Covid-19 tax implications for the unemployed NRI’s in the US

by | Oct 12, 2020 | capital losses, Tax Extension, Tax Planning, Tax Preparation, Tax Refund

Covid-19 tax implications for the unemployed NRI’s in the US

The pandemic COVID-19 has led to a complete economic setback across the United States. Many businesses have been closed down some partially and some completely. Millions of Americans have become unemployed and are facing various financial crises. The US Government has provided various tax reforms to alleviate the economic stress faced by the Americans during these challenging times.

Let us talk about some of the major tax implications for the unemployed NRIs during this distressful COVID period.

Unemployment compensation

For Income Tax, the unemployment compensation offered is taxable. This would include the unemployment benefits obtained from State and the $600 which has been received from the Federal Government. You will have to inform us about this total amount received on Form 1099-G. You must spend your benefits after considering the consequences.

Federal Income Tax Withholding

To avoid surprises, you can opt to choose for Federal Income Tax Withholding from your unemployment benefits obtained during the year. This process would be almost similar to withholding on from your paycheck thus; you would owe less at the tax time.

Estimated Payments

You might be feeling that you would owe more at the tax time; to avoid this you can make estimated tax payments throughout the year. You can keep on making estimated tax payments throughout the year and thus, avoid a potential penalty. Moreover, the IRS has waived any penalty and interest on the tax payments which were due on 15th April 2020 which was later on extended to 15th July 2020.

Retirement Plans

Any withdrawal which you are making from your retirement plans or pension plans is considered to be taxable unless they are being transferred to an IRA. Under the provisions of the CARES Act, this tax is not due at once. You can make the payment of this tax in three years. You must check with a tax advisor if you are planning to make a withdrawal from your retirement plan as the taxability of the retirement income can be complicated.

No penalty on early withdrawal from retirement income

In general, there is a 10% early withdrawal penalty on making any withdrawal from your Retirement account before you reach the age of 59-1/2 years unless it is an exceptional case. However, this year you are eligible to withdraw up to $100,000 from your IRA or 401(k) plan without having to pay any penalty. But, you will have to pay Income Tax on the withdrawal you make in the form of Retirement Income or Accrued benefit.

Loan against 401(k)

If you need extra cash, you can take a loan against your 401(k) plan. You would be able to borrow up to 100% of your account balance or $100,000, whichever is less. At the time of re-payment, you would be able to defer the payment and pay back the loan in five years without any taxes applied. However, you must check with the authorities before opting for this as the implications might vary for different plans.

Contributions made to the IRA

If you have made any contributions to your IRA and now to need the money back, you can avail of this benefit as well. The contributions made to the IRA if returned before your date of tax return filing can be withdrawn without paying any penalties. You are eligible to take out the contribution and any dividend which has been earned. However, even if you make the contribution back you will not be able to claim a deduction for the contribution made initially on your return.

Insurance premium costs

Now since you are unemployed, you will be responsible for making the payment of your health care costs. So, you are eligible to deduct the cost of the health insurance premiums including the COBRA costs as the Medical expenses. You can include the costs related to these premiums and other eligible medical expenses on Schedule A when you itemize your deductions. However, you should keep in mind that only those expenses are deductible which can exceed 10% of your AGI i.e. Adjusted Gross Income. Moreover, you can also use the money from your HSA (Health Savings Account) for making the payment of the medical expenses. Even if you lose your job, the money present in the HSA is yours. 

Available Tax Credits

You should not overlook those credits for which you had not qualified when you were employed. In the previous years, your income might have exceeded the threshold for the Earned Income Tax Credit (EITC) but you would be eligible to avail the credit now. If you meet the Earned Income Restrictions and other criteria now you can obtain the credit.

Conclusion

So, even if you are unemployed there are several methods by which you can avail of certain benefits, credits. You must resolve any queries which you have about the credits and deductions so that the tax which you owe can be reduced.

Who qualifies to be your dependent when you file your Income Tax Return?

by | Oct 10, 2020 | income tax, IRS Tax Refunds, tax filing, tax returns, taxes

Who qualifies to be your dependent when you file

your Income Tax Return?

 By claiming your dependents, you would be able to save a huge amount of taxes. So, if you have a family you must know how the dependents are defined by the IRS for income tax purposes. However, you may not completely aware of who in your family can qualify as your dependent or not.

 

Who would qualify as a dependent?

 Mainly, there are two types of dependents i.e. 

  • Your qualifying child
  • A qualifying relative

 In both the conditions, the below-mentioned criteria must be fulfilled for qualifying to become dependent. 

  • The person must be a US citizen, a US resident, a US national, or a Canadian/Mexican resident. Some people think of claiming a foreign exchange student who is staying with them temporarily. This is feasible only if the foreign exchange student fulfills this above-mentioned condition.
  • You would not be able to claim a person as your dependent if he claims a personal exemption for himself or is claiming another dependent on his tax forms.
  • You would not be able to support the claim of a person who is married and files taxes jointly with his spouse.

Qualifying child. 

  • To be a qualifying child, the child doesn’t need to be your biological child. The child must be related to you and can be your brother, sister, adopted child, stepchild, niece, or nephew as well.
  • The qualifying child must be below the age of 19 years unless he is suffering from some disability (permanent and total). However, there is an exception to this rule and you can claim a child in case of him being below the age of 24 years and being a full-time student for a minimum period of 5 months in a year.
  • The child should be a citizen of the US, US national, or a United States/Canadian/Mexican resident.
  • A child would be qualifying if he is dependent but not self-supporting. He must be living with you for more than a year unless there are exceptions like living with the other parent in cases of divorce or being temporarily absent, etc.
  • If you and your spouse have been divorced then, you can use the tie-breaker rules found in the IRS Publication 501. These tie-breaker rules are the basis for the establishment of income, the parentage, and even the residency requirements for claiming the child.  

Qualifying relative.

In case, you are supporting your parents or any other relative then certain conditions should be fulfilled to claim the dependency exemption. 

  • The person whom you are supporting should be your relative and this category of relatives would include:-
  1. Your biological child, your foster child, your stepchild, or, your grandchild.
  2. Your siblings, half-brother, half-sister, stepbrother, step-sister, or the descendants of your siblings.
  3. Your parents, stepfather, stepmother, grandparents, or other ancestors.
  4. Uncle or Aunt such as brother or sister of your parents
  5. Your in-laws can include your father-in-law, mother-in-law, daughter-in-law, son-in-law, brother-in-law, or sister-in-law. However, this can only be feasible when the marriage is active and not if there has been a divorce or separation.
  • The person whom you are supporting must have a taxable income not more than $4200 in the year 2019. However, this limit goes up every year with the changing rules.
  • The relative who would be qualifying for obtaining a tax exemption must have been living at your residence throughout the year or would be on the list of those people who do not live with you.
  • You should have paid for the support of the person in more than half of the person is being supported by multiple people who agree in multiple support agreements that the exemption can be claimed by you.

Conclusion.

So, the process of including qualified dependents for claiming tax exemptions is one of the best benefits which you can avail. By claiming these dependents, you can very easily avail several tax credits and deductions which would help in reducing your tax bills. Hence, you must understand carefully the qualifying criteria for claiming dependents failing which you would miss the opportunity of availing the benefit of low tax bills.

 

SBA Debt Relief for small business owners

by | Oct 9, 2020 | Blog, income tax, IRS, Tax Deduction, tax filing, Tax Payers, Tax Refund, tax return, Taxtips

SBA Debt Relief for small business owners

The pandemic COVID-19 has created a lot of financial problems for people across the country. People from every profession are facing several economic issues due to the coronavirus and are continuously struggling to lower the impact of the pandemic on the profession/work-related front. However, if you are a small business owner then your business must have been impacted badly by the spread of the COVID-19. So, one of the ways by which you can be able to obtain some financial aid during these challenging times is through the US Small Business Administration (SBA) Debt Relief Program.

SBA Debt Relief Program

The SBA is a part of the $2 trillion packages offered by the US Government under the provisions of the CARES (Coronavirus Aid, Relief, and Economic Security) Act. It can be described as a debt-payment assistance program that would help in providing immediate relief to the various small businesses in the United States with the help of Small Business Administration Loans.

By the SBA Debt Relief Program, financial assistance can be provided to small business owners by making a payment of principal, interest, and any other fees which the borrowers owe for the current 7(a) loans, 504 loans, and other Microloans as well.

How to participate in the SBA Debt Relief Program?

If a business is eligible to participate in the SBA Debt Relief Program there is no need for any application. Participation is automatic. The SBA has given instructions to the different lenders for not collecting any loan amount during the debt relief period. The SBA has said that it would make the loan payments for these borrowers.  According to the provisions of the CARES Act, the SBA should start making the payments within a month of the date on which the first payment of the loan taken needs to be done.

  1. In case the loan payment of a borrower was to be collected after 27th March 2020, then the lenders were provided with the instruction to inform the borrower about having the option of loan payment returned or applying the payment for even more reduction in the loan balance after the payment has been made by the SBA.
  2. If the loans are not deferred then the SBA can start making the payments on the due date of the next payment and will be making the payments for 6 months.
  3. For those loans which are on deferment, the SBA will be making the payments with the immediate next payments that are due after the end of the deferment period. The SBA will be making the payments for the upcoming 6 months.
  4. In the case of those loans which have been made after 27th March 2020 and have been fully disbursed before 27th September 2020, the SBA will make the payments. The SBA will start with the first payment which is due and would do the payments for the upcoming 6 months.

Can the SBA Debt relief program be applied to PPP and EIDL loans?

  • The Debt Relief Program by the SBA does not apply to the Paycheck Protection Program (PPP) loans to or to the Economic Injury Disaster Loan (EIDL).
  • EDILs which have the status of regular servicing which means when the loan is in a closed state with accordance to the Terms and Conditions of the loan authorization, the payment for the final disbursement has been made and the SBA guarantee fee has also been paid as of 1st March 2020, automatic deferments would be provided by the SBA through 31st December 2020.
  • However, interests would keep on accruing during this period.

 Can you get a PPP loan even if you have received the SBA debt relief?

 Yes, even if you have received the SBA Debt Relief you can fill an application for obtaining the PPP loan. You must keep in mind that the procedure for obtaining a PPP loan is different from that of the process for obtaining the SBA Debt Relief.

 

Conclusion

 So, the SBA Debt Relief is an excellent initiative by the Government to alleviate the distress caused to the economic condition of the small businesses within the country due to the pandemic COVID-19. The borrowers might have several queries related to the SBA debt relief program and must contact their lenders for this purpose.

 

The 2020 guide for tax checklist for newly married couples in the US

by | Oct 8, 2020 | 2020 IRS Form W4, 401(k), Tax Planning, Tax Preparation, Tax Refund

The 2020 guide for tax checklist for newly married couples

in the US.

On your wedding day, taxes can be the last thing in your mind; but, tying the knot can have a huge impact on your tax situation. 

  • In the tax year 2020, single people would pay tax at the rate of 37% on the taxable income which is above $518,400.
  • For those married couples who are filing their tax returns jointly, the threshold is just $622,051 which is far from double the amount which is available for the single taxpayers. This can be a very significant tax penalty.
  • However, there are some cases in which the married would also get a marriage bonus. This means married couples would pay less income tax than they would have paid in case of being single.

 Here is a checklist of the important items which you must review if you are a newly married couple.

 

Change of name and address

 Name Change

 If you are changing your name through your marriage, you must report it to the Social Security Administration. Your name on your tax return must match the name which is present on the file at the SSA. If there is a mismatch, then it can lead to a tax refund. For updating this information, you can fill out Form SS-5. You can take the completed form to the local office of the SSA along with the documents which would prove your identity and a certified copy of your marriage certificate.

 In case, you are already at the tax filing deadline but have not changed your name with the SSA then you can file a joint return with your spouse by using the name mentioned in your Social Security Card.

 Address Change

 If there has been a change in your address due to marriage, then you must inform it to the IRS and the US Postal Services. You can do this by filing the IRS Form 8822 Change of Address. The postal services must be informed to forward your mails to your new address by going online at USPS.com or by visiting the local post office.

 Withholding

 After marriage, you and your spouse must change the withholding. This can be done by filling out a new Form W-4. Newlywed couples must give this new Form W-4to their employers within 10 days. When both the spouses are working, they would move into a higher tax bracket or can be affected by the Additional Medicare Tax. The IRS Withholding Estimator on the website IRS.gov can be used to complete the new Form W-4.

 

The IRS has revised the Form W-4 for the tax year 2020. The new form would help determine how much federal income tax must be withheld from your paycheck based on your

  1. Filling status
  2. Other income
  3. Credits and deductions

 Filing Status

 Married people would be able to choose to file their income taxes either jointly or even separately. Even if filing jointly is more beneficial, it is good if you find out which works the best among both the ways. If you are married as of 31st Dec of the tax year, the IRS would consider you to be married for the full year.

 However, after marriage the process of filing tax returns with the Married filing separately Status would rarely work in reducing your tax bill. If you are choosing “Married but filing separately” Status, then it would have some special rules such as.

  1. You cannot deduct Student Loan Interest.
  2. You cannot claim the Earned Income Tax Credit
  3. You cannot claim the Child and Dependent Credit
  4. Your deduction related to Capital losses is limited to $1500 instead of $3000 which can be in case of a joint return.

 Scams

 You need to be aware of and avoid the various tax scams. Any contact by the IRS will not be initiated by using the email, phone calls, or any other text messages. You can check out your details or if you think you owe money to the IRS, and then you must visit the IRS webpage and view your tax account.

 

Conclusion

 So, these tax rules and checklist would give you a clear idea about how your tax is going to be impacted after your wedding. You must know about the changes that would occur and the steps you must take to be eligible for availing the tax benefits after being a married couple.

Tax Implications for buying/selling stocks

by | Oct 8, 2020 | Tax implications, Tax Payers, tax return, taxes

Tax Implications for buying/selling stocks

The pandemic COVID-19 has created an adverse impact on the economy of the entire world. Millions and millions of Americans have taken the advantage of the low stock prices and purchased many stocks. Many have sold their stocks and withholdings due to market fluctuations and economic causes too.

 However, if you have sold or even purchased stocks during this pandemic stricken period you must be willing to understand various tax implications on this. Moreover, you might also be inquisitive to understand the differences between long term and short term capital gains.

 So, let us talk about some of the major areas and topics associated with the tax implications on the stock market.

 

Taxes levied on the Capital Gains

 On selling of the shares of winning stock, you would have created Capital Gains. If you are selling your shares during a downturn, you must keep in mind that you might obtain again depending on the duration for which you have held the stock.

 

Suppose, you have sold a stock at a rate of $80 per share, which is d downturn from the $100 price of each share. You might think that this stock has lost its value and is apt for sale; however, if you would have purchased the stock before 10 years at the cost of $20 for each share you will have a $60 gain and not a $20 loss on each share.

 

So, in case you had 100 shares of that stock your cost price at the $2000. By selling the shares at $8000, you would be able to recognise a long-term capital gain which would be at around $6000.

 

In case, you are in the tax rate bracket of 15% long term capital gains then you would have to pay federal taxes of around $900 when the stocks are being sold.

 

Long Term Capital Gain and Short Term Capital Gain

In case you have been holding a security for a period of more than 1 year, then on the sale of that security, you will be eligible to obtain long term capital gains at the tax rates of 0%, 15%, or 20% based on the income.

  • However, if you obtain the same gain from the sale of stocks which have been held for one year or even less then the short-term capital gains would be taxed at the same rate as that of ordinary income i.e. 10%, 12%, 22%,24%, 32%, 35% or even 37%.
  • If you are married and you have a combined taxable income of $150, 0000 along with your spouse. When this is your income level, you can have a long term capital gains tax rate at 15% and your Federal Income Tax rate would be 22%.
  • Then the capital gain of $6000 which you have obtained by selling security which you have held for one year or less would be $1320 and not $900.

Capital losses can be offset with Capital Gains

You should not feel disheartened if you have sold the losing stock and have faced capital losses. You can offset your capital losses with your capital gains. This procedure is known as Tax harvesting where investors realize their capital losses and offset their capital gains.

 Suppose, you had a capital gain of $10000 from the sale of a particular stock whereas, you experienced a capital loss of around $8000 on the sale of another stock. So, in this case, you can deduct the capital losses from capital gains. You would obtain $2000 long-term capital gain thus, reducing your capital gains and taxes.

 For instance, if your capital losses are greater than your capital gains, then you can deduct up to $3000 in a year in the form of allowable capital losses against the non-investment income. This would help lower your overall taxable income.

 However, in the case of 2020 if there has been a loss of $8000 by the sale of stock then there are no gains offset it against. You can deduct $3000out of that loss against the non-investment income. The remaining $5000 can be easily carried forward into the subsequent years. This can be either deducted against the future capital gains or can also be written off against the non-investment income. This can be done at the rate of $3000 in a year until the complete loss has been deducted. 

 

Net Investment Income Tax

This is an additional tax that you might face depending on your income. The IRS had started implementing the Net Investment Income Tax for partial funding of the Affordable Care Act.

By this, an additional tax of 3.8% would be imposed on your investment income if the thresholds are exceeded by your Modified Adjusted Gross Income.

 These thresholds can be listed as

  1. Married jointly- $250,000
  2. Married but filing tax returns separately – $125,000
  3. Single or the Head of a household – $200,000
  4. You re a qualifying widow/widower along with a child – $250,000 

 The Net Investment Income Tax applies not only to the income from capital gains but also the investment income which has been derived from dividends, interest, rental income, royalty income, and also non-qualified annuity income.

Conclusion

 So, this information would be helpful for you in understanding the various tax implications imposed on the purchase or sale of stocks.