Years ago, a study showed that the IRS may might be able to complete nearly half of the nation’s tax returns automatically. The study was conducted by researchers from the U.S. Department of the Treasury, Minneapolis Federal Reserve and Dartmouth College. Random samples of 344,400 individual tax returns from 2019 were used in this study. The results show that the accuracy is higher for low- and moderate-income taxpayers. However, itemized deductions were more likely to have errors. The final impression was that an estimated 62 to 73 million pre-populated tax returns can be correctly auto filled with information that the IRS previously collected. Now, with the IRS rolling out their free direct filing system, the topic of pre-populated returns has resurfaced. In this article, we’ll explain the concept of pre-populated tax returns and which taxpayers would find this useful.
What are pre-populated tax returns?
Pre-populated tax returns refer to tax forms that are partially or fully completed by tax authorities or other relevant entities before being sent to taxpayers for review and submission. Among the information that will be pre-populated is income, deductions, and tax credits. The idea behind pre-populated tax returns is to simplify the tax filing process, reduce errors, and make it more convenient for taxpayers.
What would automatic filing mean for the U.S.?
Automatic filing would allow your taxes to be filed without you preparing a return. Many other countries achieved return-free filing, but under certain circumstances. For example, exact withholding is typically used. Exact withholding refers to the accurate and precise amount of money that is withheld from an individual’s paycheck to closely match the individual’s anticipated tax liability. To achieve this, employers take into account the individual’s income, filing status, dependents, and additional withholding. In addition, other countries have been able to successfully auto-fill returns by using tax agency reconciliation. This process requires the taxpayer, approving to approve their tentative pre-filled return.
What are the benefits of automatic, pre-filled tax returns?
Pre-filled tax returns would allow more people to file. Non-filers would claim refunds or pay due taxes with automatic filing. Automated returns also have the potential to save taxpayers time and money, which is the point this research suggests. There are billions of dollars in tax refunds, waiting to be claimed by people who can’t afford to file, or may be missing a document to file.
What are the potential risks of automatic, pre-filled tax returns?
The IRS would rely on third-party information returns to pre-fill returns. That said, the current due date of January 31 for these tax forms might not leave a sufficient amount of time to complete all tax returns by the April 15 deadline. Another potential issue with this system is ensuring the proper filing status is selected for taxpayers. This small selection can make the largest difference in an individual’s tax refund or liability. Of course, the IRS will always want to ensure that taxpayer compliance is a priority with any new system.
Need Tax Help? Call Optima Tax Relief
Pre-populated tax returns aim to streamline the tax filing process, saving taxpayers time and effort. Advocates argue that pre-populated tax returns can improve compliance, reduce errors, and simplify the tax-filing experience. Critics, on the other hand, raise concerns about data accuracy, privacy, and the potential for taxpayers to overlook errors in the pre-filled information. However, it is still too early to determine if the IRS will test pre-populated returns. In the meantime, Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
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.
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.
IRS Notice CP14 is sent to taxpayers to inform them of an outstanding balance on their federal tax account. It serves as a bill for unpaid taxes. It includes details such as the amount owed, accrued interest, and any penalties incurred. While receiving this notice might not be a shock for many, some taxpayers impacted by a declared disaster area may be surprised to see a CP14 in their mailbox despite IRS promises of tax relief. If you are one of these taxpayers who mistakenly received IRS Notice CP14 despite being in a disaster area, don’t panic. Many erroneous CP14s have been issued by the IRS. Here is what you need to know.
Which disaster areas qualify for automatic tax extensions?
The IRS has continued to issue automatic tax extensions to those impacted by natural disasters. These areas have included impacted counties of the following 12 states:
California
Florida
Oklahoma
Indiana
Tennessee
Arkansas
Mississippi
New York
Georgia
Alabama
It also includes the impacted areas of Guam and the Mariana Islands. A full list of impacted qualified disaster areas can be found at https://www.irs.gov/newsroom/tax-relief-in-disaster-situations. All taxpayers in impacted areas were automatically given an extension of time to file. They might’ve also received an extension to pay until October 16, 2023, or another form of tax relief.
Why did I receive a CP14 if I’m in a disaster area?
IRS Notice CP14s have been sent out because the IRS is legally required to if a balance is due. However, many Californian taxpayers living or working in disaster areas have received this notice which demands payment to the IRS within 21 days. Unfortunately for Californians impacted by disaster, this sends mixed messages. The IRS has issued guidance to let these taxpayers know that they do indeed have until October 16, 2023 to file and pay their 2022 taxes.
What should I do if I received a CP14 if I’m in a disaster area?
If you received IRS Notice CP14 but you have been given an automatic tax extension due to disaster relief, you do not need to worry about submitting payment within 21 days as the notice instructs. In fact, these letters should also include a specific insert stating that the payment date indicated in the letter does not apply to anyone covered by a disaster declaration, and that the disaster dates still apply.
While it may seem counter-intuitive, affected taxpayers do not need to call the IRS for confirmation. Doing so may result in extremely long wait times. The IRS has issued an apology for the confusion this has caused. At Optima, we understand how intimidating an IRS notice can be.
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.
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 an IRS interest rate increase 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 is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
