Types of interest that is eligible for Debt-Tax Deductible

by Mounica Kota | Oct 7, 2020 | income tax, IRS, Tax Planning, Tax Preparation, Tax Refund, taxes

Types of interest that is eligible for Debt-Tax Deductible

There is a number of debts that would accrue interest on them such as student loans or home mortgage, etc. When the interest accrual is for a longer period, the repayment amount goes on increasing and it turns out to be quite expensive to repay them. If you have several debts then, it is quite obvious for a lot of interest to get accumulated quickly. You might be having low-interest rates but then the only way to pay off is by reducing your outgoing expenses.

Is the interest levied on debt tax-deductible? It might be sometimes; however, it might depend on the type of interest and many other criteria.

Let us find out the types of interest which can be eligible for a tax deduction.

The interest which is eligible for a tax deduction

Student Loan Interest

A large number of the students are under the burden of debts due to the Student loan and to reduce the burden caused by these debts, the IRS provides a tax deduction on the interest which is levied on the Student loan. By the Student loan interest deduction, you can deduct a maximum of $2500 from your income which is taxable as long as the Modified Gross Income (MAGI) of your previous year is less than $70,000. The student loan must be taken either by you, your spouse, or a dependent. The loan must have been taken by you for educational purposes during the period in which you, your spouse, or dependent was enrolled for at least part-time into a degree course.

Home Mortgage Interest

If you are borrowing money for purchasing a home, then you might have the eligibility to avail of the mortgage interest deduction. According to the regulations of the IRS, if you have bought your house after 15^th December 2017 you can be eligible to take up to $750,000 in the form of the interest deduction. Moreover, this is also applicable to those mortgages which are up to $1 million and have been purchased before 15^th December 2017.

If you are paying home equity loan debt, you can be eligible to take the advantage of the home mortgage interest deduction. However, this is feasible only if you are utilizing the home equity loan for purchasing, constructing, or improving the home which secures your home equity loan.

If you want to claim your interest deduction on a home mortgage, you will require the IRS Form 1098 or the mortgage interest statement which you would obtain from your lender. You would also need proper records that would document the details of your home and mortgage. Moreover, you would obtain the need to obtain the Schedule A too for claiming your itemised deductions. You must carefully read the IRS Publication 936 to get more detailed insight into the types of documentation that the IRS would need to check for your deduction approval.

Margin Debt Interest

In case you are borrowing money from a particular lender for investing, then you would be able to claim a deduction for the interest on the margin debt that has been incurred by you. The value of the deduction is capped at the net taxable income obtained from the investment which you would be able to claim during a tax year; however if you do not have any net taxable income obtained on the investment to claim you can easily carry forward the remaining interest expense. By this, you will have the ability for interest deduction from the net taxable investment income in the next tax-filing year.

The tax deduction for the margin debt interest can be calculated by the use of the IRS Form 4952.

However, you can even calculate the margin interest which is deductible by the below-mentioned steps.

You consider your gross income and perform subtraction of qualified deductions, net gains, and all other expenses incurred from investment.
The remaining number obtained is your net investment income.

Let us suppose, you have $1000 as your investment income and $500 as your interest expenses you would be able to deduct $500 on your tax returns obtained.

Business Loan Interest

Business loans would help in providing funds for the expenses incurred in the operation and growth of your business. There are several uses of business loans and can include the accommodation of lines of credit to property mortgages. Business loans also accrue interest over time and this interest accrued is tax-deductible.

The major conditions which determine the tax deductibility of the business loan interest would include the type of business loan you have procured, the relationship between lender-debtor, legal liability for the debt and a proper agreement from both lender and debtor for the debt to be repaid.

Some of the common categories of business loans which would be eligible for small business deductions are:-

Term loans
Short-term loans
Business lines of credit
Personal loans
Business Purchase loans

You should use the IRS Form 8990 for calculation of the amount of business interest you can deduct for a particular tax year.

Sole proprietors and single-member LLCs must claim their deductible interest in the Section –Expenses of Schedule C on Line 16.
In the case of partnerships and multiple-member LLCs, the expenses related to these interests on business loans can be claimed by recording in Form 1065 and the “Other Deductions” section.

What are the benefits of deducting paid interest?

Your taxable income can be reduced by using the benefit of the interest deduction.

By taking the advantage of interest deduction, you would be able to move into a lower tax bracket.
Also, you can be taxed at a lower federal rate by utilizing the benefit of the interest deduction.

Conclusion

Hence, the above-mentioned categories of interest are eligible for the deduction of debt tax and would be beneficial for you to have low taxable income.

The top 10 myths busted for taxpayers in the US-2020.

by Mounica Kota | Oct 7, 2020 | IRS, Tax Payers, tax return

The top 10 myths busted for taxpayers

in the US-2020.

It is quite obvious that there are some common misconceptions among the taxpayers related to various facts related to taxes. Some taxpayers feel paying taxes is not necessary and can be avoided whereas certain tax deductions have been labeled as loopholes. Some taxpayers even follow the bad tax advice from others blindly and land up in troubles.

So, let us understand some of the major myths associated with the taxes in the US and debunk those myths to be better taxpayers.

Myth 1:- Filing of taxes is a voluntary activity.

Even if this can be considered as falsehood, there are a large number of people who believe in this. These people think that due to the Form 1040 instruction book, the tax system is voluntary and people are not legally liable to pay taxes.

Here the term voluntary means that every individual would find out how much tax they owe, but has no relations if the filling of taxes is done on time or not. Unless there is a legal dispute, it is a bad idea to think about such theories to contest with the IRS.

Myth 2:- Illegal activity is not taxable.

Even if performing illegal activities is wrong, it cannot be considered non-taxable. The income obtained from illegal activities is taxable. If the entire scenario is being considered from a tax perspective, then the IRS does not care whether income obtained is by robbing banks or by defrauding investors. When an individual is making money, the Government is entitled to receive its share. The person can be very good at covering the tracks but, if illegal income is made and on top of that tax cheating is done it is sure to be exposed.

Myth 3:- Pets can be claimed as dependents.

A person might love his pets up to any extent, but he cannot claim them as dependents. Pets indeed obtain half of their financial support from the masters; but, they are not humans. If a dependent is being claimed falsely, then it would be counted as a fraud and must be avoided.

Myth 4:- Students do not need to pay taxes.

It can be said that this myth is partially true. If a student is being claimed as a dependent of someone else who has an income less than $12,200, then he would not have to pay taxes. But, the students should file their taxes. If the student would have an employer who would be withholding money due to some purposes then the student can receive a refund.

Myth 5:- Online income is free of taxes.

This type of rumor might have started as those who are doing business online do not fill the Form W-9 and report their income to the IRS. But, the IRS does not consider income earned from online different from that of the income earned offline. Irrespective of the medium, if you are earning more than $400 you will have to declare the income on your tax returns.

Myth 6:- The IRS would file a tax return for you.

IRS can verify your tax returns but waiting for your returns to be filed by the IRS would be quite disappointing. Your tax returns have to be filed by you only and you cannot depend on the IRS for that.

Myth 7:- Home office deductions are equal to instant audit.

There was a time when this myth was almost considered to be the truth. But, with home offices becoming quite prevalent this fact has become a myth now. Claiming a home office would increase the scrutiny but they are quite common and reduce the fear of claiming a legitimate deduction.

Myth 8:- Lack of time to do taxes.

Since we have already covered the fact that taxes are not voluntary lack of time for not filing your taxes does not form a considerable factor anymore. There are several options available for making tax filing easier and lack of time cannot be considered anymore.

Myth 9:- Your tax mistakes are your accountant’s liabilities.

Even if you are hiring an accountant, the mistakes made in tax filing are your responsibilities ultimately. You should not assume that your accountant must have taken care of all details; rather you must double-check the details before the returns are filed.

Myth 10:- I don’t have enough money for being audited.

You might think that if your income is less you will not be audited by the IRS. However, your income has less connection with you being audited. Many other factors play an important role in your audits rather than your income. Even though the probability of being audited is more for those individuals who fall under the income bracket of $100k, still those falling below this bracket can also get audited. You must maintain a detailed record of any income which can be considered as questionable.

Conclusion.

So, these myths are the mysteries which many taxpayers in the US believe. However, these myths are far away from reality and taxpayers should avoid getting confused with these myths.

The top 10 FAQs answered for taxpayers in the US-2020.

by Mounica Kota | Oct 4, 2020 | Tax Payers, Tax Planning, Tax Preparation, Tax Refund, Taxtips

The top 10 FAQs answered for taxpayers

in the US-2020.

There have been various changes in the tax laws due to the outbreak of the pandemic COVID-19. Due to the adverse impacts of the pandemic, millions of Americans have become unemployed and are facing a huge financial crisis. To alleviate the situation of economic distress which is being faced by the Americans the IRS has introduced various changes into the tax laws for the year 2020.

The major change which was announced by the IRS was the postponement of the due date for filing federal income tax returns and for making the payment of the Federal Income tax. This due date was on 15^th April 2020 which was postponed to 15^th July 2020. Moreover, there would be no accrual of any interest or no penalties for failure in payment of taxes or failure of tax return filing by 15^th April 2020. The interest accrual and penalties will begin after 15^th July 2020. This relief has been made available for all types of taxpayers such as individuals, an estate, a trust, a corporation, or any business entity.

Now, since there have been such important tax reforms introduced by the IRS there must be several queries in the minds of the taxpayers. So, let us have a look at some of the major queries of the taxpayers related to the reforms in the tax laws.

What do I need to do to avail of the extension of tax return filing due date from 15^th April 2020 to 15^th July 2020?

No, you do not have to do anything to avail of the extension of the tax return filing due date to 15^th July 2020. You will not have to file any additional forms or contact the IRS to avail of this relief in the tax filing deadlines. If you have to pay any taxes that are due, you can do that by 15^th July 2020. After 15^th July 2020, if you need a further extension then you would have to file a request for an automatic extension.

Is there a need to be sick, quarantined, or have any impact from COVID-19 to qualify for this relief?

No, you do not have to be sick, quarantined, or impacted by the COVID-19 in any form to avail of this tax relief introduced by the IRS.

How and by when do I need to make the payment for my first and second quarter Estimated Income Taxes 2020?

The due date for the first quarter and second quarter Estimated Income Taxes was on 15^th April 2020 and 15^th June 2020. However, you can make both the payments by 15^th July 2020. You can do this in the form of a single payment with an amount that is adequate for covering both the first and second quarter Estimated Income Taxes 2020.

What would be the due date for the rolling over of the entire or a portion of a qualified plan loan offset into a retirement plan?

If you are filing your Federal tax returns by 15^th July 2020, then the due date to roll over a part of a complete qualified plan loan offset into an eligible retirement plan is by 15^th October 2020.

I had made an excess contribution to my IRA during the year 2019. Is it feasible to avoid the excise tax if I withdraw the excess amount by 15^th July 2020?

Yes, you can avoid excise tax if you withdrew the excess amount contributed by 15^th July 2020. But, you must not have taken any deduction for the excess contribution which you have done. Moreover, you can even avoid the excise tax if you withdrew the excess amount not only by 15^th July 2020 but also by 15^th October 2020.

Are the tax return filing and payment deadline for exempt organizations, businesses, or any other entities which have the due dates for filing on 15^th May 2020 or 15^th June 2020 have been extended?

All the tax return filings and payments related to the Federal taxes which are from 1^st April 2020 till 1^st July 2020 have been postponed to 15^th July 2020.

I wanted to file a claim for my Tax Refunds for the year 2016. This has to be done by 15^th April 2020. Do the tax relief laws allow this claim to be done later?

Yes, with the changes in tax laws you can file your claim for obtaining tax refunds for the year 2016 by 15^th July 2020.

What do I need to do in case I have filed for an automatic extension for filing the 2019 tax returns? I owe Federal taxes to the IRS.

You can file your tax returns by 15^th October 2020; but, you will have to pay your taxes by 15^th July 2020.

Has the IRS postponed the tax return filing deadlines for partnership firms and S-corporations which were due on 16^th March 2020?

No, there has been no postponement by the IRS for the tax return filing deadlines for the partnership firms and S-corporations that were due on 16^th March 2020. This tax relief is only for filings and payments which are after 15^th April 2020 and before 15^th July 2020.

Does this relief give me more time to contribute to my IRA, HSA, and Archer MSA?

Yes, you can make contributions to your IRA, HSA, and Archer MSA at any time in a year or by the tax return filing due date.

Hence, these common FAQs on the tax payments related to 2020 will resolve your queries related to the tax return filing and tax payments.

Tax deductions for your child born in the US.

by Mounica Kota | Oct 1, 2020 | Tax Deduction, tax deductions, tax filing, Tax Payers, taxes, US Government

Tax deductions for your child born in the US.

When the deadline for the tax return filing approaches, you should keep your details ready for review so that you do not miss any necessary detail. If you have a kid, then it is feasible that you can obtain some good tax benefits.

Dependency Requirements.

If you are going to claim your child as a dependent, then there are certain dependency requirements which your child must meet.

Your first step is applying for the Social Security Number of your baby. It will take nearly two weeks for your Social Security Number to arrive.
Another criterion is that your child should have been living with you for a period of more than half of the year. The time which your newborn child has spent in the hospital would not be taken into consideration here.

Changes in your tax filing status.

In case you were single and now after having a baby you are supporting your household, your tax filing status would change to “Head of the Household”.
By this tax filing status, you would be able to obtain a much larger standard deduction and even more favorable tax brackets.
So, you can save more on your taxes after being the Head of Household than you were saving while you were Single.
However, when married and having a child your filing status would not change.

Child Tax Credit.

This is considered to be one of the best tax breaks for the parents. You can claim Child Tax Credit up to $1000 for each qualifying child.

Some criteria must be met for your child to be the qualifying child.

Relationship – If you are going to claim this credit, then your biological children, foster children, adopted kids, step-children are eligible. Moreover, some of your other family members can also qualify.
Age – Your children must be of the age of either 16 years or younger than that to avail of this credit.
Dependent – You will have to claim your child as your dependent on the federal taxes.
Support – Your child should not have been provided half of the support.
Resident – Your child should have stayed with you for nearly half of the year or more.
Citizenship – Your child can qualify if he is a US citizen, US resident alien, or a US National.

Claiming the tax breaks for medical expenses and child care.

Medical expenses related to the birth of your child and child care are deductible.
These expenses are deductible only when they are exceeding 10% of your AGI (Adjusted Gross Income).
To qualify these expenses for deductions, these expenses must be itemized.
If you are a working parent, then you are eligible to claim credit for Qualified Child Care Expenses.
You can also claim the Child and Dependent Care Credit if you have paid some worker or Daycare center for taking care of your child while you were working.
To qualify for this credit, you should be able to identify the individual who has given support or taken care of your child. You and your spouse should have earned income to avail of this credit if you are filing the returns jointly. Moreover, the expenses paid for child care should not be given to your spouse or any other dependent on your tax returns.
This credit is based on your income and can exceed up to 35% of the child care expenses which qualify for a credit. This can be up to maximum expenses of $3000 for one child and $6000 for more children.
However, your Child and Dependent Care might get reduced if your employer is providing you with dependent care benefits that are tax-free.

Some additional tax breaks.

There are some other tax breaks which parents can enjoy such as:-

You can qualify for obtaining the Earned Income Tax Credit.
Any gifts i.e. in the form of money or property would be free of tax for you and your kid if received from grandparents and other relatives.
You can also be eligible to participate in QTP i.e. Qualified Tuition Program which is being offered by your State. Even though there is no immediate break for the taxes, the earnings in the account would be tax exempted. You could also obtain state deduction or credit for the contributions made.

Conclusion.

So, these factors would help you to understand the different facets related to the tax deductions associated with your child born in the US.

Tax implication for home-buyers in the US

by Mounica Kota | Aug 27, 2020 | property tax, Tax benefits, Tax Deduction, Tax implications

Tax implication for home-buyers in the US

More and more Americans are now looking for purchase of vacation homes, rental income properties, and comfortable places to settle down after retirement. US Tax laws governing the ownership of property are quite complex and have different tax implication for both residents and non-residents.

Tax benefits of homeownership in the US

The main tax benefit of owning a house in the US is that the homeowners do not need to pay taxes on the imputed rental income from their own homes.
Homeowners will not have to count the rental value of their homes as taxable income even though that value is just a return on investment such as that of stock dividends or interest on a savings account. So, the rental value of homes is a form of income that is non-taxable.
Homeowners are allowed to deduct mortgage interest, property tax payments, and other expenses from their federal income tax if they are itemizing their deductions.
According to the tax rules, in a well –functioning Income tax system there must be deductions made for mortgage interest and property taxes. But, the current Federal Income tax system does not tax the imputed rental income.
Furthermore, homeowners can also exclude up to a certain limit the capital gain which they realize from the sale of their home.
Both residents and non-residents in the country must pay taxes on any property which has been generated by renting a property that is located in the US and also by any gain realized from the sale of the property.

Imputed Rent

In the US, a landlord can count the rent received as income whereas the renters may not deduct the rent which they are paying. A homeowner can be considered as both the landlord and the renter. However, the tax code of the country would treat the homeowners in the same way as the renters by ignoring their simultaneous role as their landlords.

Deduction of mortgage interest

Those homeowners who are itemizing their deductions may reduce their taxable income by deduction of the interest that has been paid on the mortgage of their home. Those taxpayers who do not have their own homes will not have the ability to make any deductions for the interest paid on the debt incurred in the purchase of goods and services.

However, there have been certain changes introduced by the TCJA (Tax Cuts and Jobs Act). Before the changes introduced by the TCJA, the deduction was limited to the interest paid up to $1 million of debt which has been incurred either to purchase or substantially rehabilitate a house. Homeowners can also make a deduction on the interest that is paid up to $100,000 of home equity debt regardless of how the borrowed funds have been used. The TCJA has also limited the deduction to interest on up to$750,000 of the mortgage debt which has been incurred after 14^th December 2017 to either buy or improve a first or second home.

Deduction of property tax

Homeowners who can itemize their deductions may also have to reduce their taxable income by deduction of property taxes which they pay on their homes. This deduction can be said to be a transfer of federal funds to the jurisdiction which imposes a property tax and allowing them to raise the property tax revenue a lower cost to its constituents.

Profit from home sales

Usually, taxpayers who sell assets must pay capital gains tax on any profit which is made out of the sale. But, homeowners might exclude from the taxable income up to $2, 50,000 of capital gains on the sale of their homes. This is feasible when certain criteria i.e. the homeowners must have maintained their home as a principal residence for two years out of the five preceding years and may not have claimed the capital gain exclusion for the sale of the other home during the previous two years.

Effect of deductions and exclusions

These benefits are more useful for those taxpayers who are in the higher-income tax brackets rather than to those who are in the lower-income tax bracket. The difference in the tax impact results due to three main factors: compared with lower-income homeowners, those with higher incomes face higher marginal tax rates, typically pay more mortgage interest and property tax, and are more likely to itemize deductions on their tax returns.

Conclusion

So, if you are a house owner or are planning to buy a house in the US these tax implications would be of great help to you in understanding the details related to the tax system.

References

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