A Complete Step-By-Step Guide To Filing Your Taxes in 2021

by | Apr 2, 2021 | 2021 Tax Returns, Blog, Tax Planning, Tax Preparation

A Complete Step-By-Step Guide To Filing Your Taxes in 2021

A Complete Step-By-Step Guide To Filing Your Taxes in 2021

Almost all individuals and business entities need to pay federal income taxes to the IRS. This is solely dependent on the income for the specific year in question. And to prove that you have paid the taxes that you owe to the IRS, you need to file your tax returns.

Filing your tax returns also let you know if there are any pending taxes that you need to pay to the IRS or if you have paid additional taxes and can expect a tax return. It is that time of the year again, where one needs to do their due diligence of filing their tax returns. Here are all the steps that you need to follow.

Deadline and Deductions

To ease out the process of filing tax returns during the ongoing pandemic, the IRS has extended the deadline till the 17th of May 2021.

For single taxpayers, the standard deduction has increased by $200 to $12,400. Similarly, the standard deduction for the head of a household has increased by $300 to $18,650. And the same for married filing jointly has increased to $24,800.

Tax Forms to Collect

Additional activities such as opting for a side gig or investing in the stock market might mean you have more tax forms than before. Here are some of the most common tax forms where your income might be reported, provided they are applicable.

  • W-2: Is applicable if an employer pays you wages
  • 1099-G: Applicable for unemployment benefits
  • 1099-B: Applicable if you have sold stocks
  • 1099-R: Applicable if you have received IRA or retirement plan’s distributions
  • 1099-MISC: Applicable for rental income or other sources of income
  • 1099-NEC: Applicable for non-employee compensations or income from self-employment
  • 1099-DIV/1099-INT: Applicable if you have received dividends above $10
  • 1099-SA: Applicable if you have received distributions from the health savings account

Apart from being aware of the different tax forms, it is essential to collect other documents that might aid you during the tax return filing process.

  • Documentation, receipts, or forms for other sources of income such as rental, winnings from the lottery, etc.
  • Your bank account number along with the routing number for any refunds that you might receive.
  • Documentation of taxes that you have already paid through the year.
  • Your Adjusted Gross Income from the previous year tax return

Filing Status

Your tax filing status plays a crucial role in determining the amount of taxes that you are liable to pay. Thus, being aware and using the right filing status is crucial. Here are some of the most used filing statuses.

  • Single:

For taxpayers who are not married or separated. The single filing status is also known as single filers.

  • Married Jointly Filing:

         The status is for married couples and requires one return for both spouses. People opting for this filing status are also known as joint filers.

  • Head of Household:

          It is for taxpayers who are not married but have paid for more than half of the annual maintenance of a house and have qualifying dependents.

  • Married Filing Separately:

          Taxpayers who are married but want to file their tax returns separately can opt for this status.

Tax Bracket and Deductions

Based on your tax filing status and annual income for the specified year, your tax bracket for the current fiscal year would vary. And you can use certain deductions to furthermore offset the taxes that you are liable to pay.

Keeping the above information handy would ensure that you have a seamless tax return filing process. And having all the documents ready would keep you away from last moment running around or stress.

 

Tax Benefits that can be availed for a Newborn

by | Mar 21, 2021 | 2021 Tax Returns, Blog, Tax Planning, Tax Preparation, Uncategorized

Tax Benefits that can be availed for a Newborn

Tax Benefits that can be availed for a Newborn

Parenting can be expensive with a lot of new expenses getting added up to your list. Baby supplies, baby bottles, diapers, baby clothing, etc. can turn out to be quite expensive. However, if you are a parent to a newborn child then you can be able to avail certain tax advantages. These can help reduce the financial burden up to a certain extent.

Let us check out the tax benefits that can be availed for your newborn kid.

Child Tax Credit

If your child is below the age of 17 years then you would be able to claim him as a dependent and take the benefit of Child Tax Credit (CTC). For each qualifying child, the Child Tax Credit which can be claimed is up to $2,000.

If you are a single parent, the CTC value would be reduced by 5% of the AGI which would be over $200, 00 whereas it would be reduced by 5% of the AGI over $400, 00 if you are married and filing your taxes jointly.

CTC is refunded partially i.e. in case of the credit value ending up being more than the total amount of taxes that you owe to pay you would be able to receive a tax refund which would be up to $1400 of the amount remaining. This part of the credit would be known as Additional Tax Credit. 

 Adoption Tax Credit

If you have adopted a child in the year 2020, you would be eligible for the Adoption Tax Credit. This credit can be up to an amount of $14,300 for each child. But, the Adoption Tax Credit is non-refundable and can only be claimed if there is a federal tax bill.

The eligibility to obtain the Adoption Tax Credit would depend upon the below-mentioned criteria.

  1. To claim the Adoption Tax Credit, you should have adopted the child in the 2020 tax year. The adopted child should be below the age of 18 years and must be either mentally or physically unfit for taking care of his responsibilities.
  2. Your income should be within the limits that are needed to avail of this credit. In the year 2020, if your family has an AGI which would be less than $214,520 then the family would be able to claim the full Adoption Tax Credit. In case, the family has an AGI which lies between $214,520 and $254,520 then the family would be eligible for only Partial Credit. If a family has an AGI that would be above $254,520 then the Adoption Tax Credit cannot be claimed by the family.

 Child and Dependent Care Credit

The Child and Dependent Care Credit are somewhat different from the Child Tax Credit. These are two different credits that are available for the parents of kids. This credit would help reduce your financial liabilities while you are searching for a job.  This credit is around 25-35% of your expenses that are qualified. The amount which you would obtain as credit would mainly be based upon your level of income and how much has been spent on your child and dependent care. You are eligible to claim $3000 for each qualifying dependent or $6000 if there are two or more dependents.

Earned Income Tax Credit

The amount which you are eligible to receive as Earned Income Tax Credit (EITC) would depend on the number of children you are having, your tax filing status, and also your income. For the tax year 2020, the Earned Income Tax Credit can be ranging from $538 to $6660 whereas it would be ranging from $538 to $6728 for the tax year 2021.

You are eligible to calculate your EITC by using your income for the year 2019 or 2020 whichever would help in a bigger credit calculation.

529 plan

The 529 plan would be helpful in saving money for your children’s education. The 529 plan would help provide tax benefits in case you are saving money for your children’s education. 529 Plan can be categorized into two categories i.e. College Savings Plan and Prepaid Tuition Plans. A College Savings Plan would act as a Roth 401(k) or Roth IRA plan in which you are investing your after-tax contribution into mutual funds. In Prepaid Tuition Plan you would prepay complete or a part of your child’s in-state education in a public college.

Funds which are saved under the 529 Plan are tax-free and are not taxed even when the amount is withdrawn for education expenses.

Adjustment with tax withholding

When you have a newborn baby, you can be able to adjust your total tax withholdings on your Form W-4. By adjusting into your withholding, you would be able to make sure that the right amount is being withheld from the amount that you would receive as your paycheck, and in turn, you have to pay fewer taxes at the time of filing your returns.

Conclusion

Hence, these are some of the major tax benefits which you can avail of if you are a parent.

 

Correlation between Exempt and Refund

by | Mar 3, 2021 | 2021 Tax Returns, Blog, Tax Planning, Tax Preparation, Tax Refund

Correlation between Exempt and Refund

According to the IRS guidelines, a tax refund would be obtained by a taxpayer only when extra money has been paid by the taxpayer to the Government. It is quite usual that additional money has been withheld from a taxpayer’s paycheck and this can result in a tax refund. Moreover, there can be additional tax deductions and credits which can help reduce a taxpayer’s tax liability thus, resulting in a tax refund.

However, there can be a scenario when money has not been withheld from the paycheck of a taxpayer. In such a case, will the taxpayer be eligible to obtain a tax refund even though he is tax-exempt?

What does it mean to be tax-exempt?        

When a taxpayer is filling the Form W-4 from his employer, he would be adding up his withholding allowances. If the income of the taxpayer is less than his Standard deduction then he would be exempted from paying any Federal Income Tax.

But, in case a taxpayer has some tax liabilities in the previous year or owes to have some tax liabilities in the present year then he cannot be tax exempted. If a taxpayer had $1 of tax in the previous year or even expects earning more than the sum of his Standard Deduction i.e. $12,400 for Single taxpayers, $18,650 for the Head of the Household or $24,800 for those who are married and filing tax return jointly then it is not possible to be tax exempted in the current year.  When a taxpayer is exempt, he has no amount being withheld from his paycheck thus, leading to no refunds as well.

However, there can be certain conditions in which a taxpayer can be eligible to receive a tax refund even if he is exempted from paying any taxes.

Refundable Tax Credits

Taxpayers can receive tax refunds even if they are tax exempted if they can qualify for obtaining a refundable tax credit. Refundable tax credits are those which can help in creating negative tax liability thus, resulting in a tax refund even if taxes have not been paid by you.

Let us have a look at the most common Refundable Tax Credits which can help in obtaining a tax refund even if tax-exempt.

The most common Refundable Tax Credit is the Earned Income Tax Credit. The Earned Income Tax Credit can mainly be available to those taxpayers who are earning in the low to moderate-income bracket. In case a taxpayer is exempt and he has earned any income, he can be able to claim this credit. This can help obtain a tax refund even if there have been no taxes withheld from the taxpayer’s paycheck.

Another common refundable tax credit is the American Opportunity Credit. This refundable tax credit would be helpful to offset the certain costs that are associated with higher education and would be refundable up to 40%.

Exemption claim from withholding

If a taxpayer is not able to claim exemption from his withholding, he would still be able to reduce the amount withheld from his paycheck. This can be done easily by updating the Form W-4 and changing the withholding. The IRS has redesigned the Form W-4 and now the form available in the W-4 Employee’s Withholding Certificate. The earlier version was known as the W-4 Withholding Allowance Certificate and it has been updated for reflecting the changes. The major change in the tax system was that there has been an elimination of the personal allowances as allowances are connected with the dependents of taxpayers and with personal exemptions which have been removed. The Form W-4 which has been redesigned would consider if a taxpayer would be able to claim the Child Tax Credit and if he would be able to claim tax deductions that are different from the Standard Deduction.

Conclusion

Hence, before considering that any tax refund would not be received from the Federal Government taxpayers must understand their eligibility for the Refundable Tax Credits. Taxpayers might get some tax refunds even after being tax-exempt, but this is only feasible if the tax returns are filed.

 

2nd Generation Indians in the US: Did you know that you can avail Family Tax Deductions and Credits?

by | Mar 1, 2021 | 2020 Tax Returns, 2021 Tax Returns, Blog, Tax Planning, Tax Preparation, Uncategorized

2nd Generation Indians in the US: Did you know that you can avail Family Tax Deductions and Credits

2nd Generation Indians in the US: Did you know that you can avail Family Tax Deductions and Credits?

In the US, due to various practical and cultural causes, many families reside in their multi-generational homes. Over more than 60 million Americans tend to live with their families due to the various benefits this can offer. Sometimes, living together with families can be the reason for certain chaos; however, the advantages would always be more than chaos.

If you are an Indian staying with your family in the US, then while filing your tax returns there are certain benefits related to family which you must be aware of. You must ensure that you are taking the advantage of these tax deductions and credits while you file your tax returns.

Tax deductions on home

If you are the owner of a house, then you would be eligible to claim certain tax deductions. Let us check out some of these deductions.

  1. Points

In case, you have origination fees or points being paid for your new house to obtain a particular rate from your lender then that fee is deductible from your taxes. Moreover, if you had paid points when your house was purchased then you would be able to deduct those points in the year you had paid them.  In the case of refinancing your home, you would have to do a points deduction over the loan life.

  1. Interest

In case of a home purchase with the help of a home loan then you must have paid the mortgage interest. You are eligible to make a deduction for the mortgage interest that has been paid during the current tax year and has been reported on Form 1098.

  1. Taxes on property

Taxes paid on property are very expensive and can be deductible from your taxes if you have paid them. For the tax year 2020, your taxes on property or State Income tax withholding should not be more than $10,000 in total.

Tax Benefits on Family

As a parent, you would be able to avail various tax benefits while filing your tax returns.

  1. If your child is below the age of 13 years and was using daycare facilities in the last year then you would be eligible to claim the Child and Dependent Credit. For one dependent child, you can claim up to 35% of the $3000 that has been incurred in the daycare. For two or more than two dependent children, you would be able to claim up to 35% of the $6000 incurred in the child-care expenses.
  2. If you are working, then another tax benefit that would be advantageous for you is the Earned Income Tax Credit. If your family has three kids, then you can claim a tax deduction of up to $6,660. Last year around 25 million taxpayers were able to receive the Earned Income Tax Credit and the average Earned Income Tax Credit for each taxpayer would be around $2,476.
  3. Under the tax reforms, the dependent exemption was eliminated. But by the Child Tax Credit, you would be able to claim up to $2000 for each child who is below the age of 17 years and is a dependent. In case of your children being above the age of 17 years, you can claim the credit for non-child dependents which would be $500.
  4. You can also be eligible to avail of the American Opportunity Tax Credit (AOTC) if your kids are dependents and are studying in college. The American Opportunity Tax Credit is a refundable tax credit that would be up to $2500 for each student for the first four years of their college.
  5. In case, you are not qualifying for the American Opportunity Tax Credit, you can avail the option of Lifetime Learning Credit. The limit for this credit is up to $2000 for each tax return and you can claim it even if your dependent has attended one class in the college.

Financial support for elderly family members

If you have been providing monetary support for your parents or grandparents, then it is feasible to claim them as dependents while filing your tax returns.

  1. You can be a qualified relative to claim dependents only when you have provided more than half of the financial support for your parents/grandparents in the year 2020.
  2. In the year 2020, the taxable income of your dependents must have been less than $4300.

Conclusion

Hence, you might be staying in a nuclear family or a joint family setup; you must be aware of the tax deductions which you can claim for your dependents and family members.

What exactly is Earned Income Tax Credit?

by | Feb 12, 2021 | 2021 Tax Returns, tax filing, Tax Planning, Tax Preparation, Taxtips

What exactly is Earned Income Tax Credit?

What exactly is Earned Income Tax Credit?

 

The Earned Income Tax Credit (EITC) is helpful in obtaining a tax break for those individuals and families who have low-to-moderate income categories. In case, you are eligible to claim this credit you would be able to reduce your taxes and increase your tax refund. The refund you would obtain would be the amount of your credit if the EITC credit is more than the amount of taxes you owe.

According to the IRS report, around 25 million taxpayers from the US have received EITC last year and the average EITC received was approximately $2,461. However, millions of Americans are still unaware of the advantages that can be availed by the Earned Income Tax Credit. There are a lot of Americans who miss out on the EITC as they are qualified for claiming the credit newly or they do not file the tax returns as their income falls below the filing limit of the IRS.

Eligibility to claim the Earned Income Tax Credit 

You would be eligible to claim the EITC in case you can meet the income limits that are mentioned below.

  1. You must be a US citizen.
  2. You are above the age of 25 years or you are having qualifying children.
  3. You are not filing your tax returns under the status “Married filing separately”.
  4. You are obtaining your Earned income from employment and the unemployment income does not count.
  5. You would be qualifying for EITC if you are obtaining your income from any home business or you provide services.

Income limits to be eligible for claiming EITC

The income limits are adjusted every year and for every year the earned income and AGI (Adjusted Gross Income) must not be more than the below-mentioned figures.

  1. $50,594 for those filing tax returns as single with three or more qualifying children or $56,844 for those married and filing tax returns jointly with three or more qualifying children.

     

  2. $47,440 for those who are filing their tax returns as single with two qualifying children or $53,330 for those who are married and filing tax returns jointly with two qualifying children.

     

  3. $41,756 for those filing tax returns as single and having one qualifying child and $47,646 for those who are married filing their tax returns jointly and having one qualifying child.

     

  4. $15,820 for those filing tax returns as single and having no qualifying children and $21,710 for those who are married filing their tax returns jointly and having no qualifying child.

What is the amount of credit?

The actual amount of credit you can claim would depend on your income and the number of your qualifying children.  The maximum credits that can be obtained for the tax year 2020 are mentioned below:-

  1. $6,660 for those who are having three or more than three qualifying children
  2. $5,920 for those who are having two qualifying children
  3. $3,584 for those taxpayers having one qualifying child
  4. $538 for those taxpayers who have no qualifying children

What do you mean by a qualifying child?

For a child to be qualifying for the EITC, there are some tests which the child must meet.

  • Age –
    The child must be below the age of 19 years or the age of 24 years if he is a full-time student or he can be of any age if he is permanently disabled.

  • Residency –
    You and your child should have lived in the US together for at least a period of more than half a year.
  • Relationship –
    Your qualifying child can be your son, daughter, stepchild, foster child, or your brother, sister, half brother or sister, or step brother/sister.

     

  • Joint Return – Your child would not be a qualifying child for claiming the EITC if he has filed a joint return. 

 Conclusion

Hence, EITC (Earned Income Tax Credit) is one of the best credits which can be of great advantage for those Americans who are struggling with their finances. Qualified tax software must be used by the Americans to maximize their EITC. However, it is advisable not to commit any fraud to obtain the credit as it can lead to being penalized by the IRS.

Why file your taxes early through e-File?

by | Feb 8, 2021 | 2021 Tax Returns, Tax Planning, Tax Preparation, Taxtips, Uncategorized

Why file your taxes early through e-File?

Why file your taxes early through e-File?

 

On 12th February 2021, the IRS opened up the tax season for the year 2020 and now the process of e-filing is going on.  It is a common scenario where taxpayers wait till the end of the tax season for filing their tax returns. But, there is no significant reason as to which one should wait till the end for filing their tax returns.

Undoubtedly, tax refunds would have an impact on your finances and if you have a refund due from the IRS then it is even wiser to file your returns soon.

Let us have a look at the main reasons to file your tax returns early

1.To obtain the refunds soon

The pandemic COVID-19 has been the main reason for affecting the finances of millions of Americans. Many have become unemployed and many have been furloughed. In such adverse financial situations, tax refunds would be helpful and you would like to have your refunds as soon as possible. According to the IRS, every 9 taxpayers out of the 10 taxpayers filing their tax returns would receive their tax refunds within 21 days of e-filing or even faster than that. Moreover, there are a large number of tax deductions and credits available which would make your refund amount a bigger one. So, why not file for your tax returns early and get your refunds soon.

2.More time to pay your taxes   

Even if you have taxes to be paid to the IRS, you still can file your tax returns early. In case you file your tax returns early there would not be the necessity to pay your taxes due by the mid of April which is the deadline for tax payment. If you are filing your tax returns early, you will have ample time to understand and figure out how to pay your taxes. Moreover, you would also have the option to make contributions to the IRA in 2020 and can even avail the benefits of additional tax deduction.

3.Avoiding tax extension

If you are filing your taxes early, then you are going to avoid the chances of filing for a tax extension. Tax extensions are mainly not due to financial needs but due to disorder or disarrangement. Many people who are waiting until the last minute to file their tax returns are in the need of extra time to find out about the deductions or find out the receipts. 

If you are filing for a tax extension and you are not able to pay whatever you owe, you will be charged with interest and penalties on your outstanding debts. If you are preparing your tax returns early, you can be able to avoid this situation.

4.Financial Information

In case, you are in a phase where you are expecting that you will be purchasing a house, you would be starting your studies again, etc. then you must start filing your tax returns early. By this, you can get the essential information soon. College-going students would be able to use the information provided in Form 1040 for financial aid and if you are a home buyer then you can also show your completed tax return as your household income’s proof. When your tax returns are done early, then the paperwork for these processes can begin early.

5.Preventing tax refund fraud

By filing your tax returns early, you may not be able to eliminate the threat of identity theft. However, it will help protect your tax refund. It might happen that before you file your tax return, someone else has already filed a tax return using your Social Security number (SSN). This is tax refund fraud or scam and usually, it occurs early in the tax season before most taxpayers have filed their returns. So, you should try to keep your SSN a secret and make an attempt to file your taxes early. 

6.Less competition 

It is quite tough to get good and expert tax professionals that would help you in your tax return preparations. If you have not taken an appointment, it is difficult to get one now. Some tax professionals would even charge more when the tax filing deadline approaches closer.  So, the best way is to avoid all troubles by filing your tax returns early.

7.Avoid tax deadline stress

Most of the taxpayers are always stressed about filing their tax returns. It is a complicated task and it is better to get rid of the difficult things soon. Once, your tax return filing is done you can just sit back, relax and wait to receive the refund.

Conclusion

Hence, it is good to file your tax returns early to utilize the various advantages of early filing offers. So, if you have not filed your tax returns you must plan to do it soon.