Capital Gains tax on selling your property in 2020.

by Mounica Kota | Oct 26, 2020 | capital gains, income tax, IRS, tax filing, tax savings, taxes

Capital Gains tax on selling your property in 2020

When you are selling real estate which has been held by you as an investment, the tax implications might be different based on the period for which you have held the property. The tax rules also depend on whether the property is a home or any other category of real estate. If it is a home sale, then it is considered as a particular type of capital gains which has its own set of taxation rules.

If you are selling property that you have held for less than a year, then it is known as Short-term capital gains. You would have to pay taxes for the Short-term capital gains at the same rate as that of the Income taxes. However, the rates are based upon the income bracket under which you fall.

When you are selling property which you have held for more than a year, then the profits obtained is known as long-term capital gains. The rates at which the long-term capital gains are taxed are your taxable income, your filing status which can be single, married, and filing taxes separately and married and filing jointly/head of the household.

Let us have a look at the tax rates for the long-term capital gains of the year 2020.

a.Individual rate or when you are filing as a single

Income	Long-Term Capital Gain Rate
$0 to $40,000	0%
$40,000 to $441,450	15%
$441, 451 or above	20%

b. Married and filing taxes jointly

Income	Long-Term Capital Gain Rate
$0 to $78,750	0%
$78,751 to $488,850	15%
$488,851 or above	20%

c. Married and filing taxes separately

Income	Long-Term Capital Gain Rate
$0 to $39,375	0%
$39,376 to $244,425	15%
$244,426 or above	20%

d. Head of the Household

Income	Long-Term Capital
$0 to $52,750	0%
$52,751 to $461,700	15%
$461,701 or above	20%

Example to illustrate capital gains tax implications on Real estate

In case you are married and filing taxes jointly along with your wife. You and your wife have a taxable income of $200,000 for the year 2020. By this, you would be included in the tax bracket of 15% for the year 2020.

Then you had purchased land in California less than a year ago. However, you had some emergency and needed cash. You had estimated a profit of $10,000 when you had purchased the land. If you sell it now immediately it would be a short-term capital gain and you would have to pay tax $2400 for it. But, if you waited for some more time and sell it then it can be considered as a long-term gain and would be taxed at 15%. So, you would have to pay $900 less or $1500 for the land. Thus, you would have an $8500 gain on the investment.

How much tax can you exclude?

If you are selling the house in which you are staying current, then your capital gain would not be taxed up to $250,000 if you are filing your tax returns as a Single.
This exemption is based on the IRS Section 121 Exclusion.
If you are married and are filing your tax returns jointly, then you can avail of the benefit of a tax exemption of up to $500,000.
You would qualify for this exemption only if you are the owner of the home and have used it as your primary residence for a minimum period of 2 years out of the five years before the sale date.
There can be some factors which might not let you avail this normal exclusion such as

If you are liable to pay expatriate tax
If the home or the real estate which has been sold by you was not your main residence
If you have not lived there for 2 years out of the 5 years before the sale
If you have not owned the house even for 2 years out of the 5 years before the sale of the house.

If you are married and are filing your taxes jointly, then only one out of both of you must satisfy the owning criteria to avail of this tax exclusion.
You can still claim the tax exclusions even if any of the criteria are not satisfied if the house was sold or exchanged due to some changes in your employment place, health issues, or any unexpected circumstances.

How to file your Capital Gains Tax?

In 2019, the IRS had said to report your capital gains and losses on Schedule D and report the amount on your Form 1040. However, now if you are receiving Form 1099-S, Proceeds from Real Estate Transactions, you should report about the sale of the home even though the gain obtained from the sale is excluded under the IRS Section 121 Exclusion.

Conclusion

So, these are the important tax implications on any capital gains you have obtained by selling property. You should also keep in mind that if your investments are being sold they might be subject to an additional 3.8% income tax.

How to make the most of your capital losses in 2020?

by Mounica Kota | Oct 24, 2020 | capital losses, tax filing, Tax Planning, Tax Preparation, Tax Refund, Taxtips

How to make the most of your capital losses in 2020?

Capital gains can be said to be the profits that are made when you can sell an investment for more price than at which you have purchased them. On the contrary, if the investments you have made sell at a price which is less than the price at which you bought them is known as Capital Loss.

If you have incurred some capital gains this year and you also have some capital losses in your portfolio, then you can consider the harvesting of these capital losses. By harvesting these losses, you would offset the gains as a result of which you would not have to pay any taxes on the Capital gain income. This process is also termed as Tax-loss harvesting.

Let us check out the process by which you can begin the process of offset of your capital gains by the harvest of capital losses.

Computation of the gains

You should make a list of the sale you have done related to your stocks, bonds, and real estate during the year. You can add the capital fund dividend which you are expecting into your mutual funds.

Offset the losses which have been realized

This would include the various stocks you had purchased when the stock market was high. You even thought or expected the stock market to go higher. However, you had to sell your stocks at a point when the stock market dropped. You also had to sell your stocks at a price that was lower than your purchase price. Moreover, while this process of loss offset you should not forget about the loss carryovers from the previous years. You would be able to find the loss carryovers on Page 2 of the previous year’s Schedule D of your income tax return.

If gains are more than losses, check out for unrealized losses

It might be the scenario that you are holding on to a stock whose prices have dropped. You might be hoping that the prices of the stocks would increase or they will regain their value. You can consider this time as the best time to sell the stock that you have been holding.

Checking of the Income Tax bracket

Before you decide to sell your stock which has dropped in value, you must think about taking some advantages out of the lower capital gain tax rates. For most people, the maximum capital gains rate is around 15%. The rate at which the capital gains are taxed varies according to your taxable income and your filing status i.e. Single, Married and filing jointly, Married and filing separately, Head of the Household.

Wash Sale Rule

The awash sale is said to occur at a point in time when you are either selling or trading securities/stocks at a loss. This wash sale occurs within 30 days of before or after the sale of the securities.

You can purchase substantially identical securities.
By a fully taxable trade, you can acquire substantially identical securities.
Substantially identical securities can be acquired by the use of a contract or option.

If this is done then any loss incurred on the sold assets can be disallowed by the IRS. However, there are a few steps that can be taken to ensure that the capital loss incurred can be used to offset your capital gain.

You must wait for a minimum of 31 days before you start re-investing into another Stock Fund.
The next step is to invest in a similar type of fund.

In case, you have disallowed the loss incurred from a wash sale, then you must add up the cost of the disallowed loss into the cost of new securities. This would lead to an increase in the cost of your new stock and also reduce the gains on the sale of the newly purchased stock.

Avoid harvesting too many losses

After you have offset the losses which you have incurred against the gains, the excess losses could reduce up to $3000 of the ordinary income obtained from employment or different other sources. In case, your capital losses are much more than that then the excess losses can be carried over to the upcoming year.

Conclusion

So, these above-mentioned techniques and strategies would help you in making the complete use of capital losses in the year 2020.esting.

Is your income tax refund guaranteed?

by Mounica Kota | Oct 21, 2020 | income tax, IRS Tax Refunds, tax filing, Tax Refund

Is your income tax refund guaranteed?

You would file a tax return claiming the refund of your income tax if the excessive deduction of tax has been done at the source or during the payment of self-assessment tax. Your income tax refund is guaranteed if you and the IRS are on the same terms related to your refunds. Mostly, the IRS pays back the refunds within 10-15 days of the receipt of the tax return filing.

There are some major factors that would help you to determine how fast you can receive your tax refund.

How early you have filed your income tax return?
If you e-filed the tax refund or have sent by mail?
If you are claiming any tax credits such as EITC and CTC
If you have any existing debts with the Federal Government or not

Once your tax returns have been e-filed, you can check the status of your tax returns by

You can use the Where’s My Refund tool by the IRS to find out the status of your income tax refund.
You can also call the IRS on the Customer Support number to understand the status of your tax refund.

Can your tax refund be held back?

Your tax refunds can be held back by the IRS and then obtaining your tax refund may not be guaranteed under the below-mentioned scenarios.

a.The inaccuracy of your tax return

Your tax refund can be held back by the IRS if there has been an error made by you while filing your tax returns. There are chances that there is a discrepancy in the return that has been filed in the past.

If the IRS thinks that there has been an error made by you while filing your tax returns, then your refund can be changed by the IRS. In case, you feel that the change has done is incorrect, you can prove this to the IRS and ask for a reversal. You have 60 days within which you can do so. After 60 days are over, you will have to file for an amended return so that the IRS would issue your refund.
If you have claimed some erroneous deductions, then the IRS can conduct an audit to find out about the accuracy of your tax returns. If you can prove to the IRS that the claimed deductions are correct then the IRS will issue your refund.
The IRS has the authority to freeze your refund if your previous tax returns are being audited and it feels that you owe additional taxes to the IRS.

b.You owe back taxes

If you have pending taxes to be paid to the IRS, then the IRS would keep your refund to pay your taxes. The IRS can also take your refund if you are on a payment plan known as an Installment Agreement. However, if you are unable to pay your taxes in one go you must get into a payment agreement with the IRS for minimizing your penalties. This would also help in the prevention of collection enforcement actions.

c.You have unfiled back tax returns

In case, you have unfiled tax returns then the IRS can freeze your refund and start a delinquent return inquiry. This will continue until you have filed your pending tax returns and have also cleared all the associated pending tax bills.

d. A problem in your tax account

The IRS might suspect some problem with your IRS tax account and thus hold your tax refunds.

Victim of tax identity theft –

The IRS might suspect that there has been a tax identity theft. You will have to contact the IRS for proving your identity. Once, your identity is proved you can obtain your tax refund easily.

Dependent related discrepancy –

This might happen when someone else has claimed your child as a dependent on his tax return. You will have to explain and prove it to the IRS that you should be able to claim the dependent on your tax refund.

e.Other debt

There are some other categories of debts that might be pending on you such as Student loans, Child Support, Unemployment compensation re-payments, or the State Taxes. These debts can be collected from the IRS by holding on to your refunds. However, to resolve this problem you would have to get in touch with the source of your debt and not the IRS.

So, if any of these reasons are not expected in your case then your income tax refund is guaranteed.

Health coverage and tax exemptions.

by Mounica Kota | Oct 18, 2020 | tax deductions, Tax exemption, tax filing

Health coverage and tax exemptions.

According to the individual shared responsibility provision of the Affordable Care Act, you and the members of your family must have the qualifying health coverage. In case there is no coverage available for each month, you would have to make a payment called an Individual shared responsibility payment at the time of filing the Federal Income Tax return.

However, there are some taxpayers who qualify for an exemption from the requirement of making the above-mentioned payment. The major causes for this exemption can be:-

Those taxpayers might not be having access to the health coverage which is affordable,
Those taxpayers might have had a coverage gap which is less than three calendar months or
Those taxpayers have low income and expansion of Medicaid was not done by their respective states.

Moreover, there can be some taxpayers who would have health coverage or would qualify for the exemptions for some months and would owe payments for other months.

The Interactive Tax Assistance Tool of the IRS helps in the determination of your eligibility for a coverage exemption or your responsibility for making the payment of individual shared responsibility. The exemption might have been obtained anywhere; it must be reported by you on Form 8965, Health Coverage Exemptions while filing your Income Tax Returns.

Health Coverage Exemptions

The list of some of the available major health coverage exemptions is mentioned below.

Unaffordable coverage –

The available health coverage you have would be considered unaffordable. Your coverage would be considered as unaffordable when the lowest amount which you must have paid for the employer-sponsored coverage or for the coverage that has been obtained by the Marketplace is much more than a particular percentage of the household income you have for the year.

General hardship –

This means that you had experienced certain circumstances which prevented you from availing the health coverage under a qualified health policy. These circumstances can be eviction, homelessness, domestic violence, foreclosure, unpaid medical bills, etc.

Short coverage gap –

This would mean that you were without any coverage for almost three consecutive months during a year.

Income below the return filing threshold –

This exemption means that your gross income lies below the minimum threshold needed to file a tax return.

Certain noncitizens –

This exemption is for those who are not US citizens and are not present in the country as per the laws. You can qualify for this exemption even if you are having a Social Security number (SSN).

A resident of a state which did not expand Medicaid –

The income of your household is below 138 percent of the federal poverty line for your family’s size. Moreover, during any time of the year, you resided in a state which did not participate in the Medicaid expansion.

Members of the Indian tribe –

This health coverage exemption is available for you when you are a member of a Federally-recognized tribe of India or were eligible for services from an eligible Indian health care service provider.

How to report the coverage exemptions which have been obtained from the Marketplace?

If you are obtained health coverage exemption from the Marketplace, then you would receive an Exemption Certificate Number (ECN). You can report this exemption by entering the ECN in Part I of your Form 8965, Health Coverage Exemptions in Column C. In case, your application for health coverage exemption has not been processed until your time of filing tax returns you must complete Part I of your Form 8965, and your Colum C must have the entry as “Pending”.

Procedure to obtain coverage exemption.

Some of the health coverage exemptions can be easily obtained by applying in the Marketplace. However, there are some which can be obtained by filing a tax return.
In case, you have an income which is below the minimum limit for filing a tax return you would avail exemption from making individual shared responsibility provision. You are not even required to file the federal income tax return for claiming the exception. But, if you are filing a tax return then you must claim a health coverage exemption with your return.
You can claim health coverage exemptions on Form 8965, Health Coverage Exemptions, and attach this to Form 1040, Form 1040A, or even Form 1040EZ.

The process to claim coverage exemptions with the IRS

In case, your household income is below your tax filing threshold and you are filing a tax return then you must use Part II of Form 8965, Health Coverage Exemptions.
The other exemptions are usually claimed on Part III of Form 8965.
You must file only one Form 8965 along with your Forms 1040, 1040A, or 1040EZ for reporting all the health coverage exemptions for yourself, your spouse as well as your dependents.

Conclusion.

So, these basic details on health coverage and tax exemptions would help you in understand the process better.

Understanding the tax bracket in 2020.

by Mounica Kota | Oct 14, 2020 | tax savings, taxes, Taxpayers

Understanding the tax bracket in 2020.

In November 2019, the IRS has announced the annual inflation adjustments for the year 2020. These adjustments would include tax rate schedules and other tax changes. The adjustments of the tax year 2020 would be used while filing the tax returns in 2021. If you are planning for earning more money in 2020 or for changing your circumstances this year, then you should adjust your withholdings or plan for tweaking your payments made for estimated taxes.

Tax Brackets and Tax Rates.

The tax items for the year 2020 which would be maximum interest for the taxpayers are:-

The rates for Standard deduction for those taxpayers who are married and are filing their taxes jointly are $24,800 for the year 2020. There has been a rise of $400 from the previous year. For those taxpayers who are single and those are married but filing their returns separately, the standard deduction rates have risen to $12,400 this year. For those who are filing their tax returns as ‘Heads of households’, the rate of Standard deduction will be $18,650 which is an increase of up to $300 in 2020.

For the tax year 2020, the personal exemptions allowed are zero which remains the same as that of the year 2019. This elimination was a provision present in the Tax Cuts and Jobs Act.

For the year 2020, for individual taxpayers, the top tax rates are 37% for the individual taxpayers whose income is more than $518,400 ($622,050 for the married couples who are filing returns jointly). The other rates can be listed below as:-

35% for those incomes which are over $207,350($414,700 for the couples who are filing their returns jointly)
32% for those incomes which are over $163,300($326,600 for the couples who are filing their tax returns jointly)
24% for those incomes which are over $85,525($171,050 for those couples who are filing their tax returns jointly)
22% for those incomes which are over $40,125($80,250 for those couples who are filing their tax returns jointly)
12% for those incomes which are over $9,875($19,750 for those couples who are filing their tax returns jointly

The limitations on the itemized deductions for the tax year 2020 have been eliminated under the provisions of the Tax Cuts and Jobs Act.

For the tax year 2020, the Alternative Minimum Tax Exemption amount is $72,900 and begins to phase out at $518,400. The exemption amount was $71,700 for the year 2019 which began to phase out at 510,300.

For the tax year 2020, the maximum Earned Income Credit Amount for the taxpayers who have three or more than three qualifying children is $6,660.

The limitation in a month for qualified transportation fringe benefits is $270 for the tax year 2020.

For the tax year 2020, the limitations for the salary reductions of employees to make contributions to health spending arrangements is $2750 which is an increase of $50 from the limit of the last year.

For those participants who have self-only coverage in a Medical Savings Account, for the tax year 2020 there must be an annual deductible that is more than $2,350 which remains the same for the tax year 2019 but must be less than $3,550, which is a rise of $50 from the previous year. In the tax year 2020, for the self-only coverage, the maximum out-of-pocket expense amount is $4,750. For the tax year 2020, the taxpayers who have family coverage, the annual deductible is $4,750 which has increased from $4,650 in 2019; but, this deductible must be less than$7,100, which is an increase of $100 from the limit that has been fixed for the tax year 2019. For family coverage, the limit for the out-of-pocket expenses is $8,650 which has increased by $100 from the tax year 2019.

The Adjusted Gross Income (AGI) amount which is being used by the joint filers for determination in the reduction of the Lifetime Learning credit is $118,000for the year 2020.

For the tax year 2020, the annual exclusion for gifts as determined by the IRS is $15,000.

The Foreign Earned Income Exclusion is $107,600 for the tax year 2020.

The estates of those decedents who die during the tax year 2020 will have an exclusion amount of $11,580,000 which is greater than the exclusion amount of $11,400,000 for the estates of decedents who died in the tax year 2019.

For the tax year 2020, the maximum credit which is permissible for adoptions is the number of qualified adoption expenses up to $14,300.

Conclusion.

So, these are the major tax rules which have been changed in the tax year 2020 which must be understood by the taxpayers.

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