When it comes to running a business, one of the key goals is to minimize expenses and maximize profits. One often overlooked avenue for achieving this is by taking advantage of tax deductions. Section 179 of the Internal Revenue Code offers a powerful tool for business owners to significantly reduce their tax liability while investing in essential equipment and technology. In this article, we’ll break down the Section 179 deduction, how they work, and how you can leverage them to benefit your business’s bottom line.
Understanding Section 179 Deductions
Section 179 is a provision in the U.S. tax code that allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. This deduction is designed to encourage businesses to invest in themselves by providing an immediate tax break for capital expenditures. In other words, instead of depreciating the cost of these assets over several years, you can deduct the entire expense in the year you make the purchase.
Qualifying Assets
Not all assets are eligible for Section 179 deductions. The IRS defines eligible assets as tangible personal property used for business purposes. This includes machinery, equipment, vehicles, livestock, computers, and furniture. It also includes some intangible assets such as copyrights, patents, and software that is not custom-made. It’s important to note that the asset in question must be used more than 50% for business-related activities to qualify for the deduction.
Limits and Maximum Deductions
While Section 179 deductions can be incredibly advantageous, there are limits to how much you can deduct in a given tax year. For tax year 2023, the maximum deduction limit was $1,160,000, with a spending cap of $2,890,000. This means that if your business spends more than $2,890,000 on qualifying assets, the deduction begins to phase out dollar-for-dollar.
In addition, there are specific limitations on which vehicles for business use qualify. For example, there is a spending cap on heavy vehicles that weigh between 6,000 and 14,000 pounds. These typically include SUVs, pickup trucks, and commercial vans. In 2023, this cap is $28,900. All other eligible vehicles need to weigh under 6,000 pounds.
It’s also worth mentioning that real estate is not covered by Section 179 deductions, and neither are land or land improvements. However, there are a few exceptions, including:
Roofs
Fire alarms and other protective systems
Lodging property
Heating, ventilation, and air conditioning (HVAC) property
Conclusion
If you don’t qualify for Section 179 deductions, you might try bonus depreciation, which allows businesses to deduct a large percentage of the asset’s purchase price up front. However, the percentage will be decreasing each year per the Tax Cuts and Jobs Act of 2017. Taxpayers can depreciate 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. For help figuring out what is best for your business, consider consulting a tax professional. Optima Tax Relief is the nation’s leading tax resolution firm for both individuals and businesses alike.
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.
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.
Form 1099 is more common than ever with many taxpayers turning to side hustles for extra income. Now that we have a good understanding of what types of 1099s there are and what they are used for, we can review some of the most frequently asked questions about them. Here are some of the most frequently asked questions about IRS Form 1099.
What if I mistakenly received a 1099?
If you received a 1099 by mistake, or if the amounts reported are incorrect, you should report the error to the payer immediately. If you’re lucky, they’ll be able to correct the error before sending a copy to the IRS. On the other hand, if they already have sent the 1099 to the IRS, you’ll need to request they send a corrected form. Spotting an error quickly will give you the best chance at avoiding further complications. That said, knowing which 1099s to expect in advance, and knowing the expected amount shown on them, can help you catch mistakes early on.
Do I need to report every 1099 I receive?
Every 1099 you receive should be considered in your tax return. This is because the IRS also receives a copy of each of your 1099s as well. For example, you must include all income earned through 1099-NEC, 1099-MISC, 1099-K, 1099-DIV, and others that report income. However, let’s say you receive 1099-S after the sale of your home. Remember, if the property was your primary residence for two of the five years before the sale, then up to $250,000 of the profit is exempt from taxes. This amount increases to $500,000 for married couples filing jointly. In this scenario, the transaction is not reportable. However, you will need to submit a written certification stating why you are exempt from capital gains on the transaction. Be sure to always consult with a knowledgeable tax professional about your reporting requirements.
What’s the difference between a 1099 and a W-2?
A 1099 form reports any income earned outside of regular employer income. It is commonly received by independent contractors, gig workers, and investors. A W-2 reports wages earned through an employer for the year. The biggest difference between the two forms is that the W-2 shows any taxes withheld from your wages, while the 1099 does not. That doesn’t mean you’re off the hook though. If you earn income through 1099s, you should be making estimated tax payments each quarter since the IRS requires taxes to be paid as income is earned. Failing to pay estimated taxes on 1099 income can result in penalties, interest and surprise tax bills.
What changes are coming for the 1099-K?
Previously, taxpayers only received a 1099-K, Payment Card and Third-Party Network Transactions, if they received over $20,000 in aggregate payments over 200 transactions through third-party payment networks, like Venmo or PayPal. For the 2024 tax year, the 1099-K reporting threshold was reduced down to just $5,000 in aggregate payments. Tax year 2025 will see this amount drop to $600. The IRS is expecting many more taxpayers to receive a 1099-K by the January 31st deadline, but with some hiccups along the way. For example, you may mistakenly receive a 1099-K for non-business transactions. Common scenarios may be collecting rent money from a roommate or receiving a friend’s portion of a dinner bill. In this case, it is up to you to contact the filer to request a corrected form.
What if I have more questions about 1099s?
We can’t stress enough just how complex 1099s can be. There are dozens of 1099 types and each with their own set of rules. Therefore, it’s best to consult a tax professional for insight on your own personal 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.
Now that we know the basics of IRS Form 1099, we can take a closer look at the different types of 1099s you can receive. Remember, if you received any income outside your employer, you might receive a 1099. While most types of Form 1099 are not commonly received, there are a handful that you are likely to come across at some point. Here’s an overview of the different types of Form 1099.
1099-MISC: Miscellaneous Income
The 1099-MISC is an IRS form used to report $600 or more in miscellaneous income that you received during the tax year. Some examples of payments that require a 1099-MISC form include rent, prizes and awards, medical and health care payments, crop insurance proceeds, attorney payments, and more.
1099-NEC: Nonemployee Compensation
The 1099-NEC form is used to report non-employee compensation, including independent contractors, freelancers, sole proprietors, and self-employed individuals. If you received $600 or more in non-employee compensation during the tax year, you should receive a 1099-NEC. This form is used to report payments made for services rendered. These might include consulting fees, professional services, and other types of compensation.
1099-INT: Interest Income
Form 1099-INT is used to report any interest income you earned during the year. If you earned more than $10 in interest income, the financial institution is required to disburse a Form 1099-INT. The form will go both to you and the IRS. Interest income can include any earned from high-yield savings accounts, U.S. savings bonds, municipal bonds, and more.
1099-DIV: Dividends and Distributions
Form 1099-DIV is used to report dividends and distributions that are paid to you during the tax year, as well as any federal income tax withheld. This can include ordinary dividends, which are paid out of a company’s earnings and profits, qualified dividends, capital gain distributions, and non-dividend distributions. It does not include any dividends that you accrued through tax-sheltered retirement accounts. You will typically receive a 1099-INT if you received at least $10 in dividend income.
1099-K: Payment Card and Third-Party Network Transactions
Form 1099-K is meant to track payments made through third-party networks, such as PayPal or Venmo. For the 2023 tax year, you would receive a 1099-K if you earned at least $20,000 in 200 payments. 1099-Ks report gross income. Therefore, you should be sure to deduct any expenses you had to use third-party payment networks to receive payments.
Other Common Types of 1099
1099-B, Proceeds from Broker and Barter Exchange Transactions
This form reports the sale of stock, bonds, and other securities through a broker, as well as barter exchange transactions. These transactions must be reported even if you had a loss or broke even.
1099-G, Certain Government Payments
This reports payments you received from government agencies, including unemployment, tax refunds, taxable grants, and more.
1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
This reports distributions from annuities, profit-sharing plans, retirement plans, IRAs, insurance contracts, or pensions. You should consult with a tax professional about whether you will owe tax on these distributions.
1099-S, Proceeds from Real Estate Transactions
1099-S reports the sale or exchange of real estate. If the property was your primary residence for two of the five years before the sale, then up to $250,000 of the profit is exempt from taxes. This amount increases to $500,000 for married couples filing jointly.
1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
This form reports distributions made from a health savings account (HSA), Archer Medical Savings Account (Archer MSA), or a Medicare Advantage Medical Savings Account (MA MSA). Distributions can be taxable if they were used to pay for qualified medical expenses, if they were not rolled over in some cases, if excess contributions were made, and other scenarios. You should consult with a tax professional about whether you will owe tax on these distributions.
Less Common Types of 1099
1099-A, Acquisition or Abandonment of Secured Property
1099-A reports foreclosures on properties. You may be liable for capital gains tax and income tax for any unpaid foreclosed mortgage balances.
1099-C, Cancellation of Debt
This form reports discharged, forgiven, or canceled debt. This can include your property foreclosure or forgiven credit card debt but typically excludes debt discharged in bankruptcy. You will need to claim the amount reported on your 1099-C as taxable income.
1099-CAP, Changes in Corporate Control and Capital Structure
Form 1099-CAP reports the amount of cash, stock, or property received after a significant change in the company’s control or capital structure.
1099-H, Health Coverage Tax Credit (HCTC) Advance Payments
This reports any advance payments of qualified health insurance payments you received. If you qualify for trade adjustment assistance (TAA), alternative TAA (ATAA), reemployment TAA (RTAA), or Pension Benefit Guaranty Corporation (PBGC), you might see this form.
1099-LTC, Long Term Care and Accelerated Death Benefits
Form 1099-LTC reports payments made under a long-term care insurance contract. This includes accelerated death benefits, or benefits received before death because the policyholder has been deemed terminally ill by a doctor. The amount shown on the 1099-LTC are generally tax-free but are required to be reported to the IRS.
1099-LS, Reportable Life Insurance Sale
This form reports the amount paid to you from a life insurance sale.
1099-OID, Original Issue Discount
1099-OID reports $10 or more of income received when bonds, notes, or certificates of deposit (CDs) are sold at a discount from their maturity value.
1099-PATR, Taxable Distributions Received from Cooperatives
This reports at least $10 in patronage dividends and other distributions from a cooperative (co-op) in the prior year.
1099-Q, Payments from Qualified Education Programs
1099-Q reports total withdrawals from qualified tuition programs (QTPs) like 529 plans or Coverdell educational savings accounts. This amount may be taxable, depending on how the funds were used.
1099-QA, Distributions from ABLE Accounts
Form 1099-QA reports distributions from an Achieving a Better Life Experience (ABLE) Account for special needs individuals with a disability. These funds are not taxable if you used them to support a disabled individual.
1099-SB, Seller’s Investment in Life Insurance Contract
This reports the sale of a life insurance policy like the 1099-LS. The difference is that the original issuer of the policy files a 1099-SB after they receive the 1099-LS. You should consult with a tax professional if you receive either of these forms.
Tax Help for Those Who Receive 1099s
The types of Form 1099 and the accompanying filing requirements can quickly become very complicated. You should always consult with a tax professional if you are unsure about your tax filing requirements. Remember, even if you do not receive a 1099 for income earned, it’s still your responsibility to include it in your taxable income. Not doing so can be a major red flag to the IRS and can result in an audit. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations.
