Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses the Employee Retention Credit (ERC), including the rise in scams surrounding the credit.
The ERC is a tax credit that provides financial relief to businesses that have experienced economic hardships due to COVID-19. It encourages employers to retain their employees on payroll by offering a refundable tax credit against certain employment taxes.
Lately, there has been a rise in advertisements for the ERC by third parties claiming that they can help businesses obtain the credit easily for a fee. The issue at hand is that not all of these businesses actually qualify, and these third parties knowingly proceed with the application, leaving the businesses exposed to potential stressful IRS audits that can result in a hefty tax bills.
Before trusting any of these third parties, taxpayers should be sure to do their own research about the eligibility requirements. In addition, they should reach out to a trusted tax professional to give a second opinion. If you have already been duped by an ERC scammer, you may feel more at ease letting a professional team of tax experts handle the IRS for you. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
As of September 14, 2023, the IRS has halted new ERC processing due to the astounding amount of fraudulent applications. The halt is set to last at least until the end of 2023 and could be extended longer if necessary.
Don’t miss next week’s episode where Phil will discuss marriage and taxes. See you next Friday!
If You’ve Fallen Victim to an ERC Scam, Contact Us Today for a Free Consultation
Trusts play a crucial role in estate planning and wealth management, allowing individuals to protect and distribute their assets according to their wishes. However, navigating the complex landscape of trust taxation can be daunting. In this article, we will break down the intricacies of how trusts are taxed, helping you gain a better understanding of this essential aspect of financial planning.
What Is a Trust?
Before delving into trust taxation, let’s briefly review what a trust is. A trust is a legal entity that holds assets for the benefit of specific individuals or entities, known as beneficiaries. Assets can include property, cash, heirlooms, and others. Grantors create trusts and then transfer assets into them. A third-party trustee is then appointed to manage and administer these assets in accordance with the trust’s terms.
Revocable vs. Irrevocable Trusts
Trusts are not one-size-fits-all.In fact, they come in various forms, each with its own tax implications. The two primary classifications of trusts are:
Revocable Trusts: Also known as living trusts, revocable trusts can be altered or revoked by the grantor during their lifetime.
Irrevocable Trusts: Once established, irrevocable trusts cannot be easily changed or revoked without the consent of the beneficiaries.
Understanding Trust Taxation
With this in mind, let’s explore the taxation of trusts in more detail. Grantor trusts and non-grantor trusts are two common classifications of trusts. The primary difference between them lies in how they are treated for tax purposes and who is responsible for paying taxes on the trust’s income.
Grantor Trusts
For tax purposes, grantor trusts are considered transparent. This basically means that the income generated by the trust is typically reported and taxed on the grantor’s individual income tax return (Form 1040). The trust itself does not file a separate income tax return.
The grantor can make changes to or even revoke the trust at any time. Therefore, all revocable trusts are grantor trusts. Because the grantor maintains control over the trust assets, they are treated as the owner for tax purposes. Upon the grantor’s death, the trust may become irrevocable, and the assets may be subject to estate taxes if they exceed the applicable exemption limits.
Non-Grantor Trusts
For tax purposes, non-grantor trusts are generally considered separate tax entities. They obtain their taxpayer identification number (TIN) and must file their own income tax return (Form 1041) with the IRS. Schedule K-1 is used to report distributions made to the beneficiaries of the trust.
Non-grantor trusts are either taxes as a simple non-grantor trust or a complex non-grantor trust. Simple non-grantor trusts require beneficiaries to pay income taxes on any income generated by the trust. The trust is responsible for any capital gains taxes. Complex non-grantor trusts may allow taxes to be paid by beneficiaries, the trust itself, or both.
Tax Rates for Trusts
Trust Income Tax Rates
Grantor trust income is taxed like ordinary income. The federal income tax rates for trusts are much higher than marginal tax rates. In 2023, the trust income tax rates are as follows:
10%: $0 – $2,900
24%: $2,901 – $10,550
35% $10,551 – $14,450:
37% $14,451+
Trust Capital Gains Tax Rates
When assets within a trust are sold or transferred, capital gains tax may apply. The tax rate varies depending on factors such as the type of asset, the holding period, and the trust’s overall income. For example, short-term capitals gains are taxed like ordinary income, while long-term capital gains for trusts follow these tax rates in 2023:
0%: $0 – $3,000
15%: $3,001 – $14,649
20%: $14,650+
Net Investment Income Tax Rates
Irrevocable trusts may also be subject to the net investment income tax (NIIT) on certain capital gains. This is a 3.8% tax on either the trust’s undistributed net investment income, or the excess of adjusted gross income over $14,450, whichever is less.
Gift Tax Rates
The transfer of assets into an irrevocable trust may be subject to gift tax if it exceeds the annual gift tax exclusion amount. In 2023, the annual gift tax exclusion amount is $17,000 per beneficiary and the lifetime gift tax exclusion amount is $12.92 million. Any gifts over these exclusion amounts may be subject to a federal excise tax, which ranges from 18% to 40%. In this case, the donor pays this tax, not the recipient. However, recipients may need to pay a capital gains tax if they sell the gifted property later.
Tax Help for Trust Grantors
All things considered, trust taxation is a complex subject that requires careful consideration and planning. The type of trust you choose, how it is structured, and how it is used can all impact the tax consequences. To navigate trust taxation effectively, it’s essential to consult with experienced financial and legal professionals who can provide tailored guidance based on your specific circumstances. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
Raising a child comes with its fair share of expenses. Fortunately, the federal government recognizes the financial strain that parenting can put on families. With that, they offer child care tax breaks to help ease the burden. In this article, we will explore what child care tax breaks are, how they work, and how you can maximize your family’s finances with these valuable benefits.
Understanding Child Care Tax Breaks
Child care tax breaks are financial incentives provided by governments to help parents cover the costs of raising a child. These tax benefits are designed to alleviate some of the financial stress that comes with child care expenses. This makes it more affordable for families to provide the best care and opportunities for their children.
Types of Child Care Tax Breaks
Child and Dependent Care Credit
This credit is designed to help working parents offset the cost of care while they are working or seeking employment. That said, you cannot claim this credit if you do not have earned income. It covers a percentage of your child care expenses, up to a certain limit. You may deduct up to $3,000 in expenses for one qualified individual. You may deduct up to $6,000 for two or more qualified individuals.
While the Child and Dependent Care Credit covers individuals other than children, a qualified child includes those who were under age 13 when care was provided. They must be listed as a dependent on your tax return. Additionally, the person caring for your qualified child may not be your spouse, the child’s parent, another dependent listed on your tax return, or your own child aged 18 or under. You must provide the name, address, and Taxpayer Identification Number (TIN) of the person who cared for your child on your tax return. Finally, if you are married, you must file a joint return to claim this credit.
To calculate your credit amount, add up the total amount of child care expenses. Subtract any reimbursed expenses that your employer may provide. The percentage of your expenses that you can deduct will depend on your AGI and ranges from 20% to 35%. However, your expenses may not be more than your earned income for the year if you are single. If you’re married, it cannot be the lesser of you and your spouse’s earned income. You can claim the credit using IRS Form 2441 and attach it to your 1040 when filing your tax return.
Dependent Care Flexible Spending Account (DCFSA)
One of the lesser-known tax-advantaged accounts is the Dependent Care Flexible Spending Account (DCFSA). This employer-sponsored account allows you to set aside up to $5,000 (or $2,500 if you’re married filing separately) from your salary for dependent care. The major benefit of this account is that contributions are not subject to income tax or payroll taxes. This basically lowers your total taxable income. This is particularly beneficial for higher earners since it does not take income into consideration like the Child and Dependent Care Credit.
Dependent Care FSAs cover things like daycare, nursery school, after-school programs, some babysitting services, nannies, summer day camp, and even transportation to and from eligible care for your children and dependents. However, it does not cover educational expenses like tutoring, hobby lessons, field trips, and overnight camps. To use this account, employees need to submit a claim form requesting reimbursement for an eligible expense directly to their employer. Keep in mind that these accounts follow a “use it or lose it” policy. Unused funds do not rollover to the next year, nor can they be transferred to another FSA.
Maximizing Child Care Tax Breaks
To make the most of child care tax breaks, follow these tips:
Keep Detailed Records: Maintain organized records of your child care expenses, including receipts, invoices, and statements. Accurate documentation is essential when claiming tax credits or deductions.
Understand Eligibility: Familiarize yourself with the eligibility criteria for each tax break available. Criteria may include the child’s age, your income, and the type of care provider you use.
File Taxes Accurately: Ensure that you file your taxes accurately, taking advantage of all the available child care tax breaks. Consider seeking professional tax advice to optimize your financial situation.
Plan Ahead: Explore tax-advantaged savings accounts like DCFSAs as these can also help you save on taxes.
Conclusion
Child care tax breaks are valuable tools that can significantly reduce the financial burden of raising a family. By understanding the different types of tax breaks available and following best practices for maximizing them, parents can provide the best possible care for their children without feeling overwhelmed by the associated costs. Remember that tax laws can change, so it’s essential to stay informed about any updates or revisions to childcare tax breaks in your jurisdiction to continue making the most of these benefits. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
The IRS issued warnings to businesses of a rise in Employee Retention Credit scams. Optima CEO David King and Lead Tax Attorney Philip Hwang provide helpful guidance on how to recognize the warning signs of an ERC scam and what to do if you’ve already fallen victim to one.
Divorce can be a complex and emotionally challenging process, with numerous financial and legal considerations to address. One crucial aspect often overlooked is the impact of alimony on your taxes. Alimony, also known as spousal support or maintenance, is a regular payment made by one spouse to another after divorce or separation. While it’s essential to ensure financial stability for the receiving spouse, it’s equally important to understand the tax implications of alimony, as they can significantly affect your financial situation. In this article, we’ll explore how alimony affects your taxes and what you need to be aware of during and after divorce.
Tax Treatment of Alimony Payments
One of the most critical aspects of alimony is how it is treated for tax purposes. Understanding this treatment is essential for both the paying and receiving spouses. The laws have recently changed under the Tax Cuts and Jobs Act (TCJA) of 2017.
For the Paying Spouse:
The key date to remember is December 31, 2018. If your divorce was final on or before this date, alimony payments are generally tax-deductible, even if you don’t itemize your deductions. This means that if you’re the spouse making alimony payments, you can deduct these payments from your taxable income to reduce your overall tax liability. However, if your divorce was final after December 31, 2018, the payments cannot be deducted.
For the Receiving Spouse:
Alimony received is considered taxable income if your divorce was legal on or before December 31, 2018. This means that if you’re the spouse receiving alimony, you must report these payments as income on your tax return and you’ll owe income tax on the alimony you receive. However, if your divorce was final after December 31, 2018, the payments are not considered taxable income.
Requirements for Alimony to Be Tax Deductible
Not all payments between former spouses qualify as alimony for tax purposes. Alimony is tax-deductible for the paying spouse and is taxable income for the receiving spouse. However, certain criteria must be met:
The payments must be made under a divorce or separation agreement. Informal arrangements do not qualify for tax benefits.
The payments must be in cash, money order, or check. Property transfers or non-cash payments are generally not considered alimony.
The divorce or separation agreement must not designate the payments as non-deductible and non-taxable. Both parties should be aware of the tax implications.
The spouses must not be living in the same household when the payments are made. Cohabitating ex-spouses may not claim alimony deductions or pay taxes on the received amount.
The spouses must not file a joint tax return with their ex-spouse.
Changes in Tax Law
It’s important to keep in mind that tax laws can change over time. While the TCJA made changes to the tax treatment of alimony, it’s possible that future legislation may alter these rules. Therefore, it’s advisable to consult with a tax professional or attorney who specializes in family law. Stay up to date with any tax law changes that may affect your alimony arrangement.
Tax Help for Those Who Pay or Receive Alimony
Alimony can play a crucial role in ensuring financial stability for spouses after divorce or separation. However, understanding the tax implications of alimony is essential to avoid unexpected financial consequences. Whether you’re the paying or receiving spouse, it’s wise to seek professional guidance from tax experts or legal professionals who can help you navigate the complex terrain of alimony and taxation. By following the IRS guidelines, you can ensure that your alimony arrangement is both fair and tax compliant. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
