomer generation, a substantial portion of the population, is rapidly reaching retirement age, putting immense pressure on the system. With fewer workers contributing to support a growing number of retirees, the sustainability of the current pay-as-you-go model is at risk.
Declining Birth Rates: Modern societies are experiencing declining birth rates, resulting in a shrinking workforce. This trend further exacerbates the strain on the system as there are fewer future contributors to Social Security.
Economic Uncertainty: Economic downturns, like the 2008 financial crisis and the COVID-19 pandemic, have weakened the economy and reduced government revenue, leading to concerns about the long-term funding of Social Security.
Proposed Solutions
To ensure the long-term viability of Social Security, policymakers and experts have put forth various reform proposals. While no single solution can address all challenges, a combination of measures can create a more sustainable system:
Gradual Retirement Age Increase
One option is to gradually raise the full retirement age. People are living longer and staying healthier, so adjusting the retirement age to reflect longer life expectancies can help maintain a balanced system. For example, one proposal includes raising the full retirement age to 68 and another suggests raising the retirement age to 70. However, such a change should be implemented gradually to allow people to adjust their retirement plans accordingly.
Adjusting Cost-of-Living Adjustments (COLAs)
The automatic annual increase in Social Security benefits, based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), can be revised to better reflect the changing cost of living for retirees. A more accurate COLA calculation would ensure beneficiaries receive sufficient support while easing the financial burden on the program.
Increasing Payroll Taxes
Another consideration is raising the payroll tax cap, which currently limits the amount of income subject to Social Security taxes. Currently, the maximum amount of income that is subject to Social Security taxes is $160,200. Many are proposing raising the minimum to either $250,000 or $400,000. Increasing this cap would require higher-income earners to contribute more to the system, bolstering its financial health.
Means-Testing
Introducing means-testing for Social Security benefits could help direct assistance to those who need it most. By reducing or eliminating benefits for higher-income retirees, the system can allocate resources more efficiently to support vulnerable populations. Some are proposing to reduce benefits if a taxpayer has an AGI within a certain threshold, and even cut benefits completely if their AGI enters a higher threshold.
Finding the Balance
While reform is essential for the sustainability of Social Security, any changes must be made with careful consideration of the program’s fundamental purpose: to provide economic safety for vulnerable groups. Policymakers should balance the need for fiscal responsibility with compassion for those who heavily rely on Social Security for their basic needs. On the other hand, some Social Security income is taxable, so taxpayers should prepare for possible reform that could affect their taxes. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Whether you are a small business owner hiring independent contractors or a freelancer seeking work opportunities, the W-9 form plays a crucial role in the world of taxes. The IRS uses this form to gather essential information about independent contractors, consultants, and freelancers who provide services to businesses. In this article, we will delve into the ins and outs of the W-9 form, helping both businesses and individuals navigate its purpose, requirements, and significance.
What is a W-9 Form?
The W-9 form, officially titled “Request for Taxpayer Identification Number and Certification,” is a document used by businesses to collect key information from independent contractors or freelancers. It collects the recipient’s taxpayer identification number (TIN) or social security number (SSN). It also obtains other pertinent data, which is essential for tax reporting purposes.
Who Needs to Fill Out a W-9 Form?
Two primary parties are involved in the W-9 form process:
Business Entity. Any business or individual planning to hire independent contractors or freelancers must provide them with a W-9 to complete.
Independent Contractor/Freelancer. If you are an independent contractor or freelancer earning income through your services, you will need to fill out a W-9 form for each client you work with.
Components
The W-9 form consists of several key components, including:
Name: The full legal name of the independent contractor or freelancer.
Business Name: If applicable, the name of the contractor’s business or entity.
Address: The contractor’s mailing address.
Taxpayer Identification Number (TIN) or Social Security Number (SSN): This is the crucial piece of information needed by the IRS for tax identification purposes. Contractors must provide either their TIN or SSN.
Certification: The contractor must certify with a signature that the information provided is accurate and that they are not subject to backup withholding.
Importance in Businesses
For businesses, the W-9 form serves several critical functions:
Accurate Reporting: By obtaining the necessary information from contractors, businesses ensure accurate reporting of payments to the IRS.
1099-MISC Preparation: Businesses use the information from the W-9 to prepare and issue Form 1099-MISC to contractors who earned $600 or more during the tax year.
Avoiding Penalties: Failure to collect a W-9 form from contractors can lead to penalties if the IRS detects unreported income or incorrect taxpayer information.
Importance for Independent Contractors
Filling out the W-9 form is equally crucial for independent contractors and freelancers:
Proper Tax Reporting: Providing accurate information ensures that contractors’ income is appropriately reported to the IRS.
Avoiding Backup Withholding: By certifying the information provided, contractors prevent businesses from withholding a portion of their earnings for tax purposes.
Tax Help for Those Who Use Form W-9
The W-9 form is an essential document that facilitates accurate tax reporting for businesses and independent contractors alike. Businesses must collect W-9 forms from their contractors. Freelancers and independent contractors must complete the form for each client they work with. By understanding the significance of the W-9 form and complying with its requirements, both parties contribute to a more transparent and efficient tax reporting process. Tax regulations may change over time. That said, it is vital for individuals and businesses to stay updated with the latest guidelines from the IRS. Always consult a tax professional for personalized advice and assistance with tax-related matters. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
Dealing with debt can be a stressful and overwhelming experience. Imagine, though, finally having a weight lifted off your shoulders when a creditor cancels or forgives a portion of your outstanding debt. While the relief might be immense, it’s essential to understand that canceled debt can have significant tax implications. Many individuals are unaware that in certain circumstances, forgiven debts can be considered taxable income by the IRS. So, are canceled liabilities taxable? In this article, we will review the concept of canceled debt and its potential tax implications.
Understanding Canceled Debt
Canceled or forgiven debt occurs when a creditor releases a borrower from the obligation to repay a portion or the entirety of a debt. This situation typically arises when borrowers face financial hardships, negotiate debt settlements, or undergo bankruptcy proceedings. The canceled debt can encompass various types, including credit card debt, mortgages, personal loans, or business debts.
Tax Consequences
The IRS generally considers canceled debt as taxable income, which can come as a surprise to many borrowers. From the IRS’s perspective, forgiven debt is like receiving cash or other income, thus making it subject to taxation. So, although you don’t have to repay the debt, you might have to pay taxes on the amount forgiven. If necessary, it is typically paid in the year it was canceled.
Exceptions
Fortunately, the IRS provides certain exceptions that can exclude canceled debt from being taxable income in specific situations. Some of these include:
Bankruptcy. Canceled debt discharged through a bankruptcy proceeding is generally not taxable. This exclusion applies to both Chapter 7 and Chapter 13 bankruptcies.
Insolvency. If you were insolvent immediately before the debt cancellation, the canceled debt may not be taxable. This basically means your liabilities exceed your assets. You must file IRS Form 982 to claim this exclusion.
Qualified Principal Residence Indebtedness. The Mortgage Forgiveness Debt Relief Act of 2007 allows taxpayers to exclude up to $2 million ($1 million for other filing statues) of forgiven mortgage debt on their primary residence for years 2007 through 2020. This act also applies to discharged debt in 2021 if there was a written agreement in place in 2020. In addition, The Consolidated Appropriations Act (CAA) of 2020 excludes qualified canceled mortgage debt, up to $750,000 for married couples and $350,000 for other filers, from taxable income for tax years 2021 through 2025.
Some Student Loan Forgiveness. Some student loans are canceled after working in a certain profession for a specified number of years. Some student loan forgiveness in the years 2021 through 2025 are not considered taxable income.
Tax Reporting and Documentation
For canceled debt that qualifies as taxable income, the creditor must report the forgiven amount on Form 1099-C, Cancellation of Debt. Form 1099-C reports all eligible canceled debt of $600 or more per occurrence. Taxpayers should note that if they had debt under $600 that was canceled, it still needs to be reported as income, even if they don’t receive a 1099-C. The debtor should receive this form from the creditor. They must include the forgiven debt in their annual income whenif it’s not an excluded debt. However, if your debt does fall under one of the IRS’s exclusions, you should still file your return with Form 1099-C to acknowledge it. In addition, if you receive Form 1099-C after filing your tax return, you should file an amended return and include the Form 1099-C. Not doing so may raise some red flags with the IRS that can result in a tax audit. Finally, if there is an error on your Form 1099-C, you should contact the creditor immediately to request a corrected version.
Tax Help for Those with Canceled Liabilities
Remember, you should always consult the help of a knowledgeable tax professional if you are unsure about your 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.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses his 5 top tips for how to avoid an IRS audit.
File Your Taxes: Some taxpayers don’t file because they think they don’t have to. The minimum requirement to file a tax return depends on your filing status and income, but generally most U.S. citizens and permanent residents need to file. Remember, if you don’t file when you’re required to, you will be hit with IRS penalties and interest. The IRS could also file a tax return on your behalf. While this might sound like a burden lifted off your own shoulders, this could be much worse than filing yourself because it can result in owing more taxes. You can use the IRS’s online Interactive Tax Assistant to find out if you need to file a tax return.
Report All Your Income: Failing to report all your income is the quickest way to being audited by the IRS. Keep in mind that the IRS receives copies of every W-2, 1099, and other tax forms that you receive. They know exactly how much you earned in the previous year and if your reported income does not match what they have on file, you’re much more likely to be audited.
Use Common Sense with Business Expenses: This tip is for the self-employed filers. The IRS requires all business expenses to be ordinary and necessary to be deductible during tax time. This means it should be common for your industry and necessary for the production of income. Excessive meals and entertainment, trips taken for non-business purposes, and commuting costs are examples of nondeductible business expenses.
Keep Good Records of Income and Expenses: Keeping good records of income and expenses can not only help you monitor the progress and financial well-being of your business, but also keep track of your deductible expenses, prepare your tax returns, and substantiate claims made on your tax returns. The IRS recommends keeping returns, records, and other tax documents for at least three years.
Be Wary of Multi-Year Losses: If your business consistently reports losses during tax time, the IRS will likely audit you. In addition, the IRS only allows you to write off losses for three of the five previous tax years. If you can’t prove your business is beginning to turn a profit, even a small one, the IRS can categorize your business as a hobby, at which point you will be unable to deduct any of your expenses.
Tune in next Friday for another episode of “Ask Phil” where Phil will review common IRS tax forms.
If You Think You’re at Risk of Being Audited by the IRS, Contact Us Today for a Free Consultation
Marriage is viewed as a union of two individuals, joining both their lives and responsibilities. As financial obligations and responsibilities intertwine, questions arise about whether one spouse is accountable for the other’s past tax liabilities. In this article, we will delve into the concept of spousal responsibility for back taxes, exploring the factors that determine liability and the potential consequences for both parties involved.
Optima CEO David King and Lead Tax Attorney Philip Hwang are back from their trip to Washington D.C., where they met with members of Congress and the IRS’s new leadership to discuss what’s new in the tax world. Here is Phil and David’s recap of that meeting, including the IRS’s Strategic Operating Plan, 5,000 new customer service agents, the changes the agency’s new commissioner has already implemented and what you as a taxpayer can expect moving forward.
Tax evasion and tax fraud are federal crimes that involve the willful attempt to either evade the assessment or the payment of taxes. But at what point does the IRS pursue criminal charges for these actions? What consequences are included in the criminal charges? How does one prevent these charges from being brought upon them? Here’s what you need to know about how and when the IRS pursues criminal charges against a taxpayer.
Buying a house is an exciting milestone in life, representing stability, investment, and the fulfillment of a dream. However, for individuals who owe back taxes, the path to homeownership can seem uncertain. It’s essential to understand the implications and challenges associated with buying a house while having outstanding tax debt. In this article, we will explore the factors to consider and strategies to help you navigate this unique situation.
