We often discuss federal taxes here, from tax filings to deductions and credits. However, it’s important to note that federal taxes are typically only one half of a taxpayer’s responsibility. In addition to filing and paying federal taxes each year, taxpayers must also stay on top of their state tax responsibilities if they have any. Here we will discuss the different types of state tax systems, as well as the 2023 state income tax rates and brackets.
State Tax Systems
Not every state taxes their residents the same. In fact, some states don’t tax at all. These states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire does not tax regular income, but it does have a 5% tax on dividend and interest income. All other states either use a flat tax system or a progressive tax structure.
Flat Tax System
The flat tax system is the simpler of the two and involves one tax rate for most types of income. The factor that could change state to state is which income is considered taxable. Some states alternatively tax according to AGI instead of taxable income. States that have a flat tax rate in 2023 are:
Arizona – 2.5% of taxable income
Colorado – 4.4% of taxable income
Idaho – 5.8% of taxable income
Illinois – 4.95% of taxable income
Indiana – 3.15% of taxable income
Kentucky – 4.5% of taxable income
Michigan – 4.05% of taxable income
New Hampshire – 4% on dividends and interest income only
The remaining states use a progressive tax system, in which higher incomes are taxed at higher rates. In 2023, states that use a progressive tax system are:
State
Tax Rates
Number of Brackets
Alabama
2%-5%
3
Arkansas
2%-4.9%
3
California
1%-12.3%
9
Connecticut
3%-6.99%
7
Delaware
0%-6.6%
7
District of Columbia
4%-10.75%
7
Georgia
1%-5.75%
6
Hawaii
1.4%-11%
12
Iowa
4.4%-6%
4
Kansas
3.1%-5.7%
3
Louisiana
1.85%-4.25%
3
Maine
5.8%-7.15%
3
Maryland
2%-5.75%
8
Massachusetts
5%-9%
2
Minnesota
5.35%-9.85%
4
Mississippi
0%-5%
2
Missouri
1.5%-4.95%
8
Montana
1%-6.75%
7
Nebraska
2.46%-6.64%
4
New Jersey
1.4%-10.75%
7
New Mexico
1.7%-5.9%
5
New York
4%-10.9%
9
North Dakota
1.1%-2.9%
5
Ohio
0%-3.99%
5
Oklahoma
0.25%-4.75%
6
Oregon
4.75%-9.9%
4
Rhode Island
3.75%-5.99%
3
South Carolina
0%-6.4%
3
Vermont
3.35%-8.75%
4
Virginia
2%-5.75%
4
West Virginia
3%-6.5%
5
Wisconsin
3.54%-7.65%
4
Conclusion
Taxpayers should ensure that they stay on top of their state tax obligations as well as their federal. We often hear horror stories about what happens if the IRS begins to take collection action against you, but state tax agencies can be just as intimidating. Like the IRS, your state’s department of revenue can levy and penalize you. In addition, they can revoke or refuse to renew any state-issued licenses, including driver’s licenses and professional licenses you may need to operate a business. If you’re behind on your state taxes, Optima Tax Relief can help.
The IRS has $1.5 billion in unclaimed tax refunds for tax year 2019 and the deadline to file is approaching quickly. Optima CEO David King and Lead Tax Attorney Philip Hwang provide helpful tips on how to find out if you’re eligible for a tax refund and how to claim it before time runs out.
Life can be challenging when facing both financial difficulties and health issues. Many taxpayers ask themselves, “Can I get disability if I owe back taxes?” For individuals experiencing a debilitating condition while also owing back taxes, the situation can seem overwhelming. However, it’s essential to know that there are options available to help ease the burden. In this article, we will explore the process of obtaining disability benefits while managing tax debt, providing a comprehensive guide to assist those in need.
Understanding Disability Benefits
Disability benefits are designed to provide financial support to individuals who are unable to work due to a severe medical condition. These benefits can be crucial for maintaining a basic standard of living and accessing medical care. Two primary types of disability benefits are commonly available: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).
Social Security Disability Insurance (SSDI)
SSDI is a federally funded program that provides financial assistance to individuals who have worked and contributed to Social Security but can no longer maintain gainful employment due to a disability. To qualify for SSDI, an applicant must meet specific criteria set by the Social Security Administration (SSA):
You are under 66 years old
You are receiving treatment for medical condition
You cannot work because of your medical condition
You are not currently working, or you work part-time with a low pay rate
You are not expected to recover or work within one year
You worked and paid taxes for several years before your medical condition
Supplemental Security Income (SSI)
SSI is another federal program that provides assistance to disabled individuals with limited income and resources, regardless of their work history. Eligibility for SSI depends on the applicant’s financial need, age, disability status, and citizenship or residency status. To qualify, you must:
Be under 66 years old
Be receiving treatment for medical condition
Not be able to work because of your medical condition
Not be currently working, or you work part-time with a low pay rate
Not be expected to recover or work within one year
Have less than $2,000 in assets (single filers) or less than $3,000 (married couples), and you or your spouse must not have any other significant income
Applying for Disability Benefits with Tax Debt
While owing back taxes can complicate your financial situation, it generally does not disqualify you from receiving disability benefits. However, it’s essential to understand the potential impact on your benefits.
SSDI and Tax Debt
If you have unpaid tax debt that includes Social Security taxes, you may not be eligible for SSDI. This is because in order to qualify for SSDI, you need to have paid Social Security taxes for at least five of the last ten years. If you haven’t paid enough tax, you may not qualify for these benefits, even if your medical condition is serious. If you already receive SSDI, the IRS can garnish your pay, including up to 15% of your SSDI benefits, to pay off your tax debt.
SSI and Tax Debt
You can still apply for SSI benefits even if you owe back taxes. As of October 2015, the IRS no longer levies SSI benefits.
Tax Help for Social Security Recipients
Navigating disability benefits while owing back taxes can be a complex journey. However, it’s crucial to understand that these challenges are not insurmountable. By staying informed about your rights, seeking professional advice, and addressing tax debt proactively, you can improve your financial situation and focus on your health and well-being. Remember, help is available, and with the right approach, you can overcome these obstacles and find stability in challenging times. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses the most common tax forms every taxpayer should know about.
Tax Form 1040 or 1040-X
The well-known U.S. Individual Income Tax Return, Form 1040 is what you will use to report both your income and deductions to determine your tax liability every tax year. Form 1040-X, Amended U.S. Individual Income Tax Return, allows taxpayers to correct a previously submitted 1040, make specific elections after the tax deadline, or change an amount adjusted by the IRS.
Tax Form W-2
If you’ve ever earned money from an employer, you have probably received a W-2, Wage and Tax Statement. This critical document for wage earners includes your income earned in the previous year, as well as taxes withheld, and helps you file your federal and state tax returns. It may also include any benefits you received through your employer. If you changed jobs mid-year, worked more than one job as an employee, or if your employer was acquired by another company mid-year, you may receive multiple W-2s.
Tax Form 1099-NEC
A 1099-NEC will report your income earned as a freelancer or independent contractor. Businesses will distribute this form if they make payments to you totaling $600 or more. Non-employee income can also include fees, benefits, commissions, and other sources of income paid to you.
Tax Form W-4
Whenever you begin employment with a new employer, you will fill out a W-4, Employee’s Withholding Certificate. This form basically tells your employer how much taxes to withhold from your paycheck. Withholding too little can result in a big tax bill, while withholding too much can result in smaller than necessary paychecks. That said, it’s important to ensure that your withholding is always correct.
Tax Form W-9
Form W-9, Request for Taxpayer Identification Number and Certification, helps verify your tax information so your employer, or other paying entity, can report your earnings to the IRS. This form is for both employees and self-employed individuals.
Remember these tax forms when it’s time to file. Don’t miss next week’s episode where Phil will discuss private collection agencies. See you next Friday!
Social Security, a cornerstone of America’s safety net, has been providing financial support to millions of retirees, disabled individuals, and surviving family members for decades. However, as our society undergoes demographic shifts and economic challenges, it has become increasingly evident that the current system requires substantial reform to remain viable for future generations. So, what’s going on with Social Security reform lately? Here we will break down why reform is becoming necessary and what political leaders are suggesting we do to improve the current situation as of July 2023.
The Challenge with Social Security
The Social Security program was established in 1935 during a different era when life expectancy was lower, birth rates were higher, and the ratio of workers to retirees was far more favorable. Now, some of the latest projections show that the programs combined funds could run out in 2034. Today, the system faces numerous challenges that threaten its long-term viability, including:
Aging Population: The baby boomer generation, a substantial portion of the population, is rapidly reaching retirement age, putting immense pressure on the system. With fewer workers contributing to support a growing number of retirees, the sustainability of the current pay-as-you-go model is at risk.
Declining Birth Rates: Modern societies are experiencing declining birth rates, resulting in a shrinking workforce. This trend further exacerbates the strain on the system as there are fewer future contributors to Social Security.
Economic Uncertainty: Economic downturns, like the 2008 financial crisis and the COVID-19 pandemic, have weakened the economy and reduced government revenue, leading to concerns about the long-term funding of Social Security.
Proposed Solutions
To ensure the long-term viability of Social Security, policymakers and experts have put forth various reform proposals. While no single solution can address all challenges, a combination of measures can create a more sustainable system:
Gradual Retirement Age Increase
One option is to gradually raise the full retirement age. People are living longer and staying healthier, so adjusting the retirement age to reflect longer life expectancies can help maintain a balanced system. For example, one proposal includes raising the full retirement age to 68 and another suggests raising the retirement age to 70. However, such a change should be implemented gradually to allow people to adjust their retirement plans accordingly.
Adjusting Cost-of-Living Adjustments (COLAs)
The automatic annual increase in Social Security benefits, based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), can be revised to better reflect the changing cost of living for retirees. A more accurate COLA calculation would ensure beneficiaries receive sufficient support while easing the financial burden on the program.
Increasing Payroll Taxes
Another consideration is raising the payroll tax cap, which currently limits the amount of income subject to Social Security taxes. Currently, the maximum amount of income that is subject to Social Security taxes is $160,200. Many are proposing raising the minimum to either $250,000 or $400,000. Increasing this cap would require higher-income earners to contribute more to the system, bolstering its financial health.
Means-Testing
Introducing means-testing for Social Security benefits could help direct assistance to those who need it most. By reducing or eliminating benefits for higher-income retirees, the system can allocate resources more efficiently to support vulnerable populations. Some are proposing to reduce benefits if a taxpayer has an AGI within a certain threshold, and even cut benefits completely if their AGI enters a higher threshold.
Finding the Balance
While reform is essential for the sustainability of Social Security, any changes must be made with careful consideration of the program’s fundamental purpose: to provide economic safety for vulnerable groups. Policymakers should balance the need for fiscal responsibility with compassion for those who heavily rely on Social Security for their basic needs. On the other hand, some Social Security income is taxable, so taxpayers should prepare for possible reform that could affect their taxes. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
