Mortgage & Housing Deductions

Mortgage & Housing Deductions

by | Dec 8, 2017 | Deduction & Credits

Mortgage & Housing Deductions

Mortgage and housing deductions have always been the most criticized and denounced policy of all times if you consider the opinion of economists. The recent tax reforms proposed by the Trump administration have again brought this issue into the limelight. So, we will straight off get into the discussion and try to understand what it is and what it does.

Deductions

In general deductions are those line items in your tax filing, which help you to reduce your tax liability. Individuals who own a house(s) can show the interest paid on their house mortgage as deductions and thus reduce the amount of taxes that they are supposed to pay. A lot of countries do not allow individuals to claim the interest on personal loans and thus mortgage interest deduction became more prominent. Though there are provisions of deductions, one must fulfill some criteria before being able to do so.

Eligibility

It is very important to itemize all the deductions that you want to be part of your tax filing process. Once it is done, you need to ensure that the itemized amount is more than the standard deductions, otherwise the benefits will not come into effect. The deduction is limited only to the interest paid on the mortgage and not the principal amount for the same. There is also a cap on the amount of money used as debt for the house.

The interest paid on the debt of the first million or $500,000 if you are filing separately is considered for the program. When it comes to home equity debt, the IRS considers only the first $100,000.

In order to invite or make it easier for more and more people to purchase houses, the tax code was reformed. Earlier, the tax code would allow interest paid for a personal loan to be exempted or called in as deductions, credit card debt also qualified for the same. It was later modified to remove personal loans and add interest incurred on home loans to be added as deductions. Given the time at which the modifications were done, the idea of having more people purchase houses just doesn’t fit. Simply because, back in 1913 people preferred buying houses with money up front than taking loans.

Changes to the tax code

The current government recently has proposed changes to the tax code when it comes to interest for mortgage and housing deductions. And a lot of experts in the real estate sector strongly believe that any modifications to the real estate sectors in that regards will shake things up. Many believe that the sector hasn’t completely recovered from the bubble that burst back in the year 2006. There have been several studies which suggest that allowing deduction of mortgage has not resulted in a direct increment in ownership of houses. In fact, it has resulted in an increase of property prices to a much larger extent, which again the real estate sector benefits from.

The availability of the tax cuts ensures that house buyers pay the effectively lesser price for their houses than what they had anticipated. This results in them willing to borrow an even higher amount for their houses for completion and addition of other things. This is the point where the loop begins and price associated with the house increase and so does the income opportunities of people that are involved with the business. Expensive houses do not necessarily highlight an economic growth in any form, as the spending is merely relocated. Thus, any changes to the tax code in relation to mortgage and housing deductions is sensitive, to say the least and must be dealt with a lot of care and intense thoughts.

Early Withdrawal Penalties

Early Withdrawal Penalties

by | Dec 1, 2017 | Deduction & Credits, Tax Planning

Early Withdrawal Penalties

Withdrawal Penalties.The whole idea of retirement planning is to ensure that you have enough money at your disposal during the non-working phase of your life. This is one of the primary reasons there are penalties if you go for early withdrawal in such schemes. The government provides several tax breaks for retirement plans and also penalties if you wish to withdraw from those earlier than anticipated. These penalties are in place to discourage you from using these funds for anything else apart from retirement. Essentially, if you withdraw any amount from your retirement fund accounts before the age of 59 and half years, you pay a penalty of 10%. This is on the top of the income tax that you must pay on the amount you just withdrew. Thus, you need to access the situation very carefully before going ahead with the decision to disturb your retirement funds.

Can you avoid the penalty?

The following are some of the most common methods that you can follow to skip the penalty.

  • Maturity age

All the retirement funds have a maturity age of 59 ½ years. If you withdraw any money from your funds post this age, the 10% penalty does not apply to you. However, you will still have to pay income tax on each withdrawal.

  • Medical Expenditure

If you have undergone any medical procedures or treatment and the amount exceeds 10% of your annual income, you can use your IRA contributions to pay for the same. The only two check points being, the medical expenses should be in the same year and you should not already have reimbursed it.

  • Purchase of Home

You can use up to $10000 (or $20000 valid only for couples) from your IRA contribution to pay for your first home without inviting any sort of penalty. IRA will pursue a background check to ensure neither you nor your spouse owns a home within the two-year period which leads to the sale of a house. If due to some reason the plan falls apart, you must deposit the amount back in 120 days to avoid penalty.

  • Disability

In the unfortunate event of you becoming disabled before the maturity age for retirement funds and cannot take part in any activity which will act as source of income, you can opt for a penalty free withdrawal from your retirement fund. The IRA entertains only genuine cases, as it sends in a physician to confirm the same.

  • College Expenses

There is yet another way in which you can skip the penalty of withdrawing the fund prior to the prescribed age. If you, your spouse, children or grandchildren want to pursue higher education, and you decide to pay the same from your IRA contributions, it will not fetch any penalties. IRA considers usual expenditure such as tuition fees, supplies, books etc.

  • Health Insurance

In the unfortunate event of you being unemployed for a certain duration of time, you can use your IRA contributions to pay for medical insurance to avoid them from getting lapsed. You can pay for the medical insurance for yourself, your spouse and any dependents. In order to qualify for the same, you should have received compensation for unemployment for a period of 12 weeks consecutively.

  • Passing it on

You can pass on the retirement funds to an heir if you lose your life before the age of 59 ½ years. This will not attract any penalty unless the heir is your spouse. In that case, they are again subject to the 10% early withdrawal penalty.

There are sure some ways of getting around the 10% penalty. But that should be your last resort and not the first line of defense. You should only consider IRA or any retirement fund for that matter in situations where there are no other ways out.

Earned Income Tax Credit & All It’s Details

Earned Income Tax Credit & All It’s Details

by | Oct 20, 2017 | Deduction & Credits

Earned Income Tax Credit & All It’s Details

Taxpayers having income below a certain limit for a specific financial year can benefit from the Earned Income Tax Credit system provided by the United States of America. Under this tax credit system individuals can reduce the tax they owe to the government. In certain cases, they can even ask for a refund if they have paid more than what they owe.

The intent of this credit system is to reduce the burden of taxes on individuals with low income. It also encourages individuals to start working.

A tax credit usually confuses individuals as many of us are not aware which one we qualify for. The Earned Income Tax Credit system is applicable for taxpayers with low to moderate income. The following are some of the facts and details that you should be aware of when it comes to Earned income tax credit or EITC.

Are you eligible?

Unlike some other tax credit systems, eligibility for EITC is pretty easy going. The following are some basic requirements.

–    You must file taxes either individually or if married must file jointly.

–    Everyone involved must have a valid social security number. (You, your spouse and qualifying children)

–    You should be within the age bracket of 25 to 65 years.

–    The status of your tax filing should not be married filing separately.

–    You should not be on the list of qualified children for someone else.

–    You should be within the limits of earned income, AGI and also investment limits.

For the year 2017, the income limits to avail Earned Income Tax Credit are:

–    $15010 for single filing applicants and $20600 for married filing jointly with no qualified children.

–    $39617 for single filing applicants and $45207 for married filing jointly with one qualified child.

–    $45007 for single filing applicants and $50597 for married filing jointly with two qualified children.

–    $48340 for single filing applicants and $53930 for married filing jointly with three or more qualified children.

If you fall into any of the above categories, you stand to benefit from the tax credit system. Each of these categories has a cap on the maximum amount of credit that an individual or individuals can receive. For no qualified children, the cap is at $510. For one qualified child, the same is $3400 and $5616 for two qualified children. In case of filings with three or more qualified children, the maximum credit is $6318.

Income from investments and other income not included

Keeping all of the above points if you stand a chance to receive tax credits, there is one more factor that you should keep in mind i.e. income from investments.

If your total income from investments such as stocks, dividends, rent or inheritance is in excess of $3400, you automatically do not qualify for EITC.

Some other types of income are also barred from EITC namely social security benefit, any money received for child support, alimony, retirement income and unemployment benefits. Any payment received for work during prison time is also not applicable for the tax credit.

Additional Benefits

EITC is a federally run program, but the benefits are not restricted to the same. Most of the states provide benefits in the form of a certain percentage of the federal EITC. This ensures that more money stays with individuals with low to moderate income levels.

Even though you do not owe anything to the state, you still have access to state EITC which is refundable in almost all the states.

A lot of taxpayers do not file for EITC or any tax credit for that matter. For all the hard work that you put into your jobs, you should not leave out on such benefits. Make it a point to go through the eligibility criteria and see if you can benefit from the EITC. But do not try to falsely claim the same, as it might come back to haunt you at a later stage. As always, it pays off to be honest in case of EITC.

Check out more about Earn Income Tax Credit here.

 

Earned Income Tax Credit

Earned Income Tax Credit

by | Sep 29, 2017 | Deduction & Credits

Earned Income Tax Credit

What is Earned Income Tax Credit?

Earned Income Tax Credit or EITC is a mechanism that aims at supporting families with low to medium earnings. It is a refundable credit system that supplements individuals or families if they have been working (either self-employed or working for someone else). On qualification for EITC, one can not only reduce their taxes but also subsequently increase the tax refunds.

There have been some changes to the qualifying income limit for EITC. This means, that even if you did not qualify in the previous years, there are chances you can claim EITC this year. Along with the income limit, the maximum tax credit has also undergone some changes, allowing for higher tax credits. The primary goal of EITC is to keep families away from poverty and also encouraging more individuals and families to work.

Qualifying for EITC

In order to qualify for EITC the adjusted gross income and earned an income of a taxpayer should be below certain limits. The following are the revised limits for the year 2017 for individuals as well as joint filings for married couples.

  • $15010 in the absence of qualifying children ($20600 for married joint filing)
  • $39617 with one qualifying child ($45207 for married joint filing)
  • $45007 with two qualifying children ($50597 for married joint filing)
  • $48340 with three qualifying children ($53930 for married joint filing)

For the first category, the maximum allowed tax credit is $510. It increases to $3400 for the second category, $5616 for the third category and $6318 for the last category.

This means that an individual tax payer, without any dependents and earning less than $15010 is eligible for a maximum tax credit of $510. Similarly, a couple with three children and filing taxes jointly can seek tax credit up to a maximum of $6318.

The adjusted gross income and earned income limits for tax payers for the year 2016 were as follows:

  • $14880 in the absence of qualifying children ($20430 for married joint filing)
  • $39296 with one qualifying child ($44846 for married joint filing)
  • $44648 with two qualifying children ($50198 for married joint filing)
  • $47955 with three qualifying children ($53505 for married joint filing)

Other Criteria

There are certain other criteria that have to be met apart from the cap on income.

  • You, your spouse and dependent children that you are claiming the tax for, should have a valid Social Security Number.
  • You should have some form of income, it can either be self-employed or from employment.
  • You should be a US citizen or a resident for at least year of tax filing.
  • Or you can be a non-resident alien who is married to a US citizen or any other resident alien and opt for joint filing.
  • If you are applying for tax credits, you cannot be the qualifying child of anyone else.
  • Your qualifying child cannot be named in any other EITC filings.
  • If you are filing EITC separately, your status cannot be married.
  • For individuals who do not have qualifying children:
    • You should be more than 25 years but less than 65 years old of age.
    • Should have stayed in the United States for more than half of the years in question for tax filing.
    • Not be listed as qualifying child of anyone else.
  • Form 2555 or 2555-EZ is not accepted.
  • There is a cap on the investment income as well at $3450 for the year 2017, which was $3400 for the year 2016.

Before you file your tax returns, do take some time to check if you are eligible EITC or not. If you are, you can save a decent amount of money using the tax credit system.

3 Quick Tips to know your Tax Refund – Absolutely Free!

3 Quick Tips to know your Tax Refund – Absolutely Free!

by | Aug 1, 2017 | Deduction & Credits

3 Quick Tips to know your Tax Refund – Absolutely Free!

If you happen to pay more taxes than you owe, tax returns can help you get them back. But it can be pretty frustrating if you have no idea when and how that is going to happen. Luckily there are ways that can help you to know the exact status of your tax refunds. You can use these methods for determining federal or state taxes and the status of your refunds.

1. Federal tax status online

Though we expect everything to happen at supersonic speeds, there are certain things that take their own sweet time.

If you have filed your tax returns online, give IRS at least 72 hours before you start checking the status.

The duration increases to about 3 or 4 weeks if you mail your tax return.

When you have waited for the minimum time window, make sure you have your tax return copy with you. The IRS website would ask you some basic questions such as your social security number, status while filing returns and exact dollar value that you expect as returns. The tax return file contains this information.

On filling up the above details and selecting the tool “where’s my refund?” you can expect either of the following responses. Your return is under processing, inferring you have to wait for some more time. It can also give the date when you can expect your returns to arrive. And incorrect address resulting in the refund not delivered. Updating the address takes care of the issue.

2. Federal tax status over phone

If you are not tech savvy you can call the toll free IRS numbers to get information regarding your tax returns. If you call at 800-829-1954, you can query for tax refunds. But if you need to know the status of your tax refunds and also your tax related information, you can call 800-829-4477.

Just like the IRS website, for checking status over phone also you would need information present in the tax return.

Kindly have your social security number, status while filing the taxes and exact refund amount mentioned on the tax return, with you while checking the status.

Alternatively you can use mobile based applications to check the same. Just like any other mode, you need to provide some basic information. But the advantage with the mobile app is that you can save these information for later usage.

3. State tax status

Not all the states collect state level income tax. States like Alaska, Florida, Nevada, Texas, Wyoming and South Dakota do not charge income tax. For these states, there are no state level tax refunds.

Each state differs in the way they present the tax information to their citizens. To get hold of that, you need to visit the state’s tax division on their website and get the relevant information. Alternatively, the websites usually offer a phone number of representatives, should you have any questions.

Another aspect in which the state and federal taxes differ is the information required by each. Keeping your tax return handy would help you get through this phase.

Some of the most common data set required is the social security number, along with the exact refund amount outlined in the tax return.

Both the federal and state tax laws and processes differ a bit. Thus you must give them the minimum time frame required before looking for return status. Each of them supports various methods of gathering information, which can be extremely helpful for the citizens. If you do not receive your returns within the stipulated timeframe, the best approach is to reach out to IRS.

5 Point Checklist for Claiming Moving Expenses

5 Point Checklist for Claiming Moving Expenses

by | May 29, 2017 | Deduction & Credits

5 Point Checklist for Claiming Moving Expenses

Changing your job for a vertical movement in your career or starting that first job is always a pleasant experience for all of us. While the former increases your income and strengthens your resume, the latter gives you financial independence. But what if a job change or a new job makes you relocate? Even if you get a job promotion or a job transfer, you might be asked to relocate to a new place. Relocation, though good, also involves expenses. The cost of moving your residence to a new city and setting up a new home, all incur expenses.

The IRS gives you tax exemption on these expenses. Yes, your moving costs, in the context of your job, are allowed as deductions from your taxable income.

Amazing, isn’t it? But, before delighting in the exemption, do you know that there are certain rules regarding this exemption. Yes, to avail moving expenses as a deduction, you have to be eligible for some qualifying criteria. Here is a 5 point checklist for claiming moving expenses as a deduction:

1. The move should be because of your occupation

Salaried employees should move only if their job demands it. For self-employed individuals, the moving expenses are allowed as tax deductible only if the move is undertaken for business-related purposes, i.e. for expanding your business or for starting a new business.

2. You should qualify for two tests

To avail deduction for your moving expenses, you should qualify for two tests which are as follows:

    • Distance Test – The new job location should be at least 50 miles farther than the distance between your old home and previous workplace. So, if earlier, your old workplace was 10 miles from your home, your new workplace should be at least 60 miles from your existing old home. To calculate the distance you should use the shortest possible route between the two places.
    • Time Test – Your relocation should match the start of your new job at the new location. You should start your new job and work full time for at least 39 weeks in the first 12 months of your move. However, if you start working at the new location before moving in, you can claim the moving deductions under special circumstances. If you qualify for both these tests, the moving expenses would be tax deductible.

3. The moving expenses should qualify for tax deduction

Though the IRS allows moving expenses as a deduction, such expenses should be qualifying expenses in the sense that they are reasonable and essential for relocation.

Some qualifying moving expenses include:

    • Cost of gas incurred when travelling to the new location using your vehicle
    • Other travelling expenses like toll taxes, etc.
    • Short-term storage required for storing your household goods
    • Rent paid to trucks for moving your household articles
    • Expenses incurred on buying packing boxes and cartons
    • Cost of lodging incurred if travelling a long distance, etc.

Non-deductible expenses include:

    • Expenses on trips taken for house hunting prior to moving
    • Improvements made to home
    • Mortgage penalties
    • Temporary lodging before moving permanently
    • Cost of meals purchased when moving to new location, etc.

Check if your expenses qualify for deduction or not.

4. Checking the reimbursement received from employer against actual costs

Your employer usually pays for the expenses incurred on relocation through reimbursing the costs incurred. If the reimbursement you receive from your employer is higher than the actual expenses incurred, the excess would be taxable as a part of your income. If, however, the reimbursement is lower than the actual costs incurred, the actual expenses incurred would be deducted as moving expenses.

5. Reporting of qualifying moving expenses

After you know which expenses can be availed as deduction, you should file it correctly with your tax return. IRS Form 3903 is required to be filled in and filed for claiming moving expenses. Line 1 of the Form requires the storage and shipping costs. Line 2 should be filled in with the costs of travel, gas and lodging (if sought). Line 4 contains the amount of reimbursement received from your employer. So, fill in the form correctly and submit it with your tax return.

The IRS does not have a limit on the amount of moving expenses which can be availed as deduction.

If you relocate for work purposes, the entire qualifying expenses incurred would qualify for deduction. Follow this checklist for a complete guide to claiming your moving expenses as deduction and lower your tax liability.