First-Time Taxpayer? 12 Tax Credits and Deductions You’re Eligible For

First-Time Taxpayer? 12 Tax Credits and Deductions You’re Eligible For

by | Apr 5, 2022 | Deduction & Credits

The upcoming tax season causes even seasoned people to break out in a cold sweat. It can be scary if you are a sole proprietor and ready to file your first income tax return. 

Moreover, filing taxes entails more than simply handing over a portion of your earnings to the government. It also qualifies you for various tax benefits and deductions. We provide you with a list of credits and deductions that you can claim if you are an Indian filing taxes for the first time in the United States. In addition, you will get some money back from your ITR (Income tax return).

The Best Way to Filing As a Sole Proprietor

As a first-time tax filer, you should begin the procedure as soon as possible to get the most out of it. The sooner you begin, the less complicated it will be for you. As a result, it is suggested to get started in January, as the federal tax deadline is April 15.

Here’re some critical prerequisites that will help you stay ahead of the tax returns curve:

1) Determine your eligibility: It is critical to determine whether you satisfy the IRS’s income criterion for filing taxes. If your income falls within or above the threshold, you must pay taxes. 

So add up your gross income from your job and other sources such as interest, dividends, property rent, etc. After certain deductions, this is the amount on which you must pay tax.

2) Have your documents ready: You will receive a W-2 form from your employer if you’re employed. Clients will issue 1099-NEC forms to freelancers and contractors. For paid tuition, grants, fellowships, and other awards, students will get form 1098-T. As a student, you can also claim the tax credit. Keep the paperworks mentioned above on hand from January to February for filing taxes quickly.

3) File all receipts and papers: Get organized and file all medical bills, receipts, investment papers, and other important documents as soon as they arrive. It will assist you in completing your ITR and claiming deductions where applicable. The IRS requires that you keep these data for three years.

Recommended: Filing Taxes for the First Time?? Here are some Handy Tax Tips for You (aotax.com)

12 Tax Credits and Deductions You Can Claim When Filing Taxes

Why not pay your taxes with a smile if you are eligible as a taxpayer? 

Here is a list of tax credits and deductions to help you save money on your taxes. In addition, it can assist you in claiming an IRS refund (Internal Revenue Services):

Retirement-savings

1) Retirement savings: This credit is available to part-time students who contribute to a retirement plan. If you aren’t a claimed dependent, you can apply for this deduction.

2) Charitable donations: Being a philanthropist can help you save money on taxes. A donation to your preferred charity can be deducted for $300. Single filers pay $300, while joint filers pay $600.

3) Student loan interest: Paying for your own or your family’s education qualifies you for this tax break. The interest you paid on a student loan for yourself, your spouse, or a dependant can be reduced to $2500. If you are married and filing jointly, you can claim it.

 4) Deduction for tuition and fees: You can deduct up to $4000 in tuition expenses for yourself, your spouse, or a dependent. This deduction is only available to single filers with a gross income of $80,000 or less. For joint filers, it’s $ 160,000 or less. You will need to fill out Schedule 1 and Form 8917 while filing taxes to claim it.

5) Child tax credit: If your children are under 17 and you pay a significant amount of their expenses, you can claim the deduction. It is $3600 per child under the age of five and $3000 for a child between 6 and 17 years.

6) American Opportunity Tax Benefit (AOTC): This credit covers your higher education expenses. This category allows you to deduct the amount you spent on tuition, classroom materials, and books. 

It costs $2500 per student and pays for the first four years of college. When your gross income reaches $90,000 for single taxpayers and $180,000 for joint filers, it decreases.

7) Self-employment tax deduction: If you are self-employed, deduct half of the 15.3% self-employment tax you paid in 2021. Claim this tax in  Schedule 1.Recommended: 14 Tax Breaks for Filing as Self-Employed NRI in the US – AOTAX.COM

Home-office-deduction

8) Home office deduction: You can claim this deduction if you run a small business or freelance from home. You can claim a maximum of $1500 for a home office of 300 square feet. Visit the IRS website for more information (irs.gov). 

9) Unemployment benefits repayment: Your honesty may help you receive a tax credit from the IRS. You can claim the overpaid amount in your deduction if you got an overpayment of unemployment benefits and pay it back to the IRS. 

Please claim it within the year in which you were overpaid. Otherwise, claiming it later, while legal, may become inconvenient.

10) Renewable energy credit: Going green to help save the environment can now help you receive resident energy-efficient property credit. You can claim this credit on your ITR if you use solar energy to heat water, have geothermal heat pumps, or harness wind energy.

11) Family leave for the self-employed: You can claim this credit if you are self-employed and tended to family members during Covid in 2021. This deduction is available even if you were ill due to COVID-19.

12) Recovery rebate: If you didn’t receive your third coronavirus stimulus check or a portion of it last year, you could claim it as a recovery rebate credit. The amount for singles is $1200, married couples get $2400, and each dependent receives $1200.

As a first-time taxpayer, you can take advantage of these tax credits and refunds on your final tax bill. In addition, you might get a rapid refund from the IRS if you are filing taxes online.

Contact AOTAX for assistance if you are an Indian filing taxes for the first time in the United States. We’ve assisted over 2 million Indians in the last 15 years in becoming tax-compliant and saving money.

All you need to know about the W-2 form (Wage and Tax Statement)

by | Mar 11, 2021 | 2020 Tax Returns, Blog, Deduction & Credits, Tax Planning, Tax Preparation

All you need to know about the W-2 form (Wage and Tax Statement)

All you need to know about the W-2 form (Wage and Tax Statement)

The Form W-2 is officially known as the Wage and Tax Statement. The Form W-2 can be defined as the form which an employer should send to its employees and the IRS at the end of every financial year. It mainly denotes the annual wages of the employees and the amount of taxes that have been withheld from the paycheck of the employees. Form W-2 of an individual would also denote the State taxes and other taxes which have been withheld from his paycheck.

The information present on Form W-2 of an individual is extremely necessary while preparing his tax returns. Employers must send the Form W-2 of their employees by 31st January of the tax year to ensure proper tax return preparation. In case of an individual being a contractual employee or self-employed, the income would be reported by other tax forms i.e. Form 1099-NEC or Form 1099-K.

Tax Withholding and its importance

When an employer is withholding amounts from paychecks for the purpose of Federal Income tax, those amounts are being constantly transferred to the IRS throughout the year. Usually, the IRS instructs the taxpayers to make certain periodic payments throughout the year and this is mostly taken care of by the employers.

While the preparation of federal tax returns, the withholding amount reported on Form W-2 would be deducted from the tax bill of an employee. After this has been performed, it would be easy to understand if a tax refund is expected to be received or tax payment would be done. In the case of State Income tax too, when a taxpayer is filing the State Income Tax return a similar calculation has to be done for the amount that has been withheld from a paycheck for the payment of the State Income tax.

How to review the Form W-2?

Let us have a look at some of the major tips that can be used for a review of the Form W-2.

  1. The taxpayer must check the Social Security Number in Block A of Form W-2. If the Social Security Number is wrong, then the employer must be requested for issuing a corrected version of the Form W-2. The taxpayers should not try to change the details themselves as the employer must send the correct copy to the Government for the correct implementation of the changes.
  2. Taxpayers should never assume that the information in their Form W-2 is correct. The figures in the boxes i.e. Box 1 i.e. the federal tax, Box 2 i.e. the federal income tax which has been withheld, Box 16 which highlights the State wages, and Box 17 which highlights the withheld State Income tax must be compared with the figures that are mentioned on the final paycheck stub for 2020.
  3. In the year 2020, if the employer of the taxpayer has sponsored any of the moving expenses then those must be included in the Form W-2. Box 1 of the Form should be reviewed carefully to check the inclusion of that expenditure.
  4. In case an individual has not received his Form W-2 by the end of the first week of February then the employer must be intimated about it. There is a toll-free number that can be helpful for the taxpayers who have not received their Form W-2. As an alternate option, Form 4852 can be substituted for Form W-2 while filing the federal tax returns.

If an individual has complete knowledge about reading Form W-2 then it can be very helpful in understanding his salary structure and even starting the preparations for the tax returns. Once, the tax return preparations are over the taxpayers must attach a copy of their filled Form W-2 and send it to the IRS.

Conclusion

Hence, this information related to the Form W-2 would be of great help for the taxpayers to understand their salary, taxes, and even tax preparations.

 

How business entities would obtain benefits from the suspension of tax compliance programs by the IRS?

How business entities would obtain benefits from the suspension of tax compliance programs by the IRS?

by | Mar 25, 2020 | COVID - 19, Deduction & Credits, global income tax, Investment & Income, IRS, Tax Break, Tax compliance, Tax credits, tax deadline, Tax Extension, tax filing, Tax implications, Tax Payers, tax return, Taxation, US Government

How business entities would obtain benefits from

the suspension of tax compliance programs by the IRS?

Tax Compliance programs by the IRS has been taking a series of steps related to tax legislation as an effort to alleviate the stress common people are facing due to the outbreak of COVID-19. The rapidly spreading COVID-19 has led to the reduction in sales, slowdown of businesses, people being laid off from their jobs and huge economic adversities. In such a chaotic situation, the IRS’s initiatives on the suspension of tax compliance would act as a boon for the taxpayers, especially for the business entities. 

How business entities would obtain benefits from the suspension of tax compliance programs by the IRS.One such major initiative taken by the IRS is the implementation of the “People First Initiative” which would help in providing relaxation to those business entities who are facing uncertainties related to their taxes.

People First Initiative

The People First Initiative includes the postponement of certain payments that are associated with the installment agreements and offers in compromise.According to IRS, these measures included under the People First Initiative would start from 1st April 2020 onwards and would continue up to July 2020.The major changes which have been included in the People First Initiative are the postponement of the payments which are related to the Installment Agreements, the Offers in compromise, Audits, and other enforcement activities.

Installment Agreements

  • The IRS has announced that it has suspended the existing installment agreements that were due in between 1st April and 15th July 2020. Those taxpayers who are not able to comply with the terms of the installment agreement can suspend their payments due during this period. The IRS would also not consider any installment agreement of this period as a defaulter. However, the interest would be accruing on the unpaid balances. 
  • Also, the IRS has made provisions by which taxpayers either individuals or business entities who would not be able to make payment for their federal taxes can take the help of the monthly payment agreement by the IRS.

 

Offers in Compromise (OIC)

  1. The taxpayers who have pending OIC can provide additional information for support till 15th July 2020. Without the consent from taxpayers, IRS would not be closing any OIC which is pending before 15th July 2020.
  2. Taxpayers who have accepted OICs can suspend their payments until 15th July 2020. However, interest would be levied on the accrued balances which are unpaid.

 

3.Those taxpayers who are delinquent in the filing of their tax return for the year 2018, the IRS would not issue an OIC as a defaulter for them.

 4.Any delinquent returns of the tax year 2018 must be filed by the taxpayers either before or on 15th July 2020.

Automated Liens

and

Levies

According to the regulations of the IRS, no new automatic liens and levies would be carried out till 15th July 2020.

 

Activities related

to field collection

  • All activities related to liens, levies and any seizures associated with a personal residence that are initiated by the field revenue officers will be suspended till 15th July 2020. 
  • The field revenue officers will, however, continue to perform seizures and similar activities for high-income non-filers whenever needed.

 

Passport Certifications to the State Government and Private Debt Collection

  1. For the seriously delinquent taxpayers, the IRS would provide Passport certifications to the State Government. This procedure has been suspended currently till 15th July 2020.
  2. Moreover, new delinquent accounts will also not be forwarded by the IRS to the other private collection agencies for working on them until 15th July 2020.

Field, Office and other correspondence audits

  1. Any in-person field, office or correspondence audits will not be carried on till 15th July 2020. There can be audits or examinations remotely by the examiners of the IRS. Taxpayers should also co-operate with the IRS and provide all information that is requested for faster tax processing. 
  2. There might be some situations in which the taxpayers might be interested in the examination or audit. If the audit or examination is beneficial for the parties and the required IRS personnel are available then the audits/examination can start.

 

 

Refund claims

The IRS would continue to work on the processing of the refund claims without making any in-person contact.

Earned Income Tax Credit and

Wage Verification Reviews

  • The taxpayers have time till 15th July 2020 for responding to the IRS that whether they qualify for the EITC or their income has to be verified. 
  • Through 15th July 2020, taxpayers will not be denied these credits if they have a failure in providing the requested information.

 

Independent Office of appeals

The Office of appeals would be continuing to work on their cases. There might be a conference which would be held by telephone or through videoconferencing. For all the cases of the Independent Office of appeals, the taxpayers should promptly respond to any request made for information.

Statute of limitations

There would no disruption in the protection of the statute limitations by the IRS. The taxpayers are encouraged to co-operate with the IRS in extending those statutes whose expirations may be jeopardized. Otherwise, notes of deficiency would be issued by the IRS to protect the interests of the Government in the preservation of these statutes.

Conclusion

Hence, with these several changes being implemented by the IRS in the tax regulation the plight of the individual taxpayers and business entities would reduce by a considerable amount. With these tax relaxations and suspensions, business entities are sure to cope up with the losses that have been incurred due to the outbreak of COVID-19.  

References

https://tax.thomsonreuters.com/news/irs-suspends-certain-compliance-programs-due-to-covid-19/

https://www.forbes.com/sites/kellyphillipserb/2020/03/25/irs-will-ease-tax-payment-guidelines–limit-collections-activities-during-covid-19-crisis/#5a8cdb9c4dca

https://www.forbes.com/sites/robertwood/2020/03/25/irs-eases-installments-due-slows-audits-sweeping-relief-puts-people-first/#2eb525c93855

https://www.accountingtoday.com/news/irs-suspends-key-tax-compliance-and-enforcement-programs-to-adjust-covid-19-effort

  

 

Is it possible to maximize your tax refunds?

Is it possible to maximize your tax refunds?

by | 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.

Save money by knowing your Tax Benefits for your Dependents

Save money by knowing your Tax Benefits for your Dependents

by | Sep 6, 2019 | Deduction & Credits, income tax credit, Tax Planning, tax reduction, Tax Refund, taxes

Save money by knowing your Tax Benefits for your Dependents

If you are a citizen in the US or you are paying tax in the US, you can be able to save a lot of money by claiming dependents on your payable taxes. If you are having children and other qualifying dependents that can be used to claim tax benefits, then you are saving a lot of money.Save money by knowing your tax benefits for your dependents.According to the tax laws in the US in the earlier times, for every qualifying dependent, you are qualifying to reduce your income which is taxable by $4050.

The major purpose behind this is significant savings and if you are successful in claiming multiple dependents those savings get accumulated and in turn, you save a good amount on taxes.

By claiming dependents, the scope for other credits such as Earned Income Tax Credit, Child Tax Credit, etc. arises which can be quite beneficial for you. However, the law for the reduction of taxable income by $4050 for every qualifying dependent is not valid since 2018. But there are a number of tax benefits which you can still claim for your qualifying dependents.

Who is a qualifying dependent for the tax benefit in the US?

There are two qualifying categories of dependents who qualify for being used to claim tax benefits. Both the dependents should satisfy the below-mentioned criteria for being able to be used to claim tax benefits.

  • The dependent must be a citizen of US, US resident, US national or a Canadian or Mexican resident.
  • You are not permitted to claim a dependent that is opting for a personal exemption for him and is claiming another dependent on his own tax form.
  • You are also not permitted to claim a dependent that is married and is himself filing a joint tax return.

Your qualifying children

  • You can claim tax deductions for your own children, your siblings or even your grandchildren as your qualifying dependents.
  • The child whom you are claiming should be below the age of 19 and should have lived with you for more than half a year.
  • The child should not be able to provide more than half of his own support and you should be the only person claiming him.

Your qualifying relative

You must be the only person claiming your relative and you must be providing more than half of the financial support for your relative in a year.

The taxable income of relatives must not be more than $4050.

Let us have a look at some of the tax benefits which you can claim for your dependent children and relatives.

Child Tax Credit

If you have a child who is below the age of 17 years, then you have a child tax credit of $2000 to be earned as a tax deduction. Married parents who are filing joint returns can claim this credit if their income threshold is $400,000. If you are a single parent then your income threshold has to be $200,000 for being eligible to claim this credit.

Child and Dependent Care Credit

 In the US, childcare is expensive in nature and if you are paying for the childcare of your dependent children i.e. who are below 13 years of age, then you are eligible to claim Child and Dependent Care credit. This credit here can be defined as a reduction in your payable tax expressed in dollar-to-dollar terms. This credit would range from 20% to 35% of the expenditure incurred by you for childcare and this percentage will depend on your income.

Earned Income Tax Credit

This is an additional credit which can be availed by you if you are claiming your dependents. This tax credit can be availed by you in case of your self-employment income or wages are lower than a particular income level. This tax credit will depend upon another factor i.e. the number of qualifying kids you have.

Tax Credit for dependent relatives

 You are eligible to claim a tax credit for those qualifying relatives who are dependent on you. This tax credit is non-refundable in nature and you can claim up to $500 for each qualifying dependent.

Hence, deductions on the qualifying dependents are an excellent tax-saving option in the US. By these deductions, you can save a good amount of money and also can get back the tax refunds if any.

 

 

 

NRI with Green Card in the US, what not to forget while filing your taxes this year

NRI with Green Card in the US, what not to forget while filing your taxes this year

by | May 23, 2019 | Blog, Deduction & Credits, Investment & Income, Tax Extension, Tax Planning, Tax Preparation

NRI with Green Card in the US, what not to forget while filing your taxes this year

The income tax system that currently in motion in the United States of America, requires corporation, trusts, estates and individuals to pay taxes. If you are an NRI, you must also pay taxes to Uncle Sam. Irrespective of whether you are filing your taxes for the very first time or have been doing it for years, here are a few things that you must not forget.

  • Reporting Foreign Assets (Form 8938)

The IRS introduced Form 8938 a few years ago to get additional information regarding foreign assets of their citizens. The Form 8938 or Statement of Specified Foreign Financial Assets should be filed along with their taxes. This form requires taxpayers to disclose additional information regarding their interests and investments in foreign financial assets. With the help of this form, the IRS can identify the non-compliance of its taxpayers. Your financial assets such as pension plans, mutual funds, insurance policies, ULIP plans and bank account balances must be declared as a part of Form 8938. The form is quite exhaustive, to say the least. You can get in touch with the company handling your finances or banker to get these details.

  • Global Income

The IRS outlines its residents and citizens (PIO, OCI or NRI) to pay taxes on their global income and not only the income generated in the US. Anyone who has stayed in the US for at least 31 days in a fiscal year and 183 days in the previous three years, gets the tag of a US resident. If you qualify, you must declare your global income. Global income includes any salary that you receive in India, either for consultation or freelancing. Income in the form of interests or dividends earned on bank deposits or other securities. Income generated from rent received on a property, agricultural income or capital gain on the selling of assets, all qualify. You will be taxed on all of these in the US. While income from agriculture is tax-free, it will be taxed in the US. However, if you have paid taxes in India for any of these incomes, you can claim for the foreign tax credit as per the DTAA.

  • Employee Stock Option Plan

Employee Stock Option Plan or ESOP is something that you must not forget in your tax filing. The IRS considers the granted value of ESOPs when a taxpayer opts for the same. The total ESOP compensation must be added to the gross income. If you had exercised a similar option in India and have paid relevant taxes, you can opt for tax credit while filing your tax return.

  • Form 8621

The IRS requires all its citizens and residents to declare their foreign investments such as mutual funds and private equities in the tax return. These investments come under the purview of the Passive Foreign Investment Company (PFIC). To summarize, according to the PFIC, a taxpayer must declare all such investments and any gains that they earn out of them. These gains must be declared and appropriate taxes paid. In the event that you fail to do so or did not receive any gains from them, the final sale value would be divided for the number of years and calculated. For instance, if you haven’t received any distributions over 5 years and you gain a total of $200, it would be considered as $40 for each year. Being on the top of these will help you from coming under the scrutiny of the IRS. And of course, sets yoo up for a smoother tax filing season.