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

by Mounica Kota | 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

Filling status
Other income
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 31^st 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.

You cannot deduct Student Loan Interest.
You cannot claim the Earned Income Tax Credit
You cannot claim the Child and Dependent Credit
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.

How to leverage your income tax refunds amidst the COVID-19 pandemic?

by Mounica Kota | Jun 15, 2020 | 401(k), COVID - 19, Income Tax refunds, Roth IRA

How to leverage your income tax refunds amidst the

COVID-19 pandemic?

Currently, the entire world is facing the dreadful consequences of coronavirus. Millions and millions of people have been impacted and the global economy has come to a standstill. In the US, the impact of the pandemic COVID-19 is intensifying each day. Millions of Americans have become unemployed and the economy of the country is regressing.

In such difficult times when the livelihood of the common people has been impacted in such a worse manner, Americans see a dint of hope in the Income-tax refunds which they would obtain. Even though the Federal Government has provided Stimulus Checks, additional money is always helpful in such bad times.

If you have filed your Income Tax Returns and are waiting to receive a hefty amount from the IRS, then you should also think about avenues by which you can leverage your refunds during these critical times.

Let us have a look at some of the best options to leverage your income tax refunds during this pandemic COVID-19.

a.Emergency Savings Account

You should open a savings account and try to put a major part of your Income tax refund into that account as an Emergency Savings Account. This would be helpful in case emergencies are arising due to the pandemic such as a medical emergency or you lose your job, unfortunately. This Emergency Savings Account will be your savior in difficult times.

b.Increase your contribution into your 401(k)plan

You can utilize this opportunity to increase your contribution to your 401(k) plan. In case, you have been contributing only 3% of your paycheck but your employer matches up to 6% then you can double the pre-tax income which you are investing in your retirement funds. It can lead to your monthly paycheck being a little low but you will be investing for good and your taxable income would also be low.

c.Investment into Stocks

When you have already made your contributions to your retirement account, then you must invest your income tax refunds into purchasing stocks or mutual funds. Generally, the stock market would deliver better returns than that of a Savings Account and Treasury bonds. But, sometimes there are risks involved in the stock market and the returns are not guaranteed. Investment in stocks by tax refunds is a good idea if you are saving to attain long-term goals.

d.Paying down the existing debts

When you obtain your Income Tax returns, it is wiser to pay off your debts quickly. The high-interest debts must be paid off on priority as this would help you in saving a lot of money in the future. Usually,debts are associated with credit card dues and if you are fortunate enough to not have credit card dues then you should pay off your car loan or student loan.

e.Contribute to Regular or Roth IRA

If you are thinking about your long term savings, you must contribute your income tax refund into Regular or Roth IRA. If you and your spouse have a modified AGI of less than $203,000 then you can be able to contribute up to $6000 to Roth IRA in 2019 or $6500 if you are 50 years or above.

f.Contribute to HSA

You can open HSA if you do not have one as HSAs are a very good option to keep aside some money for medical expenses i.e. may be routine or emergency medical expenses. Your unused funds in the HSA keep on rolling to the consecutive years and the remaining money can be utilized during retirement once you are above 65 years of age.

g.Investment into an ETF

You can invest your income tax refunds in broadly diversified ETFs which are a safe investment option. ETFs would include thousands of stocks, low volatility, and any risk compared to individual stocks. Investing in ETFs would be good as they are passive and have a low expense ratio.

h.Make donations

This is a philanthropic option and perhaps one of the best ways to utilize your money obtained by a tax refund. You can make your donations into mainly those charitable organizations which support a good cause and are working towards a cause that you support.

In addition to all these available tax refund investment options, you must some a considerable amount of cash in your hand during these emergency times. Moreover, you can invest some of your money in self-care avenues like taking up any online courses/training or workshop. This would be helpful in your career in the future and would return you an incremented paycheck

References

Extended Timeline For US Tax Filing

by Mounica Kota | Mar 27, 2020 | 401(k), COVID - 19, income tax, IRA, IRS, refund due, Tax Break, tax deductions, Tax Extension, tax filing, Tax Payers, Tax Planning, Tax Refund, Taxation

Extended Timeline For US Tax Filing

While the entire world is struggling to combat the effects of the dreadful COVID-19, the US Government has come up with new initiatives to provide some relief to the public who are paying the taxes. The Treasury Department in the US and the IRS have jointly announced last week that the US Government is extending the tax –filing deadline to 15th July 2020. This decision has been taken by the US Government to give the taxpayers extra time to handle their taxes amidst the outbreak of COVID-19.

The COVID-19 outbreak was declared as a National emergency last week by the President of the US. Also, the President had invoked the Stafford Act which gives him the power to mobilize the federal resources. The taxpayers would get an additional period of 90 days for filing their taxes and the IRS will not charge any interest or penalty for this time extension. However, for those taxpayers of the country who have already filed their taxes this year would not be affected in any means by these changes made.

File Tax Sooner If A Refund Is Due

Even though the US Government has extended the timeline, those taxpayers who don’t owe any money to the IRS can consider filing their tax by the original deadline of 15th April 2020. This would be wiser as the taxpayers would be able to collect their refunds sooner. This would be very helpful for those citizens who have already started seeing their economic condition and earnings being affected by the outbreak of the pandemic COVID-19.

Moreover, it is just that the Federal Government has provided this extension in tax filing but different states in the country have formulated different guidelines concerning the tax filing extension. It is advisable for those taxpayers who are planning to delay their federal taxes to understand in detail about the tax filing extension that their State Governments are offering as well.

The Due Date For Tax Filing In Case Of An Extension

There might be some taxpayers who may be concerned about their ability to pay the taxes even by 15th July 2020 due to the loss of a job or other financial issues related to the outbreak of COVID-19. These taxpayers can contact the IRS and discuss their options. The IRS has short-term and long-term payment plans which would help the taxpayers to pay their taxes conveniently. Short-term plans would give taxpayers around 120 days to pay the taxes whereas long-term plans taxes can be paid in installments over several months.

Earlier, when the tax filing deadline was 15th April and a taxpayer who would get an extension will not have to file his tax returns till October. However, now with the IRS pushing the tax filings date to 15th July 2020, it is quite not sure how long the taxpayers would be able to get if he is filing for an extension. But with the various options made available by the IRS, it is quite sure that taxpayers would have some relief.

Deadline For Quarterly Estimated Tax Payments

Many people are required to make quarterly estimated tax payments to the IRS in case of their income not being subject to the taxes of payroll withholding. This estimated tax payment is made by the division of the year into four payment periods with each period having its payment due date. Now, since IRS has extended the timeline for filing the taxes to 15th July 2020 it is quite uncertain that what would be the impacts upon the deadline of quarterly estimated tax payments.

Some Important Steps To Consider Before The Previous Deadline

Filing of 2017 tax return

If there is a refund due of the year 2017 for a taxpayer and the tax return has not been filed, then it must be filed by 15th April through the Form 1040 or Form 1040-SR to claim the money failing which IRS would keep the money.

Max out 401(k) by 31st December 2020

The contributions made towards the traditional 401(K) help in reducing the total taxable income of an individual. Many employers also contribute to the savings made by an individual; so, if there is enough contribution made then there are opportunities to obtain some money as well.

Contribution towards IRA and HSA

The contributions which are made to an IRA and HSA are eligible for a tax deduction. This contribution must be done by the April deadline every year. Now, even though the tax filing deadline has been extended to 15th July 2020 there have been no announcements made on the deadline for IRA or HSA contributions. So, it is advisable to accomplish this task by the April deadline to avoid any further hassles.

Conclusion

Hence, with the global economy coming to a standstill and numerous lives being affected due to the pandemic COVID-19, this action by the US Government is applauding. This would reduce a lot of pressure on those expecting to owe money to the US Government. However, if there is a refund expected then it must be claimed immediately so that the cash can be utilized during this period of emergency.

References

https://www.fool.com/taxes/2020/03/24/the-tax-deadline-has-been-extended-should-you-wait.aspx

https://www.cpapracticeadvisor.com/tax-compliance/news/21130318/irs-extends-2020-income-tax-filing-deadline-to-july-15

https://www.usatoday.com/story/money/2020/03/20/taxes-2020-irs-delay-april-15-tax-filing-deadline-july-15/2883840001/

https://www.cpapracticeadvisor.com/tax-compliance/news/21129714/when-is-the-new-irs-tax-filing-deadline-for-2020-coronavirus-delay

https://turbotax.intuit.com/tax-tips/tax-planning-and-checklists/important-tax-deadlines-dates/L7Rn92V1d

https://www.nerdwallet.com/blog/taxes/april-deadline-taxes/

What is 401(k) plan?

by Mounica Kota | Feb 20, 2020 | 401(k), contributions, Distributions

What is 401(k) plan?

401(k) plan can be said to be a defined contribution plan in which an employee can contribute from his salary which can be either before the tax or after the tax based upon the options which are offered in the plan. It can be also described as a qualified retirement plan which allows the eligible employees of an organization to save and also invest for their retirement purpose on a tax-deferred basis. The contributions which are made move into the 401(k) account and the employee can choose the investments depending upon the options which are mentioned in his plan. Only the employer can be able to sponsor a 401(k) plan for his employees and are also known as the “plan sponsor”. In many cases, the employer makes contributions that match up to the contributions of the employees up to a particular percentage.

The employee will decide on how much money he wants to be deducted from his pay cheque and be deposited into the 401(k) plan based upon the limits which have been determined by the IRS. Since the employers are in the responsibility to sponsor the plan, they will run the plan according to the laws, rules, regulations, and provisions of the plan. This will also include who is eligible for the plan, how much the employer needs to contribute to the plan, how often you can be able to reallocate your assets, what type of options will be available for investment, etc.

In other words, the 401(k) plan can also be known as a Qualified Deferred Compensation Plan and the deferred compensation is not subject to any Income Tax withholding. The deferred compensation is also not reported as wages in Form 1040 or Form 1040-SR. However, in the social security and Medicare tax system the deferred compensation is reported as wages. Moreover, the employer should report the elective contributions as wages that are subject to Federal Unemployment taxes. There are some plans in which employees can select the option for making elective contributions.

Contributions

There is a limit on the amount that an employee would elect for deferring in a 401(k) plan. This limit is enforced by the Internal Revenue Code. The elective contributions which you are making can also be limited based upon the terms mentioned in the 401(k) plan.

Distributions

The 401(k) plan specifies the form of distribution and some distributions from a 401(k) plan can be eligible for lump-sum distribution treatment or rollover treatment.

Important points to keep in mind about 401(k) plan

401(k) plan is a plan meant for safeguarding your post-retirement period. It is not a savings account. The money which you have placed in your account for the 401(k) plan cannot be accessed easily. However, there are features like loans and hardship withdrawals but there are rules which make this procedure even complicated.
In case of huge and immediate financial requirements, employees can make some withdrawal from the account meant for a 401(k) plan in the form of a hardship withdrawal. Hardship distribution from a 401(k) plan is limited to the amount of the employee’s elective contribution and does not include into it any amount which is earned on the amount which is deferred.
Even if you think you will not be able to afford the 401(k) plan, you should not give up the idea. It is necessary and even it is good to start contributing to your retirement planning as soon as possible. The sooner you start the better your standard of living would be after retirement. So, even if it is a contribution of just 1% or 2% it is going to be effective in the long run.
Your plan sponsor i.e. your employer will give you a Summary Plan Description. You can read it and know much more about how your plan works, who are your trustees, options available and much other information.

Conclusion

Hence, you should be well aware of your 401(k) plan and the advantages your plan can provide. It is necessary to educate yourself and know more about the plan.

Reference

Who is considered to be an individual investor in the US?

by Mounica Kota | Jan 15, 2020 | 401(k), global income tax, IRA, tax filing, Tax Planning, Tax Refund, tax savings, taxes

Who is considered to be an individual investor in the US?

In the US, the direct impact of investment falls on the taxes of individuals. If you are investing, it would have a different implication on your taxes. Nowadays, with the various taxes, related software filing up for tax as an investor is not too tedious and difficult in the US.

Let us find out the various ways by which an individual would be considered as an individual investor in the US.

Buying or selling of a security

One of the simplest methods by which it can be determined that you are an individual investor or not is either you have bought or sold any security throughout the year. Here security can mean stocks, bonds, index funds, cryptocurrencies or even mutual funds.

However, by simply buying some stocks the way you fill your taxes for the year is not going to change. The company whose stocks or bonds you have purchased must give you a dividend and you must be able to sell them, otherwise, there would be no impact on the way you fill your taxes. In case, the company whose stocks or bonds you have purchased gives you a dividend you need to report it as income. Now, again if you sell that particular stock either for a gain or a loss you will have to report about this particular transaction on your taxes.

By investing in mutual funds or index funds, you will obtain 1099-DIV and 1099-B which will cover all the activities they have generated. In case, you have made any investments with the help of a retirement plan such as 401(k) or a Roth IRA it is going to have a separate impact on the way you will fill your taxes.

Savings App

On the purchase of stocks, you may not find it too relevant to consider yourself as an investor but there is numerous savings app available nowadays which help in saving more and turn you to be an investor. There is some savings app which will help in rounding up your purchases and thus save your money.

For instance, when you are purchasing by using the debit card of a particular company they will round up your transaction into the next dollar and your extra money would be invested on your behalf. Suppose, you have purchased food and beverages for a particular amount, it is rounded up and the extra amount is invested in a portfolio of exchange-traded funds. So, even if you are investing using these petty amounts you are an investor.

Type of investor

The type or category of investors you belong to is important when it comes to filing your tax for that particular year. A day trader or a pattern day trader is someone who can trade four times or even five times during a five-day period. The number of day trade is usually higher than 6% of the total trading activity taking place during that period. Moreover, a person can also be termed as a day trader if he is classified as a day trader by the broker and this happens in the case of distinct capital and margin requirements.

However, filing of taxes is going to be challenging even if you are a casual investor or a day trader. This is due to the heavy paperwork that is involved in the process of tax filing. But, if you have maintained your records then with electronic methods; tax filing should not pose as a threat for you.

Category of transactions

This is another simple method by which you can determine whether you are an individual investor or not. This is to think about the type of transactions you have done during the entire year.

For instance, you have sold some shares of stock and that will generate some gain or loss. This gain or loss will have to be reflected while filing the taxes. So, this clearly states you are an individual investor.

Hence, when you answer a few simple questions and analyze them it is easy for you to determine if you are an individual investor or not. While filing your taxes, you report about your transactions in Form 8949 whereas Schedule D covers the profits and losses.

Is it possible to maximize your tax refunds?

by Mounica Kota | Jan 9, 2020 | 401(k), Deduction & Credits, Investment & Income, IRA, tax deductions, tax filing, tax return, taxes

Is it possible to maximize your tax refunds?

Mostly, we think that when we have filed for our tax return and finally obtained our tax return brings an end to the entire procedure for the current year. There is nothing more to worry about or think about tax and tax returns throughout the year. However, even after receiving your tax return for the current year you can think about maximizing your tax refunds.

If you are interested in learning about how to maximize your tax refunds for the next year, then you can follow some simple tips. Let us have a look at these tips which can increase your tax refunds in the next year.

1.Deduction of education-related costs

There are numerous costs related to education that are deductible. In case you are the owner of a business or you are employed in an organization, you can try and deduct those education costs which are needed for improving your skills at the workplace. If you have an income that is less than $80,000 then you might be able to take up tuition and the fee deduction would amount up to $4,000 for the tuition, fees, and books. For instance, if you and your family members are together pursuing a degree then you can take up an American Opportunity Tax Credit which is a maximum annual credit of $2,500 for each student provided your income is less than $90,000 and is less than $180,000 for married couples who would be filing tax jointly.

2.Deduction of expenses incurred in job-hunting

There are various costs associated with job hunting which can be reduced such as deduction of the cost incurred during travel for jobs, meals and telephone calls associated with job search, preparation of a resume, career counseling, payment made to employment agencies, etc. These expenses account for almost 2% of your annual income even if you are not going to change your job anytime soon in the future. But, if it is your search or hunt for your first job then the expenses are unavoidable.

3.Take deductions available for business owners

When you are the owner of a business, you should keep a track of the business expenses and avail deductions that are available. Expenses like business dinners, mileage of the car, use of a computer, appointments, etc. can be used to increase your deductions available. You can also motivate your children to work in your business along with you. You can pay those wages for their jobs and as a result, they will not have to pay different varieties of taxes like other employees working with you.

1.Making investments in future

You should start investing in various plans such as 401(k), IRA, tax-advantaged avenues, employee stock purchase plans, etc. You should start contributing to these avenues as much as you can. If you are making smaller contributions now it would be helpful rather than making huge contributions at a time which is quite nearer to your retirement. By doing this now, you are saving now and also taking an initiative towards boosting your wealth also. This extra compounding will help increase your corpus for retirement.

2.Your own home

Your tax refund can have a remarkable increase in the mortgage interest and property tax deductions. When you are purchasing your house, you must check the settlement statement of your house properly and find out the deductible items. In your closing statement, you can find out different deductible items such as property taxes, prepaid interest, points, etc. When you are acquiring your own house, those points that are paid are deductible during that year. If there are any points paid for the refinancing of the loan, then they should be written off over the loan’s length. Again if you are refinancing, you must not forget to write off the remaining points from the previous loan.

3.Charity

Charity can also get you some tax deductions such as donating clothes, household goods, linen, sports items, etc. Donation of books and magazines made to the library can also get you tax deductions. You can make a note of the donated items and can deduct these at the time of tax filing.

Hence, tax refunds can be maximized by carefully keeping a note of the various deductibles that are available and those that have been availed by you. You can, later on, use these to maximize tax returns at the time of tax filing.