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IRS Reports Delay in Form 1099-K
IRS Reports Delay in Form 1099-K $600 Reporting Requirement for Third Party Platform Payments Like Venmo and PayPal in 2023 Almost everyone who has ever used payment facilitators such as Venmo or PayPal have been anxiously worried about the 1099-K reporting of transactions for $600 or more. Good news is that you need not worry, at least for the tax year 2023.In response to insights from tax experts, payment facilitators, and the public, the Internal Revenue Service (IRS) recently unveiled Notice 2023-74PDF. This document signals a postponement of the newly instituted $600 Form 1099-K reporting requirement for third-party payment processors for the 2023 calendar year.The IRS recognizes the need for more time to integrate this novel regulation efficiently. Thus, 2023 will be treated as an extension period. This approach aims to ensure clarity from the projected issue of 44 million Forms 1099-K to numerous taxpayers, many of whom might not anticipate such a form or have relevant tax obligations. Consequently, in 2023, reporting will be mandatory only for taxpayers receiving more than $20,000 across more than 200 transactions.Considering the intricate nature of this new rule, its extensive impact on individual taxpayers, and the necessity for stakeholders to receive definitive guidance well in advance, the IRS is strategizing a $5,000 threshold for the 2024 tax year. This is part of a gradual plan to apply the $600 reporting limit set forth by the American Rescue Plan (ARP).In addition, following discussions within the tax community, the IRS is exploring revisions to Form 1040 and associated schedules for 2024, aiming to streamline the reporting process for taxpayers. Altering the Form 1040 series, a fundamental tax document for over 150 million taxpayers, requires time; hence, these changes are slated for the tax year 2024, allowing room for further input. This postponement for tax year 2023 aims to avoid issues for taxpayers and tax professionals.Initially, the ARP mandated that third-party settlement organizations (TPSOs) such as Venmo and PayPal, including online marketplaces, report transactions exceeding $600 for goods and services sales on a Form 1099-K starting in 2022. These forms, sent to the IRS and taxpayers, are intended to assist in tax return preparation. Reporting goods and services transactions exceeding $200 per year, totaling over $20,000, was required only after the ARP.The IRS had previously deferred this new criterion last year.It is essential to understand that the obligation to report transactions does not apply to personal transactions such as birthday gifts, cost-sharing for rides or meals, or payments made to family members for household bills. Form 1099-K reporting should not include transactions that are exempt from taxation.However, selling personal items at a loss could trigger a Form 1099-K, even without tax liability.The complexity in differentiating these transaction types played a significant role in the IRS's decision to delay the reporting requirements by an additional year and to consider a $5,000 threshold for 2024. IRS will use this extended period to refine its approach, aiming to alleviate the burden on taxpayers.Feeling overwhelmed by the ever-changing tax laws? Reach out to NexGen Taxes’ team of CPAs and EAs today to get your questions answered. We are here for you 24/7, reach out to us today. Related ArticlesIRS Reminds Eligible Non-Filers to Claim Recovery Rebate Credit IRS Has Announced 2024 Retirement Account Contribution Limits: Start Your Retirement Planning Today! 8 Costly Tax Errors To Avoid While Filing Your Personal Taxes
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Tax Filing for Freelancers: Expert Guide to Maximize Returns & Minimize Stress
Mastering Freelancer Finances: A Comprehensive Guide to Navigating Tax Season Navigating tax season as a freelancer can be complex. Unlike traditional employees, freelancers handle their tax obligations, which includes understanding self-employment taxes and maximizing deductions. Freelancers have unique tax considerations. If you are self-employed or do freelance work, it's important to understand how your income and expenses will be taxed. You may be eligible for certain deductions related to your business, such as home office expenses or travel costs. Keeping detailed records of your income and expenses throughout the year can help make tax filing easier and potentially increase your savings. This guide simplifies tax filing for freelancers, aiming to ease the process and maximize returns. Navigating the Tax Maze as a Freelancer Working as a freelancer means paying self-employment taxes, including the employee and employer portions of Social Security and Medicare taxes. Unlike a regular job, where employers automatically deduct taxes, freelancers must actively manage their tax obligations. This entails calculating and setting aside a portion of their income to cover their tax liabilities. Staying organized and maintaining records of all earnings and expenses is essential to ensure compliance with tax regulations and avoid any surprises during tax season.Separating Finances: Keeping personal and business finances separate is vital for financial management. It simplifies the process of tracking business expenses and plays a significant role in ensuring accurate tax filing. By maintaining separate accounts, you can easily distinguish between personal and business transactions, which helps maintain financial clarity and make informed decisions for both aspects of your life. This practice also provides a solid foundation for financial stability and growth in the long run. Unlocking Deductions: Save More on Your Freelancer Taxes Deductions are a significant advantage for freelancers, potentially reducing taxable income. Key Deductions:Home Office: Expenses incurred for a home office used exclusively for business purposes can be deducted as a legitimate tax write-off. You can save money by claiming maintenance, utilities, and other costs associated with your dedicated home office space. It's essential to keep detailed records and consult with a tax professional to ensure that you are eligible for these deductions and to maximize your potential savings. Equipment & Supplies: Regarding tax deductions, it's worth noting that certain essential materials like computers and office supplies can be deductible expenses. You can reduce your taxable income by including these necessary items in your deductions. So, remember to keep track of your receipts and consult with a tax professional to ensure you're taking advantage of all available deductions. Travel & Meals: Regarding business-related travel and client meeting expenses, it's worth noting that these expenses are often deductible. You can save on your taxes by properly documenting and categorizing these expenses. It's always a good idea to consult with a tax professional or refer to the latest tax regulations to ensure you maximize your deductions while staying compliant. Record Keeping:Keeping track of receipts, invoices, and bank statements is crucial for substantiating and verifying these expenses, ensuring accurate financial records, and facilitating seamless expense management. By diligently maintaining these documents, individuals and businesses can confidently track their expenditures, demonstrate transparency, and effectively evaluate their financial health. Mastering Quarterly Taxes: A Freelancer's Guide Freelancers, who are self-employed individuals, usually have the responsibility of paying estimated taxes every quarter. These periodic payments are intended to cover tax liabilities for their income not subject to withholding, such as earnings from freelance work or independent contracting. By fulfilling this obligation, freelancers ensure compliance with tax regulations and financial stability.Managing Quarterly Taxes: To avoid penalties, keep track of the tax dates and guidelines provided by the IRS. By carefully estimating and making these payments on time, you can ensure compliance with tax regulations and minimize potential financial consequences. Stay informed and stay ahead to maintain a smooth and hassle-free tax process. Tools for Freelancers: Simplifying Recordkeeping When selecting the right software to help you with recordkeeping, it's important to consider key factors that can simplify the tax filing process at the end of the year. Look for features such as automated expense tracking and categorization. By choosing a recordkeeping software that offers these comprehensive features, you can ensure a smoother and more efficient tax filing experience when it is time to bring it all together and file your taxes. Resources for Freelance Tax Filing There are many resources available to help freelancers navigate the tax filing process. The Internal Revenue Service (IRS) website is a great place to start, as it offers comprehensive information and forms for self-employed individuals. Additionally, there are numerous online tools and software specifically designed for freelance tax filing that can make tax planning easy. Online Tax Filing Options Explore the convenience and efficiency of filing taxes online. Many freelance tax filing software programs offer an online option, allowing you to file your taxes from the comfort of your own home. These programs often have built-in features to help maximize deductions and ensure accuracy in your filings. Consider trying out different options to find which one best fits your needs and budget. Professional Tax Services Consider seeking professional tax services for more complex tax situations. If you're unsure about how to file your taxes as a freelancer or have multiple streams of income, it may be beneficial to seek the assistance of a tax professional. They can provide personalized advice and help ensure that you are taking advantage of all available deductions and credits. Conclusion Efficient tax filing as a freelancer is achievable and crucial for managing your finances effectively. Adopting the right approach allows you to navigate the complexities of tax obligations smoothly. Start by comprehensively understanding your tax responsibilities and identifying potential deductions specific to your freelance business. Leverage reliable tax tools and software designed for freelancers to streamline the process. Early preparation and meticulous organization are also vital in ensuring a hassle-free tax season. However, if you are overwhelmed, feel free to seek professional help reach out to one of NexGen Taxes’ tax advisor or accountant specializing in freelance taxes. Stay informed, stay organized, and make tax season a stress-free experience! Related Questions: Q: How do I file taxes as a freelancer? If you are a freelancer, the Schedule C tax form is where you will report all the income and expenses you have incurred. Firstly, in Part I, you need to report all the money you earned from your freelance work during the tax year. This includes the amounts that were already reported on the 1099 forms you received from your clients, as well as the amounts that have not yet been reported from clients who didn't send you a 1099 form. Q: Do freelancers get a 1099 or W-2? Freelancers typically receive Form 1099-NEC from clients who pay them $600 or more during the tax year. Unlike traditional employees who receive a W-2, freelancers use 1099s to report income. Q: How do I declare freelance income without a 1099? If you did not receive a 1099 form from your employer, it is still important to report your income when filing your tax return. You can do so by using Form 1040 Schedule C, designed for self-employment income and expenses. This form requires you to provide your Social Security number and the EIN of your business, if applicable. Keep detailed records of all your income, regardless of whether you receive a 1099 or not. Q: How much can you make on a 1099 before you have to claim it? You must report all income you earn, regardless of the amount. However, if your net earnings from self-employment are $400 or more, you are required to file a tax return. Q: What is the minimum income to file taxes for self-employed? For self-employed individuals, the minimum income to file taxes is $400. Q: Do I need an EIN as a freelancer? An Employer Identification Number (EIN) is not mandatory for freelancers unless they hire employees. However, obtaining one can be beneficial for privacy and professional reasons. Q: What is the difference between a 1099 and a freelancer? A 1099 form is a tax document used to report income paid to you as a non-employee, while a freelancer is an individual who performs services for multiple clients.Related ArticlesIRS Reminds Eligible Non-Filers to Claim Recovery Rebate Credit Complete Guide: Tax Filing for Freelancers
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IRS Reminds Eligible Non-Filers to Claim Recovery Rebate Credit
Claim Your Recovery Rebate Credit: A Reminder from the IRS as Tax Season Approaches As the tax season approaches, the Internal Revenue Service (IRS) is reminding eligible individuals who did not file a tax return in 2020 or 2021 to claim their Recovery Rebate Credit before it's too late. This credit, also known as the stimulus check, was provided by the government to help individuals and families financially impacted by the COVID-19 pandemic. However, some non-filers may not have received the full amount of the credit and may still be eligible to claim it. The IRS is urging these individuals to take action now before time runs out. Understanding the IRS Recovery Rebate Credit for Non-Filers If you're a small business owner who didn't file a tax return in 2020 or 2021, it's important to understand the IRS Recovery Rebate Credit for Non-Filers. This credit, also known as the stimulus check, was designed to provide financial assistance to individuals and families affected by the COVID-19 pandemic. So, how does it work? If you didn't file a tax return in either of the past two years, you may still be eligible to claim the Recovery Rebate Credit. This credit is based on your income, filing status, and number of dependents. It can range from a few hundred dollars to several thousand dollars, depending on your circumstances. To claim the credit, you'll need to fill out a special form, called Form 1040 or Form 1040-SR, and include it with your tax return. The IRS has provided instructions and resources to help non-filers navigate the process. It's important to note that if you don't claim the credit by the deadline, you may miss out on valuable financial assistance. As a small business owner, every dollar counts. So, don't leave money on the table. Take the time to understand the IRS Recovery Rebate Credit for Non-Filers and determine if you're eligible to claim it. It could make a significant difference in your financial situation during these challenging times. How Eligible Small Businesses Can Claim their Rebate Credit If you're a small business owner who didn't file a tax return in 2020 or 2021, it's crucial to know how you can claim the IRS Recovery Rebate Credit. This credit, also known as the stimulus check, can provide much-needed financial assistance during these challenging times. To claim the credit, you'll need to take a few important steps. First, gather all the necessary documents and information. This includes your income statements, filing status, and the number of dependents you have. Having these details ready will make the claiming process much smoother. Next, fill out the appropriate form. For non-filers, this would be either Form 1040 or Form 1040-SR. These forms can be found on the IRS website or through tax preparation software. Once you've completed the form, include it with your tax return. Make sure to double-check all the information for accuracy and completeness. If you're unsure about how to navigate the claiming process or have any questions, consider seeking assistance from a tax professional. They can provide valuable guidance and ensure that you're taking full advantage of the available credits and deductions. Claiming the IRS Recovery Rebate Credit can make a significant difference in your financial situation as a small business owner. Don't let the opportunity slip away – take action now and secure the financial assistance you deserve. Crucial Tax Planning Considerations for Your Small Business As a small business owner, tax planning is a crucial aspect of managing your finances effectively. With the tax season upon us, it's important to consider some key considerations to optimize your tax strategy. First and foremost, make sure you stay organized with your financial records throughout the year. This will make it much easier when it comes time to file your tax return and claim any applicable credits or deductions. Keep track of your business expenses, income, and any relevant documentation that may be required. Next, consider consulting with a tax professional who specializes in small businesses. They can provide expert advice and guidance on tax planning strategies that can help minimize your tax liability while maximizing your deductions. A tax professional can also keep you updated on any recent tax law changes that may impact your business. Another crucial consideration is to take advantage of any available tax credits and deductions specifically designed for small businesses. These can include deductions for business-related expenses, credits for hiring and training employees, and incentives for investing in certain industries. Familiarize yourself with these opportunities and ensure you're taking full advantage of them. Additionally, consider implementing a year-round tax planning strategy. Rather than waiting until the last minute to organize your finances and prepare your tax return, take a proactive approach by regularly reviewing your financials and making necessary adjustments. This can help minimize surprises come tax season and ensure you're maximizing your tax savings. Addressing Common Challenges in Financial Management for Small Businesses Financial management is a crucial aspect of running a small business, but it can also be a major challenge. Many small business owners face common hurdles when it comes to effectively managing their finances. One common challenge is budgeting and cash flow management. It can be difficult to accurately predict and plan for expenses, especially in industries with seasonal fluctuations or unexpected events like the COVID-19 pandemic. Another challenge is tracking and categorizing expenses. Small business owners often have multiple revenue streams and expenses to keep track of, which can be overwhelming and time-consuming. This can lead to disorganized financial records and difficulty in accurately calculating profits and losses. Tax compliance is also a common challenge for small business owners. Navigating the complex tax laws and regulations can be daunting, especially for those without a background in finance or accounting. Failing to meet tax obligations can result in penalties and fines, which can have a significant impact on a small business's bottom line. Lastly, finding funding and investment opportunities can be challenging for small businesses. Securing financing for growth or expansion can be difficult, especially for startups or businesses with limited credit history. Identifying suitable investment opportunities and weighing the potential risks and rewards can also be a daunting task. Addressing these challenges requires careful planning and strategic decision-making. Small business owners should consider seeking guidance from financial professionals or tax specialists who can provide expert advice tailored to their specific needs. Implementing efficient budgeting and accounting systems, leveraging technology to automate financial processes, and staying informed about tax laws and regulations can also help overcome these challenges. By addressing these common challenges in financial management, small business owners can improve their financial stability, make more informed business decisions, and increase their chances of long-term success. Leveraging Rebate Credits for Funding and Investment Opportunities Leveraging the Recovery Rebate Credit (ERC) can open up funding and investment opportunities for small businesses. These credits can be used as a down payment or collateral for securing business loans or lines of credit, providing the capital you need to expand your operations or invest in new initiatives. By taking advantage of the ERC, you can unlock the potential for growth and increase your chances of long-term success. Don't miss out on these valuable opportunities – explore how you can leverage the rebate credits for funding and investment in your small business today. Deadlines and Procedures to Claim Your Recovery Rebate Credit The IRS has set specific deadlines and procedures for claiming your Recovery Rebate Credit. It's important to be aware of these deadlines to ensure that you don't miss out on valuable financial assistance. For individuals who did not file a tax return in 2020 or 2021, the deadline to claim the Recovery Rebate Credit is October 15, 2022. This means that you must submit your tax return and include the necessary forms by this date to be eligible for the credit. It's crucial to mark this date on your calendar and make it a priority to complete the process before time runs out. To claim the credit, you'll need to fill out either Form 1040 or Form 1040-SR, depending on your circumstances. These forms can be found on the IRS website or through tax preparation software. Make sure to accurately complete all the required information and double-check for any errors or omissions. Once you've completed the form, include it with your tax return and submit it according to the IRS guidelines. It's recommended to use electronic filing methods to ensure a faster and more efficient process. Remember to keep a copy of your tax return and all supporting documentation for your records. By following the designated procedures and meeting the deadlines, you can successfully claim your Recovery Rebate Credit and secure the financial assistance you're entitled to. Don't delay – take action now to ensure you don't miss out on this valuable opportunity.The Consequences of Missing the Claim Deadline Missing the claim deadline for the Recovery Rebate Credit can have significant consequences for eligible non-filers. The deadline to claim the credit is October 15, 2022, so it's important to act promptly and not procrastinate. If you fail to claim the credit by the deadline, you will miss out on valuable financial assistance that can make a difference in your business's financial situation. One of the main consequences of missing the claim deadline is the loss of funds that could have provided much-needed relief for your business. The Recovery Rebate Credit was designed to help individuals and families financially impacted by the COVID-19 pandemic, and by not claiming it, you're essentially leaving money on the table. This can hinder your ability to invest in your business, cover essential expenses, or expand your operations. Additionally, missing the claim deadline can create missed opportunities for funding and investment. The funds from the credit can be used as a down payment or collateral for securing business loans or lines of credit, allowing you to pursue growth and expansion initiatives. By not claiming the credit, you're limiting your options and potentially missing out on the chance to take your business to the next level. Overall, missing the claim deadline for the Recovery Rebate Credit can have long-lasting consequences for your business. It's crucial to prioritize this task and take action before time runs out. Don't let valuable financial assistance slip through your fingers – act now and claim the credit before it's too late. Utilizing Professional at NexGen Taxes to Help for Successful Tax Planning and Recovery Rebate Claiming When it comes to successful tax planning and claiming the Recovery Rebate Credit, utilizing professionals at NexGen Taxes can be a game-changer. With experienced CPAs and tax professionals available for one-time consultations or recurring needs, NexGen Taxes is your go-to resource. They can assist with filing personal, business, or non-profit taxes, ensuring accuracy and maximizing your deductions. Their platform connects you with top-notch certified tax preparers, EA's, and CPA's on demand, making it easy to manage all your tax, accounting, bookkeeping, and payroll needs. Don't miss out on their expertise – let NexGen Taxes help you get organized and ensure a stress-free tax season. As they say, "With NexGen Taxes Pro Network, Accuracy is Guaranteed!" - NexGen Taxes. Customers have praised the professionalism, efficiency , and responsiveness of the NexGen Taxes team. Need More Insight About How to Claim Your Recovery Rebate Credit? Click here to view a video on how to claim your recovery rebate credit for filers and non-filersRelated ArticlesHow to Reduce Your Tax Bill Through Charitable Giving & Donations Check Your State Refund Status
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Complete Guide: Tax Filing for Freelancers
Navigating the Freelancers Tax Landscape: A Comprehensive Guide to Obligations, Deductions, and Confidence Filing taxes can be an arduous process and taking on the freedom of freelancing could make it a bit more treacherous to traverse the landscape but this guide is made for you to make it easier to understand what you need to do when filing taxes as a freelancer. Freelancing offers unparalleled freedom and flexibility, but it also comes with its own set of challenges. One of the most significant challenges is understanding your tax filing obligations as a freelancer. As a self-employed individual, you're responsible for paying taxes on your income - including federal and state income taxes, Social Security and Medicare taxes, and any applicable local taxes. In this comprehensive guide to tax filing as a freelancer, we'll cover everything from the basics of self-employment taxes to maximizing returns through deductions. We'll also discuss how to estimate quarterly tax payments, file your annual return, and determine whether you need to file an information return. Whether you're new to freelancing or looking to brush up on your tax knowledge, this guide will help you navigate the world of freelancer taxes with confidence. Understanding Freelancer's Taxes When you're your own boss, managing freelance income taxes is crucial for tax liability. Estimating taxes accurately is a good idea as it helps prevent tax bill surprises. Tracking business expenses can aid in reducing taxable income, which is good news for your tax situation. Complying with tax regulations ensures good tax standing and can lead to tax credits. Filing taxes on time is essential and avoids penalties and interest. It's important to understand the tax year, as well as state income taxes and local taxes that may apply to your freelance business. Seeking advice from a tax preparer or tax expert in the first year of your side gig can help you navigate excess amounts deducted. This input can be especially helpful if you previously had a traditional employee tax situation. The Basics of Self-Employment Tax Filing Self-employment taxes encompass contributions to social security and Medicare. When filing taxes as a sole proprietor, the Schedule C form is used to report business income and expenses. Calculating net profit is a crucial step in determining tax obligations and liabilities. Making quarterly tax payments ensures that estimated taxes for the year are covered, reducing the burden during tax season. Understanding net earnings is essential for accurate tax return preparation and compliance with tax regulations. The Importance of Business Structure Choosing a business structure significantly impacts the complexity of your tax return. S corporation taxes differ from sole proprietorship taxes, influencing the amount you owe. The business structure you choose also affects the tax deductions you are eligible for, potentially saving you money. Additionally, business income tax forms vary depending on the type of business entity, determining how you report your income to the IRS. Finally, your business expenses play a crucial role in affecting your taxable income and the amount of tax refund you may receive. Who is Self-Employed? Self-employed individuals include freelancers, independent contractors, and sole proprietors. They file self-employment taxes using the Schedule SE form and must adhere to specific regulations. Paying quarterly taxes and understanding their tax obligations is essential for self-employed individuals. What are My Self-Employed Tax Obligations? Understanding your tax filing obligations as a self-employed individual is crucial. It involves knowing about tax deductions, making estimated tax payments, keeping accurate records, and being responsible for both income taxes and self-employment taxes. Stay informed to avoid any surprises at tax time. Key Aspects of Freelancer Tax Filing Fulfilling annual tax returns by the deadline is essential for freelancers. Remitting quarterly tax payments is crucial to stay compliant with freelance tax regulations. Maintaining precise records of income and expenses is vital for accurate tax calculations. Claiming deductions for business expenses can significantly reduce a freelancer's tax liability. Understanding different tax forms is necessary to ensure the accuracy of income tax returns. Estimating Quarterly Taxes Paying estimated taxes on a quarterly basis is a crucial part of managing your freelance business's tax situation. By making these regular payments, freelancers can avoid being stuck with an excess amount of taxes owed at the end of the tax year. The process involves calculating and paying taxes based on the income earned in the previous quarter. Form Schedule C is commonly used by freelancers to estimate and report their quarterly taxes to the Internal Revenue Service. It's important to stay on top of these payments to ensure compliance with tax laws and to avoid any surprises come tax season. Declaring Your Business Income as a Freelancer When declaring your business income, it's essential to do so accurately to prevent any tax audit risks. Your bank account records play a crucial role in ensuring a successful income tax return, so keep them in order. Accurately declaring gross income can positively impact the amount of tax refund you receive, which is always good news. Additionally, it's vital to declare net profit correctly to ensure accurate tax payments and compliance with tax laws. Remember, freelance income taxes are based on your annual business income, so having a clear understanding of your tax situation is key. Maximizing Returns Through Deductions Identifying valid deductions reduces taxable income, which is good news for any freelancer. Claiming business expenses is a good idea as it helps to maximize tax deductions, thereby reducing the freelance tax liability. This, in turn, increases the potential tax refund amount. Effective recordkeeping plays a vital role in facilitating business expense deductions, making it easier for freelancers to claim all legitimate deductions they are entitled to and reduce their overall tax burden. Identifying Legitimate Deductions Maximizing tax deductions is a smart financial move for any freelancer. By identifying legitimate deductions like business expenses for supplies, travel, and home office use, freelancers can lower their taxable income, ultimately reducing their tax bill. This is good news for those running a freelance business as it impacts the net profit amount, helping them save on taxes. Keeping accurate records of these expenses is not only a good idea but also crucial for ensuring accurate tax deductions. It's essential to take advantage of every legitimate deduction available when filing taxes as it can significantly impact the freelance tax situation. What Should You Know About Freelancer Tax Deductions? Understanding the ins and outs of freelancer tax deductions is crucial for effective tax planning. By claiming qualified deductions, freelancers can lower their taxable income and reduce their tax liability. However, it's important to accurately document business expenses and ensure they are eligible for deduction to maximize returns. Typical Deduction Categories Maximizing tax savings as a freelancer involves understanding the typical deduction categories. Deductible home office expenses encompass rent, utilities, and internet costs. Additionally, business-related expenses such as supplies, equipment, and travel expenses are eligible for deduction. Freelancers are also responsible for paying self-employment taxes, which include both the employer and employee share of Social Security and Medicare taxes. Moreover, health insurance premiums paid out-of-pocket can be deducted, providing valuable tax benefits. Furthermore, contributing to retirement accounts like a solo 401(k) or IRA not only ensures financial security but also offers tax advantages. Leveraging these deduction categories effectively can significantly impact a freelancer's tax situation, making it crucial to stay informed about potential tax savings opportunities. Home Office When establishing the tax situation, owning a home office can be a good idea for freelancers looking to maximize tax deductions. The IRS provides guidelines to ensure that the workspace meets the requirements for eligibility. Whether using the traditional method for claiming expenses or opting for the simplified deduction, keeping detailed records is essential for tax credits and maximizing deductions. Consulting with a tax expert to understand the impact on federal, state, and local taxes is a good idea, especially in the first year of self-employment. This ensures accurate calculations and prevents overestimating deductions, which could lead to penalties or audits. Travel & Meals When working as a freelancer, it's essential to understand the tax implications of travel and meals. Travel expenses for business purposes, including airfare, hotels, and rental cars, can be deducted from taxes. Similarly, meals while traveling for business can also be deducted, but only up to 50% of the cost. However, to qualify for these deductions, the expense must be necessary and directly related to your freelance work. Keeping detailed records of all travel and meal expenses is crucial for claiming deductions accurately. Consulting a tax professional or using tax software can help ensure that you are claiming all eligible deductions. This can be good news for freelancers as it allows them to lower their tax obligations while enjoying the flexibility of being their own boss. It's a good idea to take advantage of these deductions to optimize your tax situation without exceeding the allowed limits. Education & Certifications As a freelancer, you have the opportunity to deduct expenses related to enhancing your skills for your freelance work. These deductible education expenses can include classes, workshops, and conferences that directly contribute to your professional development. Additionally, any certification or licensing exams relevant to your freelance work may also be deductible. It's essential to maintain detailed records of these expenses and seek guidance from a tax professional to ensure accurate deductions. Remember, only expenses directly linked to your freelance work are eligible for deduction. This emphasizes the importance of staying informed about your tax situation and consulting with a tax expert to maximize your tax credits and deductions. Equipment & Supplies When working as a freelancer, it's essential to consider your equipment and supplies as potential deductible business expenses. This can include crucial items such as computers, software, office supplies, and furniture. Keeping meticulous records and holding onto receipts is vital for tax purposes. Additionally, for equipment that may decrease in value over time, depreciation can also be deducted. However, to ensure that you are deducting these expenses correctly, it's always a good idea to consult with a tax professional who can provide guidance on navigating your tax situation and optimizing your tax credits. Estimated Taxes Payment Understanding and estimating estimated taxes is crucial for freelancers to manage their tax obligations effectively. Estimated taxes are periodic tax payments that freelancers need to make throughout the tax year. This is a good idea for freelancers, as it helps them avoid any potential underpayment penalties. Additionally, estimating tax payments allows freelancers to stay on top of their tax situation and avoid financial strain when tax time arrives. These estimated tax payments typically cover federal income taxes, self-employment taxes, as well as state and local taxes. It's important for freelancers, who are their own bosses, to work with tax professionals or use online tools to accurately estimate and manage their tax payments, ensuring compliance with the Internal Revenue Service (IRS) regulations. Estimating Your Tax Payments as a Freelancer Calculating estimated tax payments involves understanding income tax and self-employment tax. It's essential to accurately estimate payments based on expected income and deductions, requiring meticulous tracking of expenses and income throughout the year. Utilizing tax software or consulting a tax professional can help with estimation and filing. Knowledge of important tax deadlines and penalties for underpayment is crucial to avoiding future issues with the Internal Revenue Service (IRS). With the tax year in mind, estimating your tax payments as a freelancer is essential for managing your tax situation, whether it's your first year as your own boss or you're a seasoned freelancer. Seeking advice from a tax expert can be a good idea, especially for those transitioning from a traditional employee role to a freelance or side gig arrangement. How to Pay Your Taxes as Freelancers Understanding your tax obligations as a freelancer, including self-employment taxes and estimated tax payments, is crucial for managing your tax situation effectively. Keeping track of your income and expenses throughout the year will help you accurately calculate your tax liability and estimate the amount due for payment. Considering the complexity of freelance taxes, working with a tax professional or using tax preparation software can be a good idea to ensure accuracy and maximize deductions. Planning ahead for tax season by setting aside funds for tax payments and filing deadlines is also recommended. Additionally, staying up to date on changes to tax laws and regulations that may impact your freelance business is essential for compliance with the Internal Revenue Service. Step 1: Keep Accurate Records of Your Income and Expenses Accurately tracking income and expenses is crucial for maintaining the correct tax situation. Utilizing accounting software or spreadsheets to monitor all financial inflows and outflows can make the tax filing process much more manageable. Furthermore, remembering to include deductions such as home office expenses or business travel can help minimize the tax burden. Establishing separate bank accounts or credit cards for personal and business use is also a good idea, as it simplifies the record-keeping process. Maintaining precision in recording income and expenses not only aids in estimating taxes but also ensures compliance with the Internal Revenue Service regulations, preventing potential penalties and issues. This proactive approach to managing finances is essential for freelancers seeking to optimize their tax situation. Step 2: Determine Whether You Operated at a Profit or Loss After assessing your freelance income, you'll need to ascertain whether you've operated at a profit or loss. If it's the former, you'll be responsible for paying self-employment tax on your net earnings. On the bright side, if it's the latter, you may have the option to deduct that loss from your other sources of income. Maintaining precise records of all your freelance-related income and expenses is crucial. Considering a consultation with a tax professional can ensure accurate tax calculations and payments, giving you peace of mind. It's also essential to stay updated on tax deadlines and make estimated quarterly tax payments to steer clear of penalties. Step 3: Pay Estimated Taxes Quarterly Paying estimated taxes quarterly is a vital responsibility for freelancers to evade penalties. The calculation of estimated taxes is based on projected annual income and deductions, with payment deadlines in April, June, September, and January of the following year. Payment methods include online avenues or mail with a payment voucher. Accurate record-keeping of income and expenses is crucial to avoid overpaying or underpaying estimated taxes. This practice ensures a balanced tax situation and prevents any excess amount being paid. It's a good idea to seek advice from a tax expert or preparer, especially in the first year of freelancing. This approach helps freelancers navigate tax credits, state income taxes, and local taxes more effectively. Step 4: Filing Your Tax Return Filing your tax return, the final step in paying your freelance taxes is crucial to avoid penalties and interest charges due to missed deadlines. Using tax software or consulting with a tax professional can ensure the accuracy of your return and the inclusion of tax credits. Keeping copies of all tax documents and receipts is essential for future reference and audit purposes. Additionally, considering setting up estimated tax payments for the following year can help you avoid any surprises in your tax situation.Frequently Asked Questions How do I File Taxes as a Freelancer? To file taxes as a freelancer, you need to understand that freelancers are considered self-employed. Keep track of your income and expenses throughout the year and file a Schedule C form with your personal tax return. Consider working with a tax professional or using tax software for accuracy and maximizing deductions. How Do I Report Freelance Income to the IRS? To report freelance income to the IRS, freelancers need to use a Schedule C form and include all earned income. It's important to keep track of expenses for deductions. Freelancers are responsible for paying both employee and employer portions of Social Security and Medicare taxes. Consulting a tax professional or using tax software can ensure accurate reporting and maximize deductions. Do Freelancers Get a 1099 or W2? Freelancers typically receive a 1099 form from clients, which reports their income to the IRS. Unlike employees who receive W2 forms, freelancers are responsible for tracking their own income and expenses for tax purposes. How Much Can You Make on a 1099 Before You Have to Claim it? Any income earned on a 1099 form must be reported on your tax return. There is no specific amount that exempts you from reporting 1099 income. The IRS requires all income to be reported, regardless of the amount earned. Failure to report all income can result in penalties and legal consequences. Click here for an insightful video, especially if you're new to freelancing! Still Need Help? If you still have questions or need assistance with your freelancer taxes, don't hesitate to get in touch with our team of experts. We are here to help you navigate the complexities of tax obligations and maximize your returns through legitimate deductions. Whether you need help estimating your tax payments, filing your annual return, or understanding if you are required to file an information return, we've got you covered. Contact us today to ensure you stay in compliance with tax regulations and make the most out of your freelance business.Related ArticlesTax Filing for Freelancers: Expert Guide to Maximize Returns & Minimize Stress Tips for 401k Retirement Investment Financial Tips For The New Year
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Restricted Stock Units (RSUs): RSU Vesting & Taxation For Dummies. A Comprehensive Guide for Financial Well-being
Did your employer offer you restricted stock units (RSUs)? Need to know if they are good or bad for your financial well-being? This comprehensive guide will give you all the information you need about RSUs. You can very well call it RSU for Dummies!What are Restricted Stock Units (RSUs)?Restricted Stock Units (RSUs) are part of equity compensation offered by the companies to their employees. RSUs are a promise from a company to issue its stock to employees at a future date, typically after certain vesting conditions are satisfied.How do RSUs work?When a company grants RSUs to an employee, the employee does not receive any shares of the company stock at that time. Instead, the company promises to issue shares of the company stock to the employee at a future date, typically when certain vesting conditions are met.Vesting conditions can include a certain length of time the employee must work for the company, achieving specific performance goals, or the company reaching a particular financial goal. Once the vesting conditions are met, the employee receives the promised shares of stock.What are the benefits of RSUs?Restricted stock units are an attractive form of compensation for employees because they provide the potential for long-term financial gain. As the value of the company's stock increases, so does the value of the RSUs.Additionally, RSUs are generally taxed at the time of vesting, meaning the employee can only pay taxes on them once they receive the shares of stock. It can result in a lower tax liability for the employee compared to other forms of equity compensation, such as stock options.What are the risks of Restricted Stock Units?One risk of RSUs is that the value of the company's stock can decrease, resulting in a lower value of the RSUs. Additionally, if employees leave the company before the vesting conditions are met, they may forfeit their RSUs.Another risk of RSUs is that they can create tax liabilities for the employee. When your RSUs vest, they are taxed as ordinary income, which may result in a higher tax liability for employees.RSU vs Stock OptionsIn employee compensation, RSUs (Restricted Stock Units) vs stock options are popular incentives companies provide. While both offer employees the opportunity to become shareholders in their company, they differ significantly in how they work, their tax implications, and the level of risk involved.Stock Options, on the other hand, allow employees to purchase company shares at a price that is predetermined and known as the strike price. These options typically come with an expiration date. Employees with stock options can exercise them anytime before the options expire. Employees can profit by purchasing company shares at a lower price when the stock price exceeds the strike price.Critical differences between Stock Options and RSUsOwnership and Voting RightsOne significant difference between RSUs and stock options is ownership and voting rights. RSUs grant employees immediate ownership rights and voting privileges in the company, whereas stock options do not.TaxationThe tax treatment of RSUs and stock options varies. RSUs are typically taxed when they vest, based on the market value of the shares at that time. Stock options, on the other hand, are taxed when exercised.Vesting PeriodRestricted stock units often have a predetermined vesting period, during which employees must wait before gaining full ownership of the shares. Stock options may have vesting periods as well, but they also have an expiration date.LiquidityStock options offer more flexibility in terms of liquidity. Employees can choose when to exercise them, whereas RSUs automatically convert into shares once they vest.How do RSUs vest?Restricted Stock Units (RSUs) typically vest based on a predetermined schedule set by the company. The vesting process ensures that employees gradually gain ownership of the RSUs over a specified period, incentivizing them to stay with the company. Here's how RSUs typically vest:Vesting Schedule: Restricted stock units have a vesting schedule outlining when you will gain ownership of the units. This schedule can vary widely from company to company but commonly spans several years. For example, RSUs may vest over four years.Vesting Triggers: Vesting triggers are specific events or milestones determining when RSUs become yours. The most common trigger is time-based, where some RSUs vest at regular intervals, such as annually or quarterly. This means that, after each vesting date, you gain ownership of a predetermined percentage of your RSUs.Cliff Vesting: Some companies implement a "cliff" vesting schedule, where you must remain with the company for a specified period (usually one year) before any RSUs vest. After the cliff, RSUs may vest gradually over the remaining vesting period.Acceleration: In certain circumstances, RSUs may accelerate their vesting. This can happen if your company is acquired, you experience a change in control, or you become disabled or pass away. Acceleration ensures you gain ownership of your RSUs more quickly than the original vesting schedule.Forfeiture: If you leave the company before your RSUs fully vest, you typically forfeit the unvested units. However, some companies have policies that allow for partial vesting in the case of early departure, depending on the circumstances.Tax Implications: It's essential to be aware of the tax implications of RSU vesting. In most cases, the value of the vested RSUs is considered taxable income at the time of vesting, even if you choose not to sell them immediately. Consult a tax professional to understand how RSU vesting affects your tax situation.Ownership: Once RSUs vest, they convert into actual company shares, and you become a shareholder with all the associated rights, including voting rights and the potential to receive dividends.Remember that RSU vesting details can vary from one company to another, so reviewing your specific RSU grant agreement and company policies is crucial to understanding how your RSUs will vest and any unique conditions that may apply.How and When Are Restricted Stock Units Taxed?The taxation of Restricted Stock Units (RSUs) in the United States and some other countries can be complex. RSUs are typically subject to taxation at specific points in time. Here's how RSUs are generally taxed:Vesting Taxation:When RSUs get vested, they are considered taxable income. The value of the vested RSUs is included in your taxable income for the year they are granted. This means that you will owe income tax on the market value of the RSUs at the time of vesting.Withholding:Most employers will withhold a portion of the RSUs' value for income tax purposes when they vest. The withholding rate can vary depending on your country's tax laws and your tax situation.Tax Reporting: Your employer will typically provide you with a statement or document that reports the income you received from the vested RSUs. This information is crucial for accurately reporting your taxable income when you do your annual tax return filing.Tax Rates:The amount you must pay in taxes for your vested RSUs is determined by your total income and the tax bracket you fall into. The United States has different federal tax rates for different income levels, ranging from 10% to 37%. State and local taxes may also apply, further affecting the total tax you owe.Payment of Taxes: Instead of your employer, you are responsible for paying the taxes on the vested RSUs when you file your annual income tax return. The withheld amount by your employer is applied toward your tax liability, and you may need to pay any additional taxes owed or receive a refund depending on your total income and deductions.Sell-to-Cover:Some companies offer an option known as "sell-to-cover," where they automatically sell a portion of the vested RSUs to cover the taxes owed. This can be helpful to ensure that you have enough cash on hand to cover your tax liability.Holding or Selling RSUs with Capital Gains:After your Restricted Stock Units (RSUs) vest and you have paid the required taxes, you can choose to retain or sell the stocks. If you keep the stocks, any potential profits or losses will be dealt as capital gains tax when you sell them. The tax rate for long-term capital gains (holding for over a year) is typically lower than ordinary income tax rates.Tax Deferral:In some cases, you may have the option to defer the immediate taxation of your vested RSUs. This is often available for employees of certain companies, such as those in the technology sector, that issue RSUs as part of their compensation packages. The deferral allows you to postpone paying taxes until a later date, typically when you choose to sell the RSUs.It's important to note that the taxation of RSUs can vary depending on your country's tax laws and your circumstances.Income tax vs. capital gains tax for Restricted Stock UnitsIncome tax and capital gains tax are two taxes that can apply to the gains from Restricted Stock Units (RSUs) depending on when you sell the RSUs and the holding period. Here's a breakdown of the differences between income tax and capital gains tax for RSUs:Income Tax:Trigger Point: Income tax applies when RSUs vest. The value of the vested RSUs is taxable in the year they vest.Tax Rate: The tax rate for income tax is typically your ordinary income tax rate, which varies based on your total taxable income. For example, this can range from 10% to 37% in the United States.Withholding: Employers often withhold a portion of the RSUs' value at vesting to cover the income tax liability. This withheld amount is then remitted to tax authorities on your behalf.Timing: You pay income tax in the year the RSUs vest, regardless of whether you sell the shares immediately or hold onto them.Capital Gains Tax:Trigger Point: When you sell RSUs, you will be subject to capital gains tax, which is calculated based on the difference between the sale price and the fair market value of the RSUs at the time of vesting.Tax Rate: The tax rate for capital gains depends on the holding period of the RSUs:Short-term Capital Gains: If you sell the RSUs within one year of their vesting date, any profit is typically subject to short-term capital gains tax, similar to your ordinary income tax rate.Long-term Capital Gains: If you hold the RSUs for more than one year after their vesting date before selling, any profit is typically subject to long-term capital gains tax. Long-term capital gains tax rates are usually lower than short-term capital gains tax rates. In the United States, they can range from 0% to 20%, depending on your income.Timing: You pay capital gains tax when you sell the RSUs; the tax rate is determined by the time you hold the shares before selling.In summary, RSUs can be subject to income and capital gains tax, depending on when you receive them and when you choose to sell them. Income tax applies when RSUs vest and is based on their value at that time. Capital gains tax applies when you sell the RSUs. At the time of vesting, the taxable value of the RSUs is the difference between the sale price and the fair market value, with different tax rates for short-term and long-term holdings.Federal and state income tax implicationsThe federal and state income tax implications for Restricted Stock Units (RSUs) can vary depending on several factors, including your location and individual circumstances. Here's an overview of how federal and state income taxes generally apply to RSUs:Federal Income Tax Implications:Vesting Taxation: RSUs are subject to federal income tax when they vest. The value of the vested RSUs is treated as ordinary income for federal tax purposes in the year they are granted.Tax Rate: The federal income tax rate for your vested RSUs depends on your overall income and tax bracket. The tax rates can range from 10% to 37% in the United States.Tax Withholding: Employers are typically required to withhold a portion of the value of the vested RSUs to cover the federal income tax liability. The withholding amount is based on your income and tax bracket.Reporting on Tax Return: You must notify the income from the vested RSUs on your federal income tax return. This income is added to your total taxable income for the year.Capital Gains Tax: If you hold the RSUs after they vest and later sell them, any gains or losses from the sale may be subject to capital gains tax at the federal level. The tax rate for capital gains depends on your holding period, with lower rates for long-term holdings.State Income Tax Implications:State Taxation: In addition to federal income tax, you may also be subject to state income tax on the value of vested RSUs, depending on the state where you reside and work.State Tax Rates: State income tax rates vary significantly from state to state. Some states have no income tax, while others have progressive tax systems with rates that may be similar to or higher than federal rates.State Tax Withholding: Employers in states with income tax typically withhold a portion of the RSUs' value to cover state income tax liability, in addition to federal withholding.State Reporting: You must report the income from vested RSUs on your state income tax return if your state imposes income tax. The treatment of RSUs at the state level can differ from federal tax rules.Consider Local Tax Laws: In some cases, municipalities or cities may impose additional income taxes. You must know of any local tax obligations that may apply to your RSUs.Withholding RSU Tax: What Are Your Obligations?Withholding RSU tax is essential to managing your Restricted Stock Units (RSUs), and understanding your obligations is crucial to ensure compliance with tax laws. Here are the critical obligations associated with withholding RSU tax:Notification and Documentation: Your employer will typically notify you when your RSUs vest and provide documentation detailing the value of the vested RSUs and the amount of tax that will be withheld. This documentation is essential for accurate tax reporting.Tax Withholding: Employers are generally required to withhold a portion of the value of the vested RSUs for income tax purposes. This withholding ensures you have sufficient funds to cover your tax liability when you file your annual income tax return.Withholding Methods: Employers can use various methods to withhold RSU tax, including:Percentage Method: A percentage of the RSU value is withheld based on your income tax bracket.Flat-Rate Method: A fixed percentage, often determined by tax laws, is withheld.Sell-to-Cover Method: Some employers automatically sell a portion of the vested RSUs to cover the tax liability. This ensures that you have cash to pay the taxes.Payment to Tax Authorities: The amount withheld from your RSUs for tax purposes is typically remitted by your employer to the appropriate tax authorities on your behalf. This ensures that the tax is paid promptly.Reporting on Your Tax Return: When you file your annual income tax return, you must report the income from the vested RSUs, along with the tax withholding, as part of your overall income. This allows you to reconcile the amount withheld with your actual tax liability.Additional Tax Obligations: Depending on your tax situation and any applicable state or local tax laws, you may have additional tax obligations related to your RSUs, such as state income taxes or capital gains taxes, if you later sell the RSUs.Record-Keeping: It's essential to maintain accurate records of your RSU grants, vesting dates, tax withholding, and any additional tax-related documents your employer provides. These records will be valuable for future tax reporting and potential audits.The Advantages and Disadvantages of RSUs:Benefits of RSUs as a form of compensationRestricted Stock Units (RSUs) offer several benefits as compensation for both employees and employers. Here are some of the advantages of RSUs:Equity Ownership: RSUs grant employees a sense of ownership in the company. When RSUs vest, they convert into actual company shares, giving employees shareholders a stake in the company's success. This aligns the interests of employees with those of the shareholders and the company as a whole.Retaining Talent: RSUs are often used as a retention tool to motivate employees to stay with the company for an extended period. The vesting schedule encourages employees to remain with the organization, as they must fulfill a predetermined tenure to benefit fully from the RSUs.Performance Incentives: RSUs can be tied to individual or company performance metrics, motivating employees to achieve specific goals and objectives. When performance-based RSUs vest, they reward employees for contributing to the company's success.Tax Benefits: RSUs can provide tax advantages, as the taxation occurs at vesting rather than at the grant date. Employees can defer capital gains tax until they sell the shares, potentially at a lower tax rate if they hold them for a specified period.Diversification of Compensation: RSUs diversify an employee's compensation beyond a base salary or cash bonuses. This can be especially valuable if the company's stock performs well, offering the potential for significant financial rewards.Simplicity: RSUs are relatively straightforward for employees to understand compared to other equity compensation methods like stock options. With RSUs, employees receive shares upon vesting, eliminating the need to purchase shares at a strike price, as with stock options.No Out-of-Pocket Expense: Unlike stock options, RSUs do not require employees to invest their own money to acquire shares. RSUs are granted to employees as part of their compensation package, and they receive the shares upon vesting without needing a purchase.Alignment with Long-Term Goals: RSUs encourage employees to think long-term and consider the company's performance and stock price over an extended period. This alignment with long-term goals can foster a sense of commitment and dedication.Employee Recruitment: Offering RSUs as part of a compensation package can attract top talent, as prospective employees may view RSUs as a valuable benefit that can contribute to their financial well-being.Liquidity Options: After RSUs vest and convert into shares, employees have the flexibility to hold onto the shares or sell them. This flexibility allows employees to make informed financial decisions based on their individual circumstances.Employee Engagement: RSUs can enhance employee engagement by creating a sense of ownership and pride in the company's performance. Employees are more likely to be invested in the organization's success when they have a direct stake in it.Downsides, including tax implicationsWhile Restricted Stock Units (RSUs) offer significant benefits as a form of compensation, they also come with downsides, including potential tax implications. Here are some of the downsides and tax considerations associated with RSUs: Taxation at Vesting:Immediate Taxation: RSUs are subject to federal and possibly state income tax when they vest. This means that even if you don't sell the shares, you will owe income tax on their value. Tax Rate:Higher Tax Rates: The value of vested RSUs is typically taxed as ordinary income, which can result in higher tax rates compared to long-term capital gains rates. The exact tax rate depends on your income bracket. Cash Flow Impact:Cash Outlay: Taxes on RSUs are typically paid in cash, so you may need to come up with the funds to cover the tax liability when your RSUs vest. This can be a significant financial burden for some employees. Market Risk:Stock Price Volatility: The value of RSUs is tied to the company's stock price. If the stock price declines after your RSUs vest, you may have paid taxes on a higher value than the current market price, resulting in a potential loss. Limited Control:No Control Over Timing: You have no control over when RSUs vest, which can lead to unexpected tax liabilities. It's possible to have a large tax bill even if you weren't planning to sell the shares. Alternative Minimum Tax (AMT):AMT Impact: Depending on your income level and tax situation, you may be subject to the Alternative Minimum Tax (AMT) when your RSUs vest. This can result in additional tax liability. Limited Diversification:Concentration Risk: Holding a significant portion of your wealth in your employer's stock (due to vested RSUs) can expose you to concentration risk if the company's stock price declines significantly. Complexity:Complex Tax Planning: Managing RSUs can be complicated, especially if you have multiple grants, RSUs from different employers, or live in other tax jurisdictions. This complexity may require the assistance of tax professionals. Limited Benefit in a Declining Market:No Upside in Declining Stock: If your company's stock price declines after your RSUs vest, you may not receive the full benefit you initially expected, as the value of the RSUs may have diminished.Tax Planning Strategies for RSUs and Stock OptionsTax planning is essential for individuals who receive RSUs (Restricted Stock Units) and stock options as part of their compensation package. Proper tax planning can help you maximize the benefits of these equity-based incentives while minimizing your tax liability. Here are some tax planning strategies for RSUs and stock options: Understand the Vesting Schedule:Familiarize yourself with the vesting schedule of your RSUs and stock options. Knowing when these assets become yours is crucial for planning your tax obligations. Consider Holding Periods:Determine your holding period for both RSUs and stock options. Holding RSUs for at least one year after they vest can qualify them for favorable long-term capital gains tax rates. Diversify Your Portfolio:Avoid overconcentration in your employer's stock. Selling a portion of your RSUs or stock options when they vest can provide cash for diversifying your investment portfolio, reducing risk. Use Tax-Efficient Accounts:Consider holding your RSUs or stock options within tax-advantaged accounts like Individual Retirement Accounts (IRAs) or 401(k) plans to defer taxes or benefit from preferential tax treatment. Evaluate AMT (Alternative Minimum Tax):Be aware of the potential impact of the Alternative Minimum Tax (AMT) if you hold incentive stock options (ISOs). Understanding how AMT works and its implications is crucial for tax planning. Exercise Stock Options Strategically:If you have stock options, carefully plan when to exercise them. Timing can affect your tax liability significantly. Exercising options in a year with lower income or a lower stock price can reduce your tax burden. Consider Net Settlement:Some companies offer a net settlement option for stock options. This allows you to cover the exercise cost and taxes by immediately selling enough shares from the exercise. It can help you avoid out-of-pocket expenses. Understand Capital Gains Tax Rules:Familiarize yourself with capital gains tax rules, especially long-term vs. short-term capital gains rates. Holding RSUs and stock options for specific periods can lower tax rates. Tax-Loss Harvesting:If you have capital losses from other investments, consider using them to offset gains from the sale of RSUs or stock options to reduce your overall tax liability.RSUs vs. Other Forms of Stock Compensation Employee Stock Purchase Plans (ESPP)RSUs, stock options, and employee stock purchase plans (ESPPs) are all ways companies compensate employees with equity. However, they differ in risk, tax treatment, and potential reward. For instance, unlike RSUs, stock options have an exercise price and may become worthless if the stock price falls below this price. ESPPs often come with a discount on the stock price, providing immediate value to employees.Tax treatment of RSUs versus other stock compensationsThe tax treatment of RSUs is generally more straightforward than that of stock options or ESPPs. RSUs are taxed at vesting, stock options are taxed at exercise, and ESPPs have their own complex tax rules. Understanding these differences is crucial for effective tax planning and making informed decisions regarding equity compensation.ConclusionRSUs can be an attractive form of employee compensation, providing the potential for long-term financial gain. However, they also come with risks, including the potential for a lower value of the RSUs and tax liabilities for the employee. It's vital for employees to fully understand the terms and conditions of their RSUs before accepting them as part of their compensation package.Consult a Tax Professional:RSU taxation can become intricate, especially if you have multiple grants or live in different tax jurisdictions. It's highly advisable to consult a tax professional or financial advisor who can provide guidance tailored to your situation and help you minimize your tax liability.Remember that tax laws can change, so staying informed about the tax regulations in your country and seeking expert advice is crucial to managing your RSUs and ensuring you comply with tax obligations.How NexGen Taxes Can Help?It's important to do tax planning and file your taxes accurately and promptly. With the updates in the Tax laws every year, it gets challenging to keep track of all the changes that might impact your situation. When it comes to filing your taxes, it's not worth taking risks and doing it yourself.NexGen Taxes is a tax filing platform. We connect you with licensed CPAs or EAs on the network who can file your taxes so that you don't have to do it alone. Reach out to us today to get started. Frequently Asked Questions What is a Restricted Stock Unit (RSU)? A Restricted Stock Unit (RSU) is a type of equity compensation offered by companies to employees. RSUs are essentially promises to grant company stock in the future, typically after meeting certain conditions like continued employment or performance milestones. They don’t involve upfront payment, and the shares are transferred to the employee upon vesting. RSUs have become a popular method for incentivizing employees and aligning their interests with the company's success.Need help understanding how RSUs fit into your financial plan? Contact Nexgen Taxes for personalized tax and investment guidance. How does RSU vesting work? RSU vesting occurs when the conditions set by the employer, such as time-based or performance-based criteria, are met. Once the RSUs vest, employees gain full ownership of the shares. For instance, if 1,000 RSUs are granted with a 4-year vesting schedule, you might receive 25% of the shares each year. RSU vesting ensures employees remain committed to the company while also offering financial benefits as the shares increase in value.Confused about your RSU vesting schedule? Schedule a consultation with Nexgen Taxes to simplify your equity compensation strategy. What is a vesting schedule, and how does it impact RSUs? A vesting schedule determines how and when employees receive ownership of their RSUs. Companies may implement a graded vesting schedule (incremental vesting over time) or cliff vesting (full vesting after a specific period). For example, with a graded schedule, 1,000 RSUs might vest in 25% increments annually. The vesting schedule directly affects when you can sell or transfer the shares and when they become taxable.Unsure how your vesting schedule impacts your taxes? Let Nexgen Taxes guide you through the complexities of RSU taxation. What are the tax implications of RSUs? RSUs are taxable at two stages:At vesting: The fair market value (FMV) of the RSUs on the vesting date is taxed as ordinary income.At sale: Any increase in stock value after vesting is taxed as capital gains.For instance, if 500 RSUs vest at $30/share, $15,000 is added to your taxable income. If the stock value later rises to $40/share, the additional $10/share is subject to capital gains tax. Proper planning is critical to managing RSU taxation effectively.Worried about RSU tax implications? Talk to a Nexgen Taxes expert for tailored tax solutions. How are RSUs different from stock options? RSUs and stock options differ in how employees receive equity:RSUs: Shares are granted upon vesting, with no purchase required.Stock options: Employees must buy shares at a predetermined exercise price.For example, RSUs worth $10,000 vest automatically, whereas stock options require the employee to pay the exercise price to own the shares. RSUs are generally simpler and less risky.Not sure which equity option is better for you? Consult Nexgen Taxes to make informed financial decisions What happens to unvested RSUs if I leave my job? Unvested RSUs are typically forfeited if you leave the company before meeting the vesting requirements. However, certain companies may allow partial vesting or accelerated vesting under specific circumstances like layoffs, retirement, or acquisitions. For instance, if you have 1,000 RSUs and leave after 50% vesting, you’ll lose the remaining 500 RSUs unless otherwise stated in your agreement.Need clarity on your unvested RSUs? Reach out to Nexgen Taxes for expert advice on managing your equity. Are RSUs considered income for tax purposes? Yes, RSUs are considered taxable income when they vest. The fair market value of the RSUs on the vesting date is reported as ordinary income on your W-2 form. For example, if 500 RSUs vest at $25/share, $12,500 is added to your taxable income. This taxation occurs even if you don’t sell the shares immediately.Want to minimize your RSU taxes? Connect with Nexgen Taxes for expert strategies. How do I report RSUs on my tax return? To report RSUs on your tax return:Include the fair market value of the vested shares in your ordinary income (reported on your W-2).Report any sale of RSU shares on IRS Form 8949 and Schedule D. The cost basis is the FMV on the vesting date.For instance, if RSUs vest at $30/share and you sell them later at $40/share, the $10/share gain is taxed as capital gains.Struggling with your tax return? Let Nexgen Taxes handle your RSU reporting. Can I sell RSUs immediately after vesting? Yes, you can sell RSUs immediately after vesting unless restricted by company policies, blackout periods, or insider trading laws. Selling immediately can help cover taxes and reduce exposure to stock price fluctuations. However, holding the shares could offer long-term growth potential if the company performs well.CTA: Need help deciding when to sell your RSUs? Contact Nexgen Taxes for personalized guidance. What is the average vesting period for RSUs? The average vesting period for RSUs is typically between three and five years. For example, many companies use a four-year vesting schedule with annual or quarterly increments. This structure incentivizes employees to remain with the company and aligns their interests with long-term company success.Curious how vesting affects your finances? Book a session with Nexgen Taxes to plan ahead. Are RSUs better than cash bonuses? RSUs may be better than cash bonuses if the company’s stock price appreciates, offering higher long-term value. For example, $10,000 worth of RSUs could grow to $15,000 if the stock price rises. However, cash bonuses provide immediate liquidity and certainty, which may be preferable for short-term financial needs.Unsure which compensation option to choose? Nexgen Taxes can help. How is the value of RSUs determined? The value of RSUs is based on the company’s stock price on the vesting date. For instance, if 1,000 RSUs vest and the stock price is $50, the RSUs are valued at $50,000. This value also determines the taxable income reported to the IRS.Need help evaluating your RSU value? Get expert advice from Nexgen Taxes. What are the common mistakes to avoid with RSU taxation? RSU taxation can be complex, and some common mistakes include:Failing to plan for taxes at vesting: The fair market value of RSUs at vesting is treated as taxable income, and not withholding enough can lead to a tax shortfall.Ignoring capital gains tax: Selling RSUs after they appreciate without considering holding periods can lead to higher taxes.Not understanding your vesting schedule: Misinterpreting vesting terms can lead to missed opportunities to maximize benefits.Proper planning and understanding can save significant taxes and prevent compliance issues.Avoid these RSU tax mistakes with Nexgen Taxes! Contact us today for expert tax planning and filing assistance. How can RSU holders reduce their tax liability? RSU holders can reduce tax liability through these strategies:Sell some shares upon vesting to cover the taxes due.Hold shares for more than one year after vesting to qualify for long-term capital gains tax rates.Utilize tax-advantaged accounts like IRAs to invest any proceeds.Charitable contributions: Donating appreciated shares can provide a tax deduction.A tax advisor can guide you on tailoring strategies to your specific financial situation.Reduce your RSU tax burden with Nexgen Taxes! Schedule a consultation now to start saving. What happens to RSUs in the event of a company merger or acquisition? During a merger or acquisition, the fate of RSUs depends on the terms outlined in the agreement:Accelerated vesting: Unvested RSUs may vest immediately.Conversion to new company shares: RSUs may be converted to equivalent shares in the acquiring company.Cash buyout: Employees may receive cash for unvested RSUs based on the deal terms.Each situation is unique, so understanding the specifics of your agreement is crucial.Facing an RSU-related change in your company? Reach out to Nexgen Taxes for clarity and guidance through complex corporate events.
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IRS Has Announced 2024 Retirement Account Contribution Limits: Start Your Retirement Planning Today!
Fortifying Your Retirement: IRS Raises 401(k) Contribution Limits for 2024 In a move that spells good news for American workers planning for their retirement, the IRS has recently announced an increase in the 401(k) plan contribution limits for the year 2024. This update offers individuals a golden opportunity to bolster their retirement savings and secure their financial future. Let's delve into the details and explore how this change can benefit you. What are the New 401(k) Contribution Limits for 2024? In 2024, employees will be able to contribute up to $23,000 into their workplace 401(k) plans. This marks a significant increase from the previous limit of $22,500 in 2023. This additional $500 in contributions can make a substantial difference in the long run, helping you grow your retirement nest egg more effectively. Catch-Up Contributions for Those Over 50 For individuals aged 50 and above, there's even better news because IRS allows you to make additional "catch-up" contributions towards your retirement planning. This applies not only to 401(k) plans but also to 403(b) and most 457 plans, along with the federal government's Thrift Savings Plan (TSP). In 2024, if you fall into this category, you'll have the opportunity to contribute up to $30,500, including the standard contribution limit. Supercharging Your Individual Retirement Account (IRA) While the 401(k) plan updates are exciting, the IRS has sweetened the pot for Individual Retirement Accounts (IRAs) as well. For those who prefer this retirement savings vehicle, you'll be pleased to hear that the contribution limits for IRAs have also been increased. Starting in 2024, you can contribute up to $7,000 annually, up from the previous limit of $6,500. However, the catch-up deposit for IRAs will remain at $1,000. The Benefits of Maximizing Your Contributions Now that we know about the increased contribution limits, it's essential to understand that we can use this to do tax planning for the year 2024. First Step Towards Tax Planning is to Understand Which Tax Bracket You Will Fall Into You can only really plan the future by knowing your current situation. Figure out which federal tax bracket you are in and where you will be in the year 2024. Now that you know where you stand, let's discuss some tax planning strategies that can lower your tax bill and save you some money. This will make retirement planning easier!Deferring Income IRS allows high earners to defer a portion of their income for future years for "highly compensated employees." Check whether your employer can give a deferred compensation package. You can access these funds when an action is triggered, such as retirement, buying a new house in the future, or for the higher education of your kids. This money is only tax deductible in its entirety. This can lower your income in the current year and provides you the option of getting paid in the future based on your need or upon retirement, where you might be in a lower tax bracket. Understand Tax Deduction Requirements Before you start your tax planning for the new tax year, you should review every available IRS deduction as well as their requirements. Taking the above steps will help prevent your tax deductions from being filed at the end of the calendar year. Retirement Saving Strategies Saving through retirement is one standard method of minimizing taxation. Using traditional retirement savings accounts such as 401K or traditional IRA accounts can reduce gross income. IRS has boosted the contributions limit; use that to maximize your tax savings and reduce your tax liabilities. You don't have to depend on the employer-sponsored plan to start saving towards your retirement. When you are self-employed, the IRS allows you to invest in a SEP IRA or SIMPLE IRA to reduce your taxable income. Maximizing contributions to these retirement accounts can help you save more on taxes and defer the payment until retirement.Make sure you understand the difference between types of Individual retirement accounts and how they can help you save more on taxes. Tax Deductions Are Not the Same as Tax Credits Understanding tax deductions and tax credits can make tax planning much more straightforward. Both reduce the taxes. But knowing the difference will help you to make retirement planning more efficient and maximize your savings. Tax deductions are certain expenses incurred that could be deductible as part of the tax return that the taxpayer paid. The tax cut limits the amount you can claim as a taxpayer. Tax credits are more effective as they reduce the tax burden dollar for dollar. Use Dependent Care Flexible Spending Accounts Dependent Care FSA is a type of benefit provided by employers. They are used to pay for certain dependent care expenses incurred in order for one or both parents to work. These expenses could include childcare, daycare, and before- or after-school programs. DCFSAs can help you save up to 30% on your dependent care expenses because you pay for the services with pre-tax dollars. That means you'll pay less in taxes and save more money. It is important to remember, however, that DCFSAs come with an annual limit on how much you can contribute per year. Be sure to check your plan's limits before contributing. Use Capital Gains and Losses Judiciously Capital gains and losses are an essential part of retirement planning. Gains can help you maximize your investments, while losses can help you offset taxes on those gains. It is critical to understand the tax implications of capital gains, as well as tax planning strategies for minimizing the amount owed to Uncle Sam. If you plan on investing for long-term goals such as retirement or college savings, it is worth looking into ways to minimize the taxes you pay on capital gains. Doing so can help you keep more of your hard-earned money in your pocket. Offloading loss-making investments before the end of the financial year can also be a valuable personal tax planning strategy for reducing your tax burden and offset capital gains made throughout the year. Start Investing Early Start investing as soon as possible! There are many options available besides 401(k)s and IRAs, such as Health Savings Accounts or just personal investment accounts. The sooner you start planning your retirement, the more time there is for compounding interest to work its magic. With every investment you make, you are putting yourself in the best position to take advantage of potential gains. Investing early also provides more time to balance your portfolio and adjust for any losses or changes in the market. It's important to remember that investing is a long-term game – allocating money for short-term goals should come first! Making intelligent investments now can help set you up for success and Work on Your Entrepreneurial Dreams You don't have to be a millionaire to become an entrepreneur. In fact, you can start small and work your way up. Often times, it takes hard work and dedication to build something from the ground up – but it's worth it in the end. With patience and a little bit of luck, you could find yourself running a successful business or making passive income. Expenses you make to set up your business entity can help you lower your taxes and put more money back into your pocket.As you get ready to close the curtain on 2023 and get your 'A' game on to start 2024 on the right foot. Start thinking of ways to invest in your future and plan for your retirement. Ask yourself what you need to do today to help you reach your goals tomorrow. Tax planning early on is going to help you achieve your financial freedom sooner. Whether it's starting a side hustle, investing money in stocks or real estate, or finding a mentor – you have the power to make something great out of the coming year! Whether you are a DIY person or you need help in tax planning, take action now to set yourself right for financial success in the year. Start small and work your way up, but soon, you'll be reaping the rewards of your hard work and dedication. How Can NexGen Taxes Help? It's important to plan for your retirement and file your taxes accurately and promptly. With the updates happening in the Tax laws every year, it gets challenging to keep track of all the changes that might impact your personal situation. When it comes to filing your taxes, it's not worth taking any risks and doing it on your own.NexGen Taxes is a tax filing platform. We connect you with licensed CPAs or EAs on the network who can file your taxes so that you don't have to do it on your own. Reach out to us today to get started.Related ArticlesHow to Reduce Your Tax Bill Through Charitable Giving & Donations 10 Costly Tax Errors for Individuals and Businesses Tips for 401k Retirement Investment
Non Profit
Help, My Nonprofit’s Tax Exemption Status Has Been Revoked!
Navigating 501(c)(3) Tax-Exempt Status: Balancing Ease of Maintenance with Potential Pitfalls It’s easy for a 501(c)(3) organization (nonprofit) to maintain its IRS tax-exempt status and it is just as easy to lose it. The IRS recognizes private foundations, churches, educational institutions, hospitals, and many other types of public charities. 501(c)(3) IRS Tax-Exempt Status is a Privilege IRS tax exemption status is a privilege, and your nonprofit organization can lose this status anytime if you’re not careful. There are 6 key areas to stay on the IRS’s good side and keep that tax exemption.Private benefit/inurement Lobbying Political campaign activity Unrelated business income (UBIT) Operation in accordance with the stated exempt purpose(s) Annual reporting obligationYou can learn more about these six key areas here. If your nonprofit fails to file its annual return (Form 990) for three consecutive years, the IRS will automatically revoke your organization's tax-exempt status. This automatic revocation happens by operation of law – there are no exceptions. Check Whether Your Non-Profit is Tax-Exempt The IRS maintains a list of all nonprofits that are tax-exempt called, “Select Check,” which is updated regularly by the IRS. Check the list. If your organization is not listed, contributions to it are no longer tax-deductible to the donor(s).What Happens When a Nonprofit’s Tax-Exempt Status is Revoked? Revocation means that your nonprofit is no longer exempt from federal income tax and will have to pay corporate income tax on annual revenue. Learn more.The organization may be subject to back taxes and penalties for failure to pay corporate income taxes if the effective date of revocation was in a prior tax year.A revocation means that any state tax exemptions that your nonprofit received may also be revoked now. Some of these State Tax exemptions are exemptions for income tax, property tax, and sales/use tax. These State tax exemptions are dependent on your IRS Tax Exempt StatusRevocation will result in your non-profit organization not being listed in IRS Publication 78, which is the official list of organizations eligible to receive tax-deductible charitable contributions.Donors will not be eligible to receive a tax deduction for their gifts to the organization after the revocation date.Most private foundations are unlikely to give a grant directly to nonprofits that are not tax-exempt because their guidelines normally require grantees to be recognized as tax-exempt public charities.What if Automatic Revocation Happened in Error? If you believe that your nonprofit’s tax-exempt status was automatically revoked in error, the IRS encourages you to contact its Customer Account Services (toll-free): (877) 829-5500. Remember, before calling the IRS, be sure to obtain copies of all documentation that you have showing a mistake was made (such as copies of correspondence to or from the IRS demonstrating that an annual return, IRS Form 990 was filed within the last three years). What to do if you believe your organization is listed as revoked in error?Remember that once a charitable nonprofit is no longer tax-exempt, contributions to it are not eligible for a tax deduction. Always be transparent with donors about the tax status of your nonprofit.It is important to be compliant and follow the rules all the time to maintain your tax-exempt status with IRS. Reach out to our team today to get the help you need to maintain this status so that you can focus on supporting the ‘Cause’ that is close to your heart.Related ArticlesDon’t Lose Your Nonprofit’s Tax-Exempt Status! Tax Season Refund Frequently Asked Questions Nonprofit Tax Filing 101 – Get Started Today!
Business Taxes
How to Reduce Your Tax Bill Through Charitable Giving & Donations
Strategic Charitable Giving: Maximizing Tax Deductions and Minimizing Liabilities Charitable giving and donations can be used to reduce your tax bill by taking a tax deduction for the value of the gifts on your income tax return. In order to claim a tax deduction for charitable donations, you must itemize your deductions on your tax return using Schedule A, and the donations must be made to qualified organizations. Additionally, you must keep records of your donations, such as receipts or canceled checks, to prove the value of your gifts to the IRS. Additionally, you can also consider giving appreciated assets, such as stocks, rather than cash since you can deduct the full fair market value of the assets and avoid paying capital gains tax on the appreciation.Make sure the organization you are donating to is a qualified charitable organization. Check with the IRS or consult a tax professional to confirm.Keep records of your donations. This includes receipts, bank statements, or canceled checks.Take advantage of tax deductions for non-cash donations such as clothing, household items, or vehicles. Make sure to get a written receipt from the organization and have the item appraised if it is worth more than $500.Consider making a charitable contribution to a Donor-Advised Fund (DAF), which allows you to make a charitable contribution and get a tax deduction in the current year but then allocate the funds to different charities over time.If you are over 70 1/2 years old, consider making a charitable distribution from your IRA account. This allows you to donate directly from your IRA account, reducing your taxable income and satisfying your required minimum distribution.Keep in mind that charitable giving and donations can also reduce your estate tax.Consult a tax professional to determine the best strategy for maximizing your charitable giving and donations to reduce your tax bill.Always consult with tax professionals before making any financial decision.Optimize your tax savings with the expertise of NexGen Taxes! Our seasoned tax professionals are ready to guide you through effective strategies for minimizing your tax bill via charitable giving and donations. Take the first step towards financial empowerment—Connect with a tax pro today!Related ArticlesDon’t Lose Your Nonprofit’s Tax-Exempt Status! Help, My Nonprofit’s Tax Exemption Status Has Been Revoked! Tax Season Refund Frequently Asked Questions
Chartity
What Has Changed for the 2022 Tax Season?
There Are a Few Changes for the 2022 Tax Season That Individuals and Businesses Should Be Aware Of:Increase in the standard deduction: The standard deduction for the tax year 2022 has increased for all filing statuses. For example, the standard deduction for single filers will be $12,550, up from $12,200 in 2021.Changes to itemized deductions: The Tax Cuts and Jobs Act (TCJA) made changes to itemized deductions starting in 2018. For the tax year 2022, the State and Local Tax (SALT) deduction is limited to $10,000. Additionally, the mortgage interest deduction limit is reduced to $750,000 for mortgages taken out after December 15, 2017.Increased child tax credit: The child tax credit for the tax year 2022 has increased to $3,000 per child under age 17, up from $2,000 in 2021.Extension of certain COVID-related tax breaks: Some tax breaks that were put in place to help individuals and businesses during the COVID-19 pandemic have been extended for tax year 2022. For example, the employee retention credit and the paid sick and family leave credit have both been extended.Changes to the earned income credit: The earned income credit has been expanded for the tax year 2022, with higher income limits and larger credit amounts for families with three or more children.It is important to note that these changes may be subject to change based on legislative actions. It's always best to consult with a tax professional for the most accurate and up-to-date information.Related Articles8 Costly Tax Errors To Avoid While Filing Your Personal Taxes 2021 Tax Law Changes/ Tax Season Refund Frequently Asked Questions
Non Profit
Don’t Lose Your Nonprofit’s Tax-Exempt Status!
Preserving 501(c)(3) Status: Safeguarding Your Nonprofit's IRS Tax-Exempt Designation It’s easy for a 501(c)(3) organization / Nonprofit to maintain its IRS tax-exempt status – and it can be just as easy to lose it. the IRS recognizes private foundations, churches, educational institutions, hospitals, and many other types of public charities. 501(c)(3) IRS Tax-Exempt Status Is a Privilege IRS tax exemption is a privilege, and your 501(c)(3) organization can lose it if you’re not careful. There are 6 key areas to stay on the IRS’s good side and keep that tax exemption.Private benefit Lobbying Unrelated business income (UBIT) Political campaign activity Operation in accordance with the stated exempt purpose Annual reporting obligationPrivate Benefit / Private Inurement If your 501(c)(3) holds an IRS tax exemption, then its activities have to be directed toward an exempt purpose. It should not serve the private interests, or benefit, of any person or organization more than insubstantially.The concept of inurement states that no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual who, because of the person’s relationship to the organization, has an opportunity to control or influence its activities. Prohibited inurement includes the payment of dividends, the payment of unreasonable compensation to insiders, and the transfer of property to insiders for less than fair market value.By the same token, nonprofits with tax exemptions can’t have their income or assets benefit insiders. This includes people like board members, officers, directors, and important employees of an organization. If an organization benefits them, the insiders AND the organization could be subject to penalty excise taxes, and the nonprofit could lose its tax-exempt status.If a 501(c)(3) organization engages in inurement or substantial private benefit, the organization risks losing its exemption. Additionally, insiders guilty of inurement may be subject to excise tax. Lobbying Lobbying is when an organization contacts, or asks the public to contact, lawmakers to propose, support, or oppose the legislation. It’s also considered lobbying when the organization directly advocates for or against any legislation. 501(c)(3) organizations are allowed to do some lobbying. However, if lobbying activities are substantial an organization risks losing its tax-exempt status. An organization can elect to have its lobbying activities measured by an “expenditure test” to determine whether or not the activities are substantial. This is known as a 501(h) election, so named for the section of the Internal Revenue Code where the rules for the expenditure test are spelled out.By making this election, an organization agrees to not spend more than a certain percentage of its total expenses on lobbying activities. The other way to measure lobbying activity is to determine whether, based on all of the pertinent facts and circumstances, an organization’s lobbying comprises a substantial part of its overall activities. This substantial part test is a more subjective method compared to the more mathematical, objective expenditure test.Organizations must file Form 5768, Election/Revocation of Election by an Eligible Sec. 501(c)(3) Organization to Make Expenditures to Influence Legislation, in advance to be subject to the expenditure test. Political Activity Nonprofits cannot participate in political campaigns for or against any candidate for public office, at the federal, state, or local level. All Section 501(c)(3) organizations are prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate running for public office. The prohibition applies to all campaigns (federal, state, and local level). Political campaign intervention includes any and all activities that favor or oppose one or more candidates for public office. The prohibition extends beyond candidate endorsements. Contributions to political campaign funds or public statements of position (verbal or written) made by or on behalf of an organization in favor of, or in opposition to, any candidate for public office clearly violate the prohibition on political campaign intervention.Section 501(c)(3) organizations may engage in some activities to promote voter registration, encourage voter participation, and provide voter education, but they can’t engage in activities that favor or oppose any candidate for public office. Whether an activity is a political campaign intervention depends on all the facts and circumstances.The political campaign intervention prohibition is not intended to restrict free expression on political matters by leaders of organizations speaking for themselves as individuals. Nor are leaders prohibited from speaking about important issues of public policy. However, for their organizations to remain tax-exempt under section 501(c)(3), leaders cannot make partisan comments in official organization publications or at official functions of the organization.To learn more about political activity and nonprofits, check out Charities, Churches, and Educational Organizations – Political Campaign Intervention. Unrelated Business Income (UBI) Earning too much income from activities that aren’t related to your exempt purpose can endanger your exempt status. This kind of income comes from a business activity that is not substantially related to the organization’s exempt purpose. This can get murky because there are some modifications, exclusions, and exceptions.An organization that produces unrelated business income due to its unrelated trade or business may have to pay taxes on that income. The income-producing activity must meet three conditions before the income is potentially taxable.First, the activity must be a trade or business. Second, the trade or business must be regularly carried on. Third, the business activity is not substantially related to an organization’s exempt purpose. In other words, the activity itself does not contribute to accomplishing the exempt purpose for which the non-profit had been set up, other than through the production of funds.Some of the most common UBI-generating activities include the sale of advertising space in weekly bulletins, magazines, journals, or on the organization’s website; sale of merchandise and publications when those items being sold do not have a substantial relationship to the exempt purpose of the organization; provision of management or other similar services to other organizations; and, even some types of fundraising activities. Generally, organizations that generate unrelated business income should file Form 990-T, Exempt Organization Business Income Tax Return, and pay tax on the income.Any non-profit generating money in activities that do not further its specific exempt purposes should be very careful in continuing to do so. In addition to paying taxes on the income from unrelated activities, if those activities are substantial in relation to the exempt purpose activities, the non-profit may be putting its exempt status in jeopardy.For more information about what is considered UBI and how it’s taxed, see Publication 598, Tax on Unrelated Business Income of Exempt Organizations. Annual Reporting Requirements Public charities are exempt from federal income tax, yes. But, the Internal Revenue Code requires most of these organizations to report information every year by filing Form 990. The 990 verifies that the nonprofit still qualify for tax exemption. It’s a public record, and it helps inform the public about the organization’s programs and operations. In addition, the non-profit may also be liable for unrelated business income tax as discussed above, employment tax, excise taxes, and certain state and local taxes.Public charities generally file either Form 990, Return of Organization Exempt from Income Tax, Form 990- EZ, Short Form Return of Organization Exempt from Income Tax or submit online Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ.The type of form or notice required to be filed by the non-profit is determined by its gross receipts and the value of its assets. An organization may file Form 990-EZ if its gross receipts are normally less than $200,000 and if its total assets are less than $500,000 at the end of the year. If the organization’s gross receipts are $200,000 or greater, or if its assets at the end of the tax year are $500,000 or more, the organization generally must file Form 990. If the organization’s annual gross receipts are generally $50,000 or less, the organization may in lieu of Form 990 or 990-EZ submit online new Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required to File Form 990 or 990-EZ.There are some public charities that are not required to file Forms 990 or 990-EZ, including churches and certain church-affiliated organizations. In general, the organizations that do not need to file a Form 990 are:Branches of other nonprofits: Subsidiaries of larger nonprofit organizations may be covered under a general return filed by the parent nonprofit organization. Many government corporations. State organizations that provide essential services. Smaller nonprofit organizations: Those with annual incomes of $25,000 or less do not need to file. Nonprofit organizations not yet in the system: Organizations that have not yet applied for exemption from federal income tax are not required to file a Form 990 as the IRS would not yet have the organization's information. State institutions: Organizations that provide essential services, such as universities, do not need to file a Form 990. Churches and other faith-based organizations.The Pension Protection Act of 2006 provides for the automatic revocation of an organization’s tax-exempt status if it fails to file a required annual information return for three consecutive years. In June 2011, the IRS enforced this provision for the first time by publishing a list of about 275,000 organizations that lost their tax-exempt status for failing to meet their annual filing obligations for three consecutive taxable years.If an organization finds that its exempt status has been automatically revoked due to non-filing and it wants its tax-exempt status reinstated, it will need to reapply and pay the appropriate user fee. Get started today to get the help you need in reinstating the tax-exempt status of your non-profit.You can learn more about filing requirements, including new requirements applicable to supporting organizations, at IRS Nonprofits and Charities. Not Operating Within Your Exempt Purpose Endangers Your 501(c)(3) IRS Tax-Exempt Status This can be really troublesome. A 501(c)(3) with the IRS tax exemption received it because it promised to fulfill a charitable mission or purpose. Day to day it must pursue the exempt activities it promised in its IRS application for exemption. If an organization’s activities go toward something other than its original purposes, it must inform the IRS to prevent future problems. If you’re unsure whether a deviation is significant enough to report, contact a nonprofit attorney.Non-profit organizations must adhere to the guidelines inherent in these six areas. If they continue to do this, they will maintain their tax-exempt status and enjoy its benefits. Questions about 501(c)(3) IRS Tax-Exempt Status? If you have questions about your 501(c)(3) IRS tax-exempt status, schedule your consultation with NexGen Taxes now.Related ArticlesHelp, My Nonprofit’s Tax Exemption Status Has Been Revoked! Nonprofit Tax Filing 101 – Get Started Today! Tax Season Refund Frequently Asked Questions
Track My Refund
8 Costly Tax Errors To Avoid While Filing Your Personal Taxes
Navigating Individual Tax Filing: Common Errors to Avoid for a Smooth Process Filing your taxes as an individual can seem very easy. However, a lot of little details can slip by depending on your due diligence. Here are 8 common tax filing errors committed by people while filing their taxes. 1. Missing/Incorrect Details A lot of missing or incorrect details go unnoticed when people file their tax reforms. People often forget to file entire forms depending on their tax bracket, their assets, and investments. Some of the details inaccurately or entirely left out of tax forms include:Missing or Inaccurate Social Security Numbers: Each SSN on a tax return should appear exactly as printed on the Social Security card. Misspelled Names: A name listed on a tax return should match the name on that person's Social Security card. Missed forms: 1099 forms for Interest and Dividends on the accounts, even the accounts that you didn't actively trade in, needs to be added to your filing2. Incorrect Filing Status Certain taxpayers choose the wrong filing status for their filing. At times, more than one filing status applies to you. Figuring this out can be challenging as the Tax laws change from time to time. If you are in doubt, reach out to our team of tax experts to help you figure out your tax filing status. 3. Mathematical Errors The most common errors are often mathematical mistakes which can range from addition and subtraction to more complex operations. Taxpayers often double-check their math, but it’s better to have software do it automatically for you. 4. Unsigned Forms Unsigned tax returns are invalid. If you are filing a Join Tax Return with your Spouse, your spouse also needs to sign the joint tax return. Some exceptions do exist, like for members of the armed forces, and those taxpayers who have a valid power of attorney. The best solution is to file returns electronically and use a digital signature. 5. Figuring Credits or Deductions Did you know that one of the most common mistakes tax filers make while filing their taxes is figuring out things like their Earned Income Tax Credit, Child, and Dependent Care Credit, Child Tax Credit, and Recovery Rebate Credit? This can be a pain if you’re owed some deductions and want to collect. More importantly, if you don't use these credits correctly, you will get the dreaded letter from the IRS. Having a streamlined tax filing service for individuals can cut down on such errors. If you are in doubt, reach out to our team of tax experts to help you figure out the tax credits and deductions you are entitled to 6. Using an Expired ITIN (Individual Tax Identification Number) Many tax filers use ITIN instead of SSN to file their taxes. However, some of the ITINs series issued previously have expired. It’s quite common for tax returns to be filed using an invalid or expired tax identification number (ITIN). Taxpayers can renew their ITIN number while filing their tax return 7. Filing Too Early While taxpayers should not file late, they also should not file prematurely. People who don't wait to file before they receive all the proper tax reporting documents risk making a mistake that may lead to a processing delay. 8. Incorrect Bank Account Numbers. Taxpayers who are due a refund should choose direct deposit. This is the fastest way for a taxpayer to get their money. However, taxpayers need to make sure they use the correct routing and account numbers on their tax returns.During tax filing season, IRS is usually backlogged. If you have committed one of these errors, your tax file will get stuck in that backlog. The much-awaited tax refund you were looking forward to will be delayed. So don't commit these common mistakes. Better still, use one of the Tax Software to compute your taxes or reach out to our tax experts to help you file your taxes.Related Articles10 Costly Tax Errors for Individuals and Businesses What Has Changed for the 2022 Tax Season? Where is My Refund?
Tax Tips
10 Costly Tax Errors for Individuals and Businesses
Avoiding Costly Mistakes: The Importance of Professional Tax Filing Services for Businesses and Individuals There are several technicalities and inaccuracies through which you can make errors when filing taxes. These errors can be costly for both businesses and individuals, depending on the taxes owed. To make sure you don’t make these errors, you should hire a tax filing service for businesses or individuals. A business like NexGen Taxes has CPAs and tax professionals onboard to help you. Here are 10 costly tax errors which can cost businesses and individuals dearly according to the IRS. 4 Costly Tax Errors for Businesses These 4 tax errors can result in heavy penalties for businesses, big and small. 1. Underpayment of Estimated Taxes Business owners usually estimate what taxes they have to pay if they are paying over $1,000. However, if they don’t pay enough of it through withholding and estimated tax payments, there is a penalty charge. These penalties start from 5% of the underpaid amount. However, they can rise to 25% of that amount as well. Depending on how much you’ve underpaid, the penalty can get larger and larger. 2. Depositing Employment Taxes Business owners have to deposit withholding tax if they have employees. These taxes also include the employer’s share of those taxes. This is done through electronic transfers. However, if not deposited correctly, or before the deadline, those taxes can result in penalties. 3 Late Filing This is a no-brainer. Filing your taxes late will result in a late fee. Whether you’re a business owner or an individual, you have to meet deadlines. These deadlines can vary depending on your status as a filer and the year in question. The tax filing deadline in the US is the 15th day of the 4th month. However, if that date falls on a Saturday, Sunday or legal holiday, it’s pushed to the next business day. 4. Not Separating Personal Expenses It may be easier to use a single credit card for all expenses if your business is a sole proprietorship. However, this can blur the lines between legitimate business expenses and personal expenses. This could cause errors when you claim deductions. It could also be a problem when an audit comes up. 6 Costly Tax Errors for Individuals Filing your own taxes as an individual can seem very easy. However, a lot of little details can slip by depending on your due diligence. Here are 6 tax filing errors for individuals. 1. Missing/Incorrect Details A lot of missing or incorrect details go unnoticed when people file their tax reforms. In fact, people often forget to file entire forms depending on their tax bracket, their various assets, and their investments. The various details inaccurately or entirely left out of tax forms include:• Missing or Inaccurate Social Security Numbers: Every social security number should match the one on your Social Security Card.• Misspelled Names: Your name should be filled out exactly as it appears on your Social Security Card. 2. Incorrect Filing Status Certain taxpayers choose the wrong filing status for their documents. This is one of the major problems that a tax filing service for individuals can help you solve. At times, more than one filing status applies to you. Figuring this out can be extremely tricky for the layman. 3. Mathematical Errors The most common errors are often mathematical mistakes which can range from addition and subtraction to more complex operations. Taxpayers often double-check their math, but it’s better to have software do it automatically. 4. Unsigned Forms Unsigned tax returns are invalid. In several cases, spouses have to sign a joint tax return, so both their signatures are required. Some exceptions do exist, like for members of the armed forces, and those taxpayers who have valid power of attorney. The best solution is to file returns electronically and use a digital signature. 5. Figuring Credits or Deductions Did you know that one of the most common mistakes in tax filing is to figure out things like credits or deductions? This can really be a pain if you’re owed some deductions and want to collect. The mistakes can include things like tax credits, child and dependent card credits, rebate credits, etc. Having a streamlined tax filing service for individuals can really cut down on such errors. 6. Using an Expired Individual Tax Identification Number Finally, it’s quite common for tax returns to be filed using an invalid or expired tax identification number (ITIN). This can work if you just have to file taxes. However, if you’re expecting exemptions or credits from that tax return, it won’t happen. The IRS has clear rules to not allow claims to be filed using an expired ITIN. Taxpayers can renew their number and refile a return to get back the claimed credits and exemptions. These are just a few of the errors that you can commit when filing individual and business taxes. However, if you’re working with a tax filing service, you can significantly minimize your chances of filing taxes incorrectly. Use NexGen Taxes for Your NextGen Tax Filing Needs If you’re looking for a tax filing service for individuals or businesses, look no further than NexGen Taxes. We provide not only a streamlined process for filing your taxes, but a network of experienced professionals to guide you. So, what are you waiting for? Whether you’re a business or a regular citizen, contact NexGen Taxes for tax filing in the 21st century!Related ArticlesWhat Has Changed for the 2022 Tax Season? Why Did I Get a Reduced Refund? Financial Tips For The New Year
Non Profit
Nonprofit Tax Filing 101 – Get Started Today!
Navigating Non-Profit Tax Obligations: A Guide to Successful Filing and Compliance Congratulations! You were able to set up your non-profit to work on the cause you care about. You also did the hard work of getting the non-profit status established with the IRS. Now what? Here are some of your questions answered about tax filing for the non-profit. Do Nonprofit Organizations File Tax Returns? Yes! Nonprofit organizations that have been granted tax exemption by the IRS are required to file an IRS Form 990, an annual information return. You might wonder why, given that such organizations are exempt from paying taxes anyway. To put it in layman’s terms – your nonprofit organization is required to ‘justify’ its tax-exempt status. In other words, the annual tax return of a 501(c)(3) organization proves to the IRS that the nonprofit is living up to its charitable purpose.Unfortunately, there are always some who might take advantage of a nonprofit’s tax-exempt status for personal financial gain. For example, an individual could create a shell company and submit invoices to obtain payments for services not rendered or deliver goods or services marked up excessively. It is for reasons such as these that larger nonprofits, and nonprofits that are recipients of grants, are required to have an independent accountant perform an audit. What is the IRS Form 990? IRS Form 990 is the annual information return or tax return filed by tax-exempt organizations with the IRS that details financial information, including statements of revenue and expenses and balance sheets. Form 990 is an annual compliance report of your organization to the IRS that documents:Information on governance, documentation of decisions made, and written policies to demonstrate accountability and transparency. That your tax-exempt organization is adhering to best practices and stays within the confines of its tax-exempt purpose. That your organization remained compliant with applicable federal tax law, from payroll and information reporting to unrelated business income taxes, and so on. Generally, tax-exempt organizations under section 501(a) of the Internal Revenue Code (which includes 501(c)(3) nonprofits) are required to file annual information returns. Failure to file the IRS Form 990, filing after the due date, or failing to file an extension of time to file, could result in the IRS assessing penalties of up to $20 or more per day. The penalty assessed largely depends on annual gross receipts, for each date the information return is overdue. It is worth noting that penalties will also be assessed if a tax-exempt organization files on time but files inaccurate information or omits any required information. Your information return is considered filed only if it is complete and accurate. What Kind of Tax Return Does a Nonprofit File? There are several types of IRS Form 990s, which are determined by the financial standing of a nonprofit. Nonprofit organizations are required to file form 990 based on their assets, gross receipts, and public charity status.Tax-exempt organizations with gross receipts that are equal to or greater than $200,000 or have total assets of $500,000 or more are required to file Form 990, Return of Organization Exempt from Income Tax.Organizations with gross receipts less than $200,000 and total assets less than $500,000 can file Form 990-EZ, Short Form Return of Organization Exempt from Income Tax.Organizations with gross receipts of at most $50,000 are not required to file either Form 990 or 990-EZ but are required to file, IRS 990-N Electronic Notice (e-Postcard).If the organization is a private foundation rather than a public charity, it is required to file an IRS Form 990-PF regardless of its revenue.To ensure that your tax returns are filed correctly and on time, the team at NexGen Taxes keep track of due dates on your behalf, file extensions when necessary, and triple-check every tax return to account for errors before filing. What Happens if Your Tax Return or Form 990 Has Incorrect or Missing Information? It is not uncommon for nonprofit organizations to file the wrong type of Form 990. All too often, Form 990s might be missing information or even an entire schedule. When this happens, the IRS generally sends back your information return along with one of the following letters:IRS Letter 2694C (Return Form 990 due to missing information)IRS Letter 2695C (Return Form 990-EZ due to missing information)IRS Letter 2696C (Mission Information Request to Process EO Return)If your organization has received one of these letters, Contact Us immediately. Our nonprofit tax filing experts here at NexGen Taxes will assist you in providing a corrected return, along with your explanation detailing why your organization failed to submit the required information. Once you receive one of these letters from the IRS, you have 10 days from the date of the letter to correct your mistake.If your organization fails to file its required information return for 3 consecutive years, the IRS will automatically revoke your tax-exempt status and place your organization on its Auto-Revocation List. Revocation means that your nonprofit organization will now be liable to pay federal income tax and often state income tax on annual revenue. In addition, your donors will no longer be able to make tax-deductible contributions.If your tax-exempt status has been revoked, reach out to the team at NexGen Taxes today, and we will help you reinstate it on your behalf. If your organization has reasonable cause for failure to file on time, we will also request an abatement of penalties assessed. How the IRS Assesses Penalties for Tax-Exempt Organizations The maximum penalty the IRS can assess if an organization fails to file its return is the lesser of either 5% of the organization’s gross receipts or $10,000 for the year. For nonprofit organizations with over a million dollars in gross receipts per annum, the penalty is $100 per day with a maximum of $50,000.To avoid these penalties, your nonprofit must remain aware of Form 990 return due dates, which vary based on your organization’s accounting periods or tax timetable. What is the Due Date of IRS Form 990? Form 990 due dates depend on the specific tax calendar that your nonprofit follows. This table outlines different due dates based on when your nonprofit's tax year ends:Who is Responsible for Filing Non-Profit Taxes? Every nonprofit organization is responsible for filing its taxes, in fact, there are several people within the non-profit organization who are responsible for filing its taxes.The first person you should know about is the Board of Directors. The Board of Directors is often made up of volunteers (or paid employees) who oversee the day-to-day operations of your nonprofit organization and help ensure that all financial responsibilities are met. It's their responsibility to make sure that all tax filings are kept current and accurate so that you don't incur any penalties or fines from the IRS or state department.Another person who might be involved in helping prepare your nonprofit's tax returns each year is an accountant or CPA (certified public accountant). CPAs handle tax preparation for individuals and businesses alike, so if you don't have experience preparing tax returns yourself, it might be worth hiring one at least once every year to do so for you. Reach out to our qualified team of Tax experts to help you get started with tax filing for your non-profit. How Do Non-Profits File Their Taxes? In general, non-profit/exempt organizations are required to file annual returns, although there are exceptions. If an organization does not file a required return or files late, the IRS may assess penalties. In addition, if an organization does not file as required for three consecutive years, it automatically loses its tax-exempt status. You can check which 990 Series Form your organization needs to file on the IRS's Website. You can now file your 990 Form online. What's at Stake if I Forget to File My Non-Profit Taxes? If you don't file your nonprofit taxes on time, you may be hit with tax penalties and fines.Per IRS, if an organization fails to file a required return by the due date (including any extensions of time), it must pay a penalty of $20 a day for each day the return is late. The same penalty applies if the organization does not give all the information required on the return or does not give the correct information.The use of a paid preparer doesn't relieve the organization of its responsibility to file a complete and accurate return.In general, the maximum penalty for any return is the lesser of $10,500 or 5 percent of the organization's gross receipts for the year. For returns required to be filed in 2021, for an organization that has gross receipts of over $1,084,000 for the year, the penalty is $105 a day up to a maximum of $54,000. For returns required to be filed in 2022, for an organization that has gross receipts of over $1,094,500 for the year, the penalty is $105 a day up to a maximum of $54,500.If the organization is subject to this penalty, the IRS may specify a date by which the return of correct information must be filed. If the return is not filed by that date, an individual within the organization who fails to comply may be charged a penalty of $10 a day. The maximum penalty on all individuals for failures concerning a return shall not exceed $5,000.Penalties for failure to file may be abated if the organization has reasonable cause for the failure to file timely, completely, or accurately.Please keep in mind, automatic revocation of your tax exemption status occurs when an exempt organization that is required to file an annual return (e.g., Form 990, 990-EZ, or 990-PF) or submit an annual electronic notice (Form 990-N, or e-Postcard) does not do so for three consecutive years. Under the law, the organization automatically loses its federal tax exemption. The NexGen Taxes team can help you get this tax-exemption status reinstated. Reach Out to us today! How Should I Prepare for Tax Season? Some of the tips you can follow to file taxes are:Prepare to file taxes throughout the year, don't leave it for the last minute. It helps to be organized. Reach Out to us today to get our Non-Profit Tax Organizer to help you be prepared for the tax filing.Have a good understanding of your organization's financials, especially if you're new to running the non-profit. This will help you prepare accurate tax forms and keep records that are necessary for reviewing past years' tax returns.Use the Internal Revenue Service's (IRS) Form 990 series to submit your annual information return. These forms are public records and can be accessed by anyone who requests them online or in person at an IRS office, so make sure they’re accurate!Keep a calendar of when the filing is due and then file taxes for your non-profit on time. The IRS has strict rules about filing deadlines, so make sure you stay up-to-date with these deadlines when preparing for tax season each year.We hope you now have most of your questions answered for filing taxes for your non-profit. If you have any questions about how to file, please reach out to our team of qualified tax professionals. We'd love to hear from you!Related ArticlesHelp, My Nonprofit’s Tax Exemption Status Has Been Revoked! Don’t Lose Your Nonprofit’s Tax-Exempt Status! Tax Season Refund Frequently Asked Questions
Tax Tips
Tips for 401k Retirement Investment
Maximizing Your Retirement Savings: Optimizing 401(K) or 403(B) Plans for a Secure Future For most people retirement planning is synonymous with investing in 401(K) or 403(B) plans as employer-provided tax advantage retirement vehicles are the most used retirement planning tools. Quite frankly, they are some of the best vehicles out there for the average employee. They provide great ways to defer money from your payroll on a pre-tax, or post-tax, basis for retirement. Here are some tips for optimizing your retirement savings through your employer provided 401(K) or 403(B). Sign-up Immediately The old Chinese proverb by Lao Tzu goes “A journey of a thousand miles starts with the first step.” Interpreting it in terms of building your retirement nest egg, if you aren’t contributing to your 401(k) / 403(B), do it now! The sooner you get started the closer you will be to building a nest egg that can help you retire with peace of mind. Minimum Contribution Now even if you are facing challenges in your life, you should still contribute in your 401(k) / 403(B) account to at least the minimum your company will match. For instance, if your company matches on the first 6% you defer, then put minimum 6% away. If you are not doing the minimum contribution, you are leaving literally free money on the table. Beyond the minimum contribution whatever extra you can contribute will be a huge plus but doing the minimum contribution should be a first and foremost priority. 10%-15% The general rule of thumb is to elect a minimum of 10%-15% of your salary from day one to defer into your 401(k) / 403(B) account. This will typically have you in a pretty good position when it comes time to retire. Don’t think about doing all the savings in later part of the year. Nobody can predict future; you might encounter some emergency due to which you might not be able to maximize the contribution in later half of the year. Also, last few months of the year also are filled with holidays. What if did some impulse shopping and are unable to maximize your contribution. So, it makes sense to start contributing into your retirement account from the beginning of the year. Max Out If the minimum target to save is the company match, and the minimum target for a good retirement savings rate is 10%-15%, then what is the maximum we can contribute? Well, in 2022 if you are under 50 years old you can contribute $20,500 with a $6,500 catch-up amount for those 50 or older. Everyone’s goal should be to max out as soon as they can. However, highly paid employees may be restricted in their ability to make 401(k) contributions. A 401(k) plan can elect to stop salary deferrals once a participant's compensation reaches $305,000 in 2022 and can only use up to this amount when providing a 401(k) match. For the 2022 plan year, an employee who earns more than $130,000 in 2021 is a Highly Compensated Employee. Also, keep a lookout year-to-year on the maximum as the government tends to increase these limits frequently. Auto Increase A cool feature that will help big time is the auto increase feature. This is one feature that everyone should check/enable when they sign up It will increase your 401(k) contribution 1% a year until you hit the IRS maximum. Most people don’t even notice the marginal change as it is usually offset with the yearly pay increase and it goes a long way in getting your retirement savings on the right track. Before or After-tax Savings Many companies these days offer both a pre-tax option and a Roth 401(k) option. Whatever you choose or even a mixed combo is still subject to the IRS limits in aggregate. Thus, not allowing you to contribute $20,500 to both accounts. That said, which account should you invest in? This is a personal decision and one that you should discuss with your financial planner. As such a good rule of thumb is the higher your income bracket is, the bigger the benefit of pre-tax contributions are as you’ll likely be in a lower tax bracket at retirement. Of course, the opposite is true for Roth 401(k) contributions. If you are in a modest tax bracket it may be better for you to contribute to the Roth and take the tax hit now in hopes of never paying taxes on those dollars ever again. Keep in mind, whatever type of account you choose the company match always goes into a pre-tax account. How Much Savings for Retirement is Enough This is a great question and the best way to answer this is to consult with your financial planner. A good financial planner can see how much you are earning and based on your unique needs how much you will need in retirement. Having said that, for a quick reference guide go by these guidelines suggested by Fidelity based upon a study it has done of retirement portfolios it holds. At age 30 you should aim to have one times your yearly salary saved in your 401(k), thus if you earn $75,000 your 401(k) balance should be $75,000. By age 40 aim to have three times your yearly salary saved. Age 50 the goal is six times of your yearly salary saved, while at age 60 the minimum target is eight times your yearly salary. This is a good basic guideline to reference while saving for retirement. That said, you can never have too much stashed away in your savings. Brokerage Window 401(k) plans can be a little confining if you have investing experience. Because a 401(k)can only be offered by an employer, you’re stuck investing money into a plan with relatively few investing options compared to the almost limitless options of an IRA or traditional brokerage account. As more people become sensitive to investing fees, employers have started offering 401(k) accounts with a brokerage window. A brokerage window allows you to take advantage of the many other investment options outside of a normal 401(k) and yes, it includes stocks, ETFs, bonds, and even some lower risk trading. If your employer provides this option, and you have solid investment experience or guidance, you should definitely look into it. Essentially, the Provider allows you to pay a nominal fee to elect to open a brokerage window within your 401(k) account. You can then move your balance within the plan to this brokerage window. Once it is done, you’ll have many more investment options, rather than the normal dozen or so your provider offers. However, this can be overwhelming and risky if investing isn’t your strong suit. Good news is that you can easily get someone to help you with investments, and investing in stocks and bonds does not carry any investing fees. How to Invest Once you start making deductions, the next big hurdle is, how to allocate your 401(k). Conventional wisdom is the younger you are the more “aggressive” or equity-based your allocation should be. However, it is a personal decision based on your goals and risk tolerance. You should look at what are the investment options offered by your 401(K) service provider in your plan, and research a little on historical performance and trends of investment options. Choose investment offerings based on this research and your investment goals. Target Date Funds Most 401(k) plans these days offer ‘No Brainer’ target date funds. These are funds where you choose a retirement date and basically let it ride. The funds will shift through the years to a more and more conservative allocation or more bond-focused as it starts getting close to your target retirement date. For some, these are simple and get the job done. However, if you have experience with investing, you don’t have to put your funds in the Target Date Funds. Keep in mind, that most of these Target Date Funds have additional costs associated with them. Also, the fact of the matter is the investing, and investment allocation is a very personal decision so generalizing it with a Target Date Fund should be your last choice. The investment choices should be based on goals and needs, rather than arbitrary age allocation. If you are uncomfortable making investment choices by yourself, reach out to your 401(K) service provider to get help. Rebalance Often missed or misunderstood by many is the option of rebalancing your retirement portfolio. By selecting this option (semiannually if not quarterly) your 401(k) portfolio will be rebalanced at your chosen interval back to your preselected allocation. You may ask why is it important. Because funds performance is not guaranteed so with the passage of time you may find your 60/40 Stocks / Bonds allocation has drifted into a 90/10 Stocks / Bonds allocation which may leave you exposed and out of your comfort zone. Active vs. Passive Funds Another question that comes up time and again is whether to go with actively managed funds or passively managed (index) funds while selecting funds in your retirement portfolio. Frankly speaking, there are benefits to both. During certain time periods, and for certain sectors that will benefit from both active and passive management. It is advisable to get exposure to both in hopes of smoothing out the ride. Diversification It is a good idea to hold different funds in different sectors within your retirement portfolio. This will help you in smoothing out the ride a bit and you won’t end up putting all your eggs in one basket. It also can go a long way in protecting the downside from one sector decimating your retirement savings. Rollover Old 401(k) Don’t forget to take care of your old 401(K) with your ex-employers. Roll them into an IRA or Roth IRA depending on how you contributed in the first place. This way you will have endless investment options vs. the handful that your ex-employer is offering. If you consolidate them into a single IRA it will become more manageable and you won’t have to spend endless hours taking care of multiple IRAs with multiple providers. Rollover of an old 401(k) into an IRA is tax-free to do and relatively easy. In the long term, you will see enormous benefits from this move. Audit Your Retirement Accounts Once a year you should audit your retirement accounts. A retirement account is not like your checking account that you need to keep a close eye on. However annually or semiannually do an audit of the account and check for the following:Is your allocation still appropriate? How has the performance been? Any new funds available? Any new features added like Roth or open architecture? Is your contribution rate appropriate, or can you do more? If intending to max out, are you on track to hit the limits? if you are 50 or older have you selected the catch-up option? Are you receiving the full employer match? Any change in your beneficiaries?After Tax Strategy Last but not least, see if you can do a Mega Back-Door Roth. A Mega Back-Door Roth is a special type of 401(k) rollover strategy used by high earners to deposit funds in a Roth IRA account. This strategy only works under certain circumstances for people with extra money they would like to stash in a Roth IRA. In short, if your employer allows after-tax (different than Roth 401(K)) contributions, you can contribute above and beyond the $20,500 limit (up to $61,000 including all sources if under 50 or $67,500 if you are 50 or over) to an after-tax bucket. Then typically once a year you can convert just the after-tax dollars to a Roth IRA of your own effectively making a substantial Roth IRA contribution each year from already after-tax dollars. If this sounds complicated it probably is so it would be probably better to get help from an investment professional.If you keep on following these tips year after year, you will have a stellar nest egg built by the time you are ready to retire. Click Here to Get Started! Let's GoRelated ArticlesIRS Has Announced 2024 Retirement Account Contribution Limits: Start Your Retirement Planning Today! What Has Changed for the 2022 Tax Season? Financial Tips For The New Year
Track My Refund
Check Your State Refund Status
Track Your State RefundLet's help you track your State Tax Refund Status. If you are wondering when you will receive your refund? The answer depends on how you filed your return. The state should typically issue your refund check within six to eight weeks of filing a paper return. If you use e-file, your refund should be issued between two and three weeks. You can check on the status of your refund by clicking on the links below.Select state and press submit to open corresponding state websiteState FilesAlabamaCaliforniaDelawareAlaskaColoradoGeorgiaArizonaConnecticutHawaiiIdahoIowaLouisianaIllinoisKansasMaineIndianaKentuckyMarylandMassachusettsMississippiNew JerseyMichiganMontanaNew MexicoMissouriNebraskaNew YorkNorth CarolinaOklahomaRhode IslandNorth DakotaOregonSouth CarolinaOhioPennsylvaniaUtahVermontWisconsinWyomingVirginiaWashingtonNorth Carolina (NC)West Virginia
Child Tax Credit
IRS Letter 6419-Reporting Child Tax Credit Payments
IRS Letter 6419: How Do I Report My Child Tax Credit Payments? Now that the tax season is about to start, you must be collecting your tax documents to file your taxes. While doing this, keep an eye out for IRS Letter 6419. The IRS is planning to send this important notice in late January to those who received Advance Child Tax Credit Payments in 2021.You may ask, why is this letter so important? The details in the document will not only help you report your advance payments correctly—it will also help you claim the other half of your Child Tax Credit that is still pending. Additionally, by reporting the amount reported in IRS Letter 6419, you can avoid delays in processing and sending your refund that might arise due to mismatch in amount.So let’s dig deeper into what is the IRS Letter 6419 and what you can do in case you didn’t receive this letter or lost it. What is a Letter 6419? The IRS Letter 6419 is the official documentation that has the details you need to report your advance Child Tax Credit (CTC) payments.Specifically, it will show you:The total amount of advance CTC payments you received for 2021. This information will go on Schedule 8812, line 14f or 15e as applicable. Number of qualifying children counted in determining the advance CTCIn addition to the details above, the letter 6419 will also outline how the IRS calculated your amount and the conditions for repayment. You can also find those details here in our 2021 Child Tax Credit article. Do I Really Need the 6419 Letter to File My Taxes or Can I Just Use My Bank Statement? As such it is not required for you to have the IRS Letter 6419 but we would strongly encourage you to reference IRS Letter 6419 before you file your taxes. Using incorrect amounts on your return can trigger a manual review of your return, which can result in a possible delay in processing your return—and a refund for weeks.Also, using your bank statements may not be the best route. In some cases, amounts may have been adjusted due do a variety of reasons, including if the processing of a 2020 return after an initial advance CTC payment was made. Or, the amounts may have changed from one payment to the next as you made changes in the IRS Child Tax Credit portal.Ready to file but don’t have your IRS Letter 6419? Read on to learn about using the IRS Child Tax Credit portal as an alternative. Who Will Receive the IRS Letter 6419? Anyone who received at least one advance Child Tax Credit payment from July 2021 to December 2021 will receive the IRS Letter 6419. So, even if you stopped payments after receiving your first or second payment, you should still expect to receive a letter.In case of ‘Married’ filers, both spouses will receive their own IRS Letter 6419. You’ll need to have both documents to file an accurate return and claim the second half of your credit. Help, I Can’t Find My IRS Letter 6419. If you’re ready to file, but don’t have your letter, there is an alternative. You can use the IRS Child Tax Credit portal with an ID.me account to verify the details from the letter.Here’s how to check your advance child tax credit payments:Create a new ID.me account (if you don’t have one) by going to: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal Click Manage Advance Payments Click ID.me Create New Account Follow the on-screen instructions to provide information to set up the secure ID.me account. Note that users may be asked to create a live video of themselves (using phone or webcam) and/or upload photo identification.Once you’ve created an ID.me account, you can access the portal at the link directly above. Need Help Reporting Advance Child Tax Credit Payments? Need help filing your IRS letter 6475, NexGen Taxes team of fully vetted accounting and tax professionals can help you report the advance payments you received in 2021 and help you claim the second half of your Child Tax Credit payment on your return. We are here for you 24/7, reach out to us today.Related ArticlesTax Season Refund Frequently Asked Questions Help, I’m Missing My IRS Letter 6475 How Do I Report My Child Tax Credit Payments?
News
2021 Tax Law Changes
It is easier to keep up with Kardashians than with ever-changing tax laws!! No wonder it gets challenging to file your taxes. You have been closely following news about all tax-related changes and then you blinked and now you don’t know what you missed! Luckily, the team at NexGen Tax is here to walk you through the must-know tax law changes for 2021, so you can file your taxes with confidence. Top 10 Must-know changes for 2021 taxes Here is a summary of the top tax law changes for 2021 and a brief outline of what has changed along with the reason why it could matter to you.Need help navigating 2021 tax law changes? NexGen Tax team of fully vetted accounting and tax professionals will evaluate your tax situation and can help you determine whether you qualify for a deduction and identify other opportunities to minimize your taxes. Contact our Tax Services team to learn how legislation can impact you or can benefit you. Reach out to us today. 2021 Tax Changes Impacting Individual Tax Filing Stimulus payments and Recovery Rebate Credits You need to report any stimulus payments you received in the spring of 2021 on your tax return. At the time of tax filing, if you realize that you didn’t get every dollar you should have, you can claim a Recovery Rebate Credit to get the money you deserve. Unlike last year, the IRS will send out Letter 6475 in January to everyone who received the Stimulus payments, which will show the amount you received for 2021. To avoid tax refund delays, you may want to use the amounts shown on your Letter 6475 to report your payment and claim any additional money. Find out more about Letter 6475 and how to validate your amount if you don’t have your letter. Child Tax Credit The Child Tax Credit was expanded in 2021 to provide more money for more families. With this 2021 tax law change, up to half of the credit was paid as advance payments, while the other part can be claimed when you file. To provide relief to families during difficult COVID-19 pandemic times, this is the first time child tax credit has been sent in advance to families. As part of your 2021 tax filing, you need to accurately report the advance amount on your 2021 returns to claim the remainder of your child tax credit. The IRS will send Letter 6419 to you in January, which will show the amount of advance payment you received. To avoid tax refund delays, you may want to use the amount shown on your Letter 6419 to report your advance payments and claim the rest of your credit. Find out more about Letter 6419 and how to validate your amount if you don’t have your letter. You can estimate the Child Tax Credit with our child tax credit calculator. Earned Income Tax Credit The Earned Income Tax Credit has always been a valuable tax credit for families whose income falls beyond a certain threshold but understanding who is eligible for it has always been a bit complicated. For the tax year 2021, the IRS has expanded the maximum credit for childless workers from $538 to about $1,500, making this credit even more valuable. Additional changes include lowering the bottom age limit to 19 and allowing those without children to claim the credit if they are 65 or older. These changes are new for 2021 tax filing. Besides this, you can also choose to use your 2019 income to calculate your Earned Income Credit amount if your 2019 earned income is larger than your 2021 earned income and that provides a larger credit (this is called the Lookback Rule). However, keep in mind that if you decide to use your 2019 income for calculation, it might take the IRS more time to process your refund. As you may already know the Earned Income Credit is refundable, meaning after it helps reduce your tax bill, you could potentially get your money back. With the changes above and the potential for a delay related to using the Lookback Rule, it is always advisable to get help from a tax expert to file your taxes. NexGen Taxes team of fully vetted accounting and tax professionals will evaluate your tax situation, and analyze to figure out if choosing to use the Lookback Rule can qualify you for a better refund and help you in minimizing your taxes. Child and Dependent Care Credit The Child and Dependent Care Credit allows families to claim expenses related to the care of a child or someone who is physically or mentally unable to care for themselves. While filling 2021 taxes, families may now claim a refundable credit of up to 50% of qualifying expenses, meaning they could claim a maximum credit of:$4,000 for one qualifying child (based on $8,000 of expenses)$8,000 for two or more qualifying children (based on $16,000 of expenses)As this is a refundable credit, this tax benefit not only will help in lowering the tax you owe, but it also can potentially help you in getting your money back. You can estimate the Child Tax Credit with our child tax credit calculator. Unemployment Income Taxability Historically unemployment income is considered taxable income by the IRS. However, in the tax year 2020 due to the pandemic, the unemployment income up to $10,200 was excluded for tax purposes. For tax filing for 2021, the tax law has changed back to what it was before 2020 which means, any unemployment compensation received will be subject to income taxes. If you received unemployment income in 2021, please make sure to include that in your taxable income. In case, you had taxes withheld from your unemployment benefits as they were paid out, you might have already covered a portion of your tax liability for this income. Education Credit Changes The cost of going to college is high. However, education-related tax benefits can help make college more affordable for students and their families. For the tax filing year, 2021 few changes have been made to these tax benefits to make them more streamlined. While the Tuition and Fees deduction has not been extended for the tax year 2021, eligibility has been extended for more people for the Lifetime Learning Credit. To extend the eligibility, the phase-out range for this credit has been increased to $80,000-$90,000 for single filers and from $160,000 to $180,000 for joint filers. As such this credit still carries a value of up to $2,000 While the eligibility for the Lifetime Learning Credit for higher education has been extended, American Opportunity Credit still gives you a better refund. However, you need to carefully review other factors to consider around choosing between the Lifetime Learning Credit or American Opportunity Credit when filing as a student or filing with a dependent student. Wrongfully applied education credits are one of the leading causes of Tax audits but the IRS. Get help from the NexGen Taxes team of fully vetted accounting and tax professionals to which credit is best suited for your tax situation. Charitable Contributions When the standard deduction was doubled in 2017, far fewer taxpayers were still able to itemize their deductions. This impacted the deductions related to charitable contributions as well. The 2021 tax law change allows for a deduction of up to $600 in cash charitable contributions for those married filing jointly and up to $300 for individuals and married filing separately. This deduction is available to all taxpayers whether you use the standard deduction or itemize your deductions. So make sure you keep the receipts of your charitable contributions handy and use this deduction to lower your tax liability. 2021 & 2022 Tax Changes Premium Tax Credit For Health Insurance If you are one of those who buy health insurance from the federal or state marketplace, the Premium Tax Credit gives health insurance premiums give you relief and makes it more affordable. A larger tax credit was put in place for the tax years 2021 and 2022. For households to pay a smaller share of their income towards premiums, they get a higher premium tax credit. You can use the credit to pay a smaller share of your income towards the premium. Change Impacting Business Tax Filing 100% Business Meal Tax Deduction To incentivize visits to restaurants after the pandemic, an expanded business meal deduction was added for the tax years 2021 and 2022. Unlike previous years the deduction now covers 100% of business meals that are dine-in, catered, or take-out; and a 50% limit is in place for food and beverages not from restaurants. So start gathering receipts on your business meals that meet the criteria for business meal deductions, so you can claim the deduction for the tax years 2021 and 2022. Employer Incentives And Payroll Credits For Small Business The 2021 American Rescue Plan Act put in place several new or expanded credits that impacted employer payroll returns, especially among small businesses. This business stimulus relief was designed to help keep people on the payroll through a long period of economic uncertainty. Payroll credits for continuing to pay employees in adverse situations were extended and a new credit for covering health insurance premiums was added. There are multiple credits employers can use for their payroll tax filings. If you’re a small business owner and you have people on the payroll, or if this is your first year with employees on a payroll, there may be credits and incentives you’re unaware of for payroll quarters during 2021. NexGen Taxes team of fully vetted accounting and tax professionals will evaluate your tax situation, and analyze to figure out what credits your business can qualify for to help you in minimizing your taxes. 2022 Tax Changes A major change coming in for tax year 2022 that impacts gig workers 1099-K Rule Change For Gig Workers Previously, workers who received payments via credit card or a third-party payment network received Form 1099-K if they had more than 200 individual payments and $20,000 in payments. When you report this income, you also report the expenses associated with your business. Starting in 2022, these thresholds have been significantly lowered. Now you only need payment transactions of $600 or more. While the first 1099-Ks under this rule won’t be sent until Jan. 2023, if you expect to meet this new threshold, you’ll have additional tax responsibilities—this year. For starters, you may want to consider making or adjusting quarterly estimated tax payments to help avoid an unexpected tax bill and to avoid underpayment penalties. Need Help Navigating 2021 Tax Laws? With the ever-changing tax laws, you may want to work with a tax pro to have peace of mind. We’re ready to help you in tax season 2021! Get started with filing taxes online with the NexGen Taxes team of fully vetted accounting and tax professionals who will analyze your tax situation to help minimize your taxes. We are here for you 24/7, reach out to us today.Related ArticlesWhat Has Changed for the 2022 Tax Season? Financial Tips For The New Year 10 Costly Tax Errors for Individuals and Businesses
Child Tax Credit
Help, I Am Missing IRS Letter 6475
Navigating Tax Changes: Reporting Stimulus Payments and IRS Letter 6475 for the 2021 Tax Season Due to the pandemic and the 2021 American Rescue Plan Act, tax filing has seen many changes. One of them is reporting stimulus payments received in 2021. Reporting of stimulus payments for the tax year 2021 will look a little different for the 2021 tax season. To help taxpayers report the correct amount, the IRS will begin to send out a new type of document in late January, it will be IRS Letter 6475.Just like every year, you are eager to file your taxes and get your refund but you should wait to file your taxes till you receive Letter 6475 from the IRS. Using the figures in this letter will not only help you report your 2021 stimulus payment correctly—but it will also help you avoid delays in getting back your refund. What is IRS Letter 6475? IRS Letter 6475 only applies to the third round of Economic Impact Payments, which were issued in March through December of 2021. The third round of Economic Impact Payments, including "plus-up" payments, were advance payments of the 2021 recovery rebate credit that would be claimed on a 2021 tax return. Plus-up payments were additional payments the IRS sent to people who received a third Economic Impact Payment based on a 2019 tax return or information received from the Social Security Administration, Railroad Retirement Board, or Veterans Affairs. Plus-up payments were also sent to people who were eligible for a larger amount based on their 2020 tax return. Anyone who received a 2021 stimulus payment will be sent letter 6475. Does Letter 6475 Need to be Filed? Can’t I Use My Bank Statement?As such it is not required for you to have the 6475 letters but we would like to encourage you to wait for your 6475 letters before filing taxes for 2021 vs. using other sources to figure out the amount. If the amount you gathered from alternate sources is different from what is reported by the IRS then it could trigger a manual review of your return, which could delay your return – and refund for weeks.While you may have received a Letter 1444-C after receiving your stimulus payment, that’s not the document the IRS recommends you use to prepare your tax return. What if I can’t find my Letter 6475? If you’re ready to file your taxes, but you have still not received your 6475 letters, there is an alternative. You can create an ID.me account with the IRS to verify the details from the 6475 letters.Here’s how to check your Economic Impact Payment:• Create a new ID.me account (if you don’t have one) by going to: https://www.irs.gov/payments/your-online-account • Click Sign in to your Online Account • Click ID.me to Create a New Account • Follow the on-screen instructions to provide information to set up the secure ID.me account. Note that users may be asked to create a live video of themselves (using a phone or webcam) and/or upload photo identification. For help, visit the ID.me help page. Get Started Now Once you’ve created an ID.me account, you can access your online account at the link directly above. In your online account, you should be able to see all transactions including the Economic Impact Payment. What should you do with IRS Letter 6475?Once you get your letter, you need to use the amount shown on your Recovery Rebate Worksheet to determine if any credit applies.“I’m not required to file taxes. Is there a benefit to reporting this money?”Yes, even if you are not required to file taxes, you should file taxes to be eligible for more money later on.For example:• If you believe you didn’t receive the full stimulus payment amount that you were due, you can file a 2021 federal income tax return to claim the additional money. This is known as a Recovery Rebate Credit.• You may be entitled to a refundable credit, such as a Child Tax Credit or Earned Income Credit. That means, when you file, you’ll get your money back. But the catch is, you have to first file your tax return to claim that money. Get Help Filing Your IRS Letter 6475 and Getting Back the Dollars You Deserve. Need help filing your IRS letter 6475, NexGen Taxes team of fully vetted accounting and tax professionals can help you report the advance payments you received in 2021 and help you claim any other credits or deductions you’re entitled to. We are here for you 24/7, reach out to us today.10NovRestricted Stock Units – RSU Vesting & Taxation For DummiesRead More07NovIRS Has Announced 2024 Retirement Account Contribution Limits: Start Your Retirement Planning Today!Read More26AugHelp, My Nonprofit’s Tax Exemption Status Has Been Revoked!Read More
Tax Tips
2021 Tax Law Changes
Decoding 2021: A Concise Guide to Key Tax Law Changes and How They Impact You It is easier to keep up with Kardashians than with ever-changing tax laws!! No wonder it gets challenging to file your taxes. You have been closely following news for all tax-related changes and then you blinked and now you don’t know what you missed!Luckily, the team at NexGen Taxes is here to walk you through the must-know tax law changes for 2021, so you can file your taxes with confidence. Top 10 Must-Know Changes for 2021 Taxes Here is a summary of the top tax law changes for 2021 and a brief outline of what has changed along with the reason why it could matter for you.Need help navigating 2021 tax law changes? NexGen Taxes team of fully vetted accounting and tax professionals will evaluate your tax situation and can help you determine whether you qualify for a deduction and identify other opportunities to minimize your taxes. Contact our Tax Services team to learn how legislation can impact you or can benefit you. Reach out to us today. 2021 Tax Changes- Impacting Individual Tax Filing 1. Stimulus payments and Recovery Rebate Credits You need to report any stimulus payments you received in the spring of 2021 on your tax return. At the time of tax filing, if you realize that you didn’t get every dollar you should have, you can claim a Recovery Rebate Credit to get the money you deserve. Unlike last year, the IRS will send out Letter 6475 in January to everyone who received the Stimulus payments, which will show the amount you received for 2021. To avoid tax refund delays, you may want to use the amounts shown on your Letter 6475 to report your payment and claim any additional money. Find out more about Letter 6475 and how to validate your amount if you don’t have your letter. 2. Child Tax Credit The Child Tax Credit was expanded in 2021 to provide more money for more families. With this 2021 tax law change, up to half of the credit was paid as advance payments, while the other part can be claimed when you file. To provide relief to families during difficult COVID-19 pandemic times, this is the first time child tax credit has been sent in advance to families. As part of your 2021 tax filing, you need to accurately report the advance amount on your 2021 returns to claim the remainder of your child tax credit. The IRS will send Letter 6419 to you in January, which will show the amount of advance payment you received. To avoid tax refund delays, you may want to use the amount shown on your Letter 6419 to report your advance payments and claim the rest of your credit. Find out more about Letter 6419 and how to validate your amount if you don’t have your letter. 3. Earned Income Tax Credit The Earned Income Tax Credit has always been a valuable tax credit for families whose income falls beyond a certain threshold but understanding who is eligible for it has always been a bit complicated. For the tax year 2021, the IRS has expanded the maximum credit for childless workers from $538 to about $1,500, making this credit even more valuable. Additional changes include lowering the bottom age limit to 19 and allowing for those without children to claim the credit if they are 65 or older. These changes are new for 2021 tax filing. Besides this, you can also choose to use your 2019 income to calculate your Earned Income Credit amount if your 2019 earned income is larger than your 2021 earned income and that provides a larger credit (this is called the Lookback Rule). However, keep in mind that if you decide to use your 2019 income for calculation, it might take the IRS more time to process your refund.As you may already know the Earned Income Credit is refundable, meaning after it helps reduce your tax bill, you could potentially get money back. With the changes above and the potential for a delay related to using the Lookback Rule, it is always advisable to get help from a tax expert to file your taxes. NexGen Taxes team of fully vetted accounting and tax professionals will evaluate your tax situation, and analyze to figure out if choosing to use the Lookback Rule can qualify you for a better refund and help you in minimizing your taxes. 4. Child and Dependent Care Credit The Child and Dependent Care Credit allows families to claim expenses related to the care of a child or someone who is physically or mentally unable to care for themselves. While filling 2021 taxes, families may now claim a refundable credit of up to 50% of qualifying expenses, meaning they could claim a maximum credit of:• $4,000 for one qualifying child (based on $8,000 of expenses)• $8,000 for two or more qualifying children (based on $16,000 of expenses)As this is a refundable credit, this tax benefit not only will help in lowering the tax you owe, but it also can potentially help you in getting your money back. 5. Unemployment Income Taxability Historically unemployment income is considered taxable income by the IRS. However, in the tax year 2020 due to the pandemic, the unemployment income up to $10,200 was excluded for tax purposes. For tax filing for 2021, the tax law has changed back to what it was before 2020 which means, any unemployment compensation received will be subject to income taxes. If you received unemployment income in 2021, please make sure to include that in your taxable income. In case, you had taxes withheld from your unemployment benefits as they were paid out, you might have already covered a portion of your tax liability for this income. 6. Education Credit Changes The cost of going to college is high. However, education-related tax benefits can help make college more affordable for students and their families. For the tax filing year, 2021 few changes have been made to these tax benefits to make them more streamlined. While the Tuition and Fees deduction has not been extended for the tax year 2021, eligibility has been extended for more people for the Lifetime Learning Credit. To extend the eligibility, the phase-out range for this credit has been increased to $80,000-$90,000 for single filers and from $160,000 to $180,000 for joint filers. As such this credit still carries a value of up to $2,000 While the eligibility for the Lifetime Learning Credit for higher education has been extended, American Opportunity Credit still gives you a better refund. However, you need to carefully review other factors to consider around choosing between the Lifetime Learning Credit or American Opportunity Credit when filing as a student or filing with a dependent student. Wrongfully applied education credits are one of the leading causes of Tax audits but the IRS. Get help from the NexGen Taxes team of fully vetted accounting and tax professionals to which credit is best suited for your tax situation. 7. Charitable Contributions When the standard deduction was doubled in 2017, far fewer taxpayers were still able to itemize their deductions. This impacted the deductions related to charitable contributions as well. The 2021 tax law change allows for a deduction of up to $600 in cash charitable contributions for those married filing jointly and up to $300 for individuals and married filing separately. This deduction is available to all taxpayers whether you use the standard deduction or itemize your deductions. So make sure you keep the receipts of your charitable contributions handy and use this deduction to lower your tax liability. 2021 & 2022 Tax Changes 8. Premium Tax Credit For Health Insurance If you are one of those who buy health insurance from the federal or state marketplace, the Premium Tax Credit gives health insurance premiums give you relief and makes it more affordable. A larger tax credit was put in place for the tax years 2021 and 2022. For households to pay a smaller share of their income towards premiums, they get a higher premium tax credit. You can use the credit to pay a smaller share of your income towards the premium. Change Impacting Business Tax Filing 9. 100% Business Meal Tax Deduction To incentivize visits to restaurants after the pandemic, an expanded business meal deduction was added for the tax years 2021 and 2022. Unlike previous years the deduction now covers 100% of business meals that are dine-in, catered, or take-out; and a 50% limit is in place for food and beverages not from restaurants. So start gathering receipts on your business meals that meet the criteria for business meal deductions, so you can claim the deduction for the tax years 2021 and 2022. 10. Employer Incentives And Payroll Credits For Small Business The 2021 American Rescue Plan Act put in place several new or expanded credits that impacted employer payroll returns, especially among small businesses. This business stimulus relief was designed to help keep people on the payroll through a long period of economic uncertainty. Payroll credits for continuing to pay employees in adverse situations were extended and a new credit for covering health insurance premiums was added. There are multiple credits employers can use for their payroll tax filings. If you’re a small business owner and you have people on the payroll, or if this is your first year with employees on the payroll, there may be credits and incentives you’re unaware of for payroll quarters during 2021. NexGen Taxes team of fully vetted accounting and tax professionals will evaluate your tax situation, and analyze to figure out what credits your business can qualify for to help you in minimizing your taxes. 2022 Tax Changes A major change coming in for the tax year 2022 that impacts gig workers: 1099-K Rule Change For Gig Workers Previously, workers who received payments via credit card or a third-party payment network received Form 1099-K if they had more than 200 individual payments and $20,000 in payments. When you report this income, you also report the expenses associated with your business. Starting in 2022, these thresholds have been significantly lowered. Now you only need payment transactions of $600 or more. While the first 1099-Ks under this rule won’t be sent until Jan. 2023, if you expect to meet this new threshold, you’ll have additional tax responsibilities—this year. For starters, you may want to consider making or adjusting quarterly estimated tax payments to help avoid an unexpected tax bill and to avoid underpayment penalties. Need Help Navigating 2021 Tax Laws? With the ever-changing tax laws, you may want to work with a tax pro to have peace of mind. We’re ready to help you in tax season 2021! Get started with filing taxes online with the NexGen Taxes team of fully vetted accounting and tax professionals who will analyze your tax situation to help minimize your taxes. We are here for you 24/7, reach out to us today.
Child Tax Credit
How Do I Report My Child Tax Credit Payments?
IRS Letter 6419: How Do I Report My Child Tax Credit Payments? Now that the tax season is about to start, you must be collecting your tax documents to file your taxes. While doing this, keep an eye out for IRS Letter 6419. The IRS is planning to send this important notice in late January to those who received Advance Child Tax Credit Payments in 2021.You may ask, why is this letter so important? The details in the document will not only help you report your advance payments correctly—but it will also help you claim the other half of your Child Tax Credit that is still pending. Additionally, by reporting the amount reported in IRS Letter 6419, you can avoid delays in processing and sending your refund that might arise due to a mismatch in the amount. So let’s dig deeper into what is IRS Letter 6419 and what you can do in case you didn’t receive this letter or lost it. What is a Letter 6419? The IRS Letter 6419 is the official documentation that has the details you need to report your advance Child Tax Credit (CTC) payments. Specifically, it will show you:The total amount of advance CTC payments you received for 2021. This information will go on Schedule 8812, line 14f or 15e as applicable. Number of qualifying children counted in determining the advanced CTC. In addition to the details above, letter 6419 will also outline how the IRS calculated your amount and the conditions for repayment. You can also find those details here in our 2021 Child Tax Credit article. Do I Need the Letter 6419 to File My Taxes or Can I Just Use My Bank Statement? As such it is not required for you to have the IRS Letter 6419 but we would strongly encourage you to reference IRS Letter 6419 before you file your taxes. Using incorrect amounts on your return can trigger a manual review of your return, which can result in a possible delay in processing your return—and a refund for weeks. Also, using your bank statements may not be the best route. In some cases, amounts may have been adjusted due to a variety of reasons, including the processing of a 2020 return after an initial advance CTC payment was made. Or, the amounts may have changed from one payment to the next as you made changes in the IRS Child Tax Credit portal. Ready to File But Don’t Have Your IRS Letter 6419? Read on to learn about using the IRS Child Tax Credit portal as an alternative. Who Will Receive IRS Letter 6419? Anyone who received at least one advance Child Tax Credit payment from July 2021 to December 2021 will receive the IRS Letter 6419. So, even if you stopped payments after receiving your first or second payment, you should still expect to receive a letter.In the case of ‘Married’ filers, both spouses will receive their own IRS Letter 6419. You’ll need to have both documents to file an accurate return and claim the second half of your credit. Help, I can’t find my IRS Letter 6419 If you’re ready to file, but don’t have your letter, there is an alternative. You can use the IRS Child Tax Credit portal with an ID.me account to verify the details from the letter. Here’s how to check your advance child tax credit payments:Create a new ID.me account (if you don’t have one) by going to: https://www.irs.gov/credits-deductions/child-tax-credit-update-portal Click Manage Advance Payments Click ID.me to Create a New Account Follow the on-screen instructions to provide information to set up the secure ID.me account. Note that users may be asked to create a live video of themselves (using a phone or webcam) and/or upload photo identification. For help, visit the ID.me help page. Once you’ve created an ID.me account, you can access the portal at the link directly above. Need Help Reporting Advance Child Tax Credit Payments? Need help filing your IRS letter 6475, NexGen Taxes team of fully vetted accounting and tax professionals can help you report the advance payments you received in 2021 and help you claim the second half of your Child Tax Credit payment on your return. We are here for you 24/7, reach out to us today.
