People often think of tax preparation when they think about doing their taxes. As tax time approaches, people scramble to find savings and frantically rush to file their returns and avoid incurring penalties. However, a tax strategy is not just for filing your taxes every year. It can be an effective means of planning for the future and minimizing your taxes simultaneously. This is exactly where you need tax planning.
So, then are tax planners different from tax preparers? In a nutshell, yes. The process of tax preparation is reactive, whereas tax planning focuses on the future.
While these words sound similar, each refers to a different aspect of taxation and has distinct meanings. As we go through each service, let’s see how they differ and choose the best one.
What is Tax Preparation?
Preparing taxes is typically a one-time task. Normally, tax preparation takes place between January and April. A tax preparer or Certified Public Accountant (CPA) prepares tax returns before the deadline for filing. Tax preparation needs several documents that provide valuable information regarding income, investments, and retirement plan statements. The approach also considers multiple income streams, deductions, and charities.
The role of a tax preparer
A tax professional prepares the tax return by organizing and entering the previous year’s tax information. So you need to visit a tax preparer once or maybe twice a year. Their expertise in tax laws ensures that returns comply with the IRS regulations. So you can rest assured about meeting the federal and state regulations.
Tax preparers can offer general tax advice and tax-saving suggestions based on your previous records. A tax preparer can address general questions regarding the filing process. There will, however, be no proactive tax strategies to help you reduce your tax liabilities. The reason – Such meticulousness, detail, and planning fall into a more comprehensive process requiring more expertise and attention.
Qualifications to look for in a Tax Preparer
Preparer tax identification numbers (PTINs) are the primary requirement for preparing taxes. A PTIN needs no additional credentials or accounting experience. Some states require tax preparation certification, similar to a PTIN but do not signify expertise or competence. Tax preparation services can be provided for a fee by qualified tax preparers.
While anyone with a PTIN and the required state credential can prepare your tax return, it’s a prerequisite to be either a Certified Public Accountant (CPA), enrolled agent, or an attorney who can address things like IRS issues, payments, audits, and collection activities.
Benefits of tax preparation
Save more money. A tax professional understands tax laws and compliance. They maximize your tax deductions and credits.
Save time. It takes a great deal of time and effort to prepare your tax return independently. A tax preparer can save all that time.
Error-free returns. A mistaken tax return can have disastrous results. Errors can lead to audits and penalties. Additionally, you can reduce your risk for audit with tax preparation.
What is Tax Planning?
A comprehensive tax strategy will help you chart a course of financial behavior that will help you manage your taxes in the future. When it comes to tax planning, it’s less about your specific return and more about how to maximize it.
The role of a tax planning agency or tax planner
Financial planning often entails a regular meeting with a financial planner and taking an active role in making decisions about your finances. Tax planning, on the other hand, is an ongoing process, one that shifts and changes as your goals do. A tax planner or tax planning agency integrates the changing financial dynamics and fosters an open and transparent relationship with its client. A tax planner will analyze your financial objectives, values, and future vision to create a personalized financial plan.
Creating a tax plan that meets your needs and considers your goals is essential. Few tax planning services like AOTAX have specific plans for businesses and individuals. They chalk out a plan considering both business and individual tax needs. The services vary from advisory services to business tax preparation and planning. All that so you can act fiscally responsible and tax-friendly.
Qualifications to look for in a Tax Planner
While tax planners require a great deal of expertise and specific knowledge, they are not subject to any federal or state regulations. They need to hold a CPA for general tax planning or be an accredited tax advisor for sophisticated cases. The biggest asset for a tax planner is their industry knowledge regarding applicable laws and particular situations.
Benefits of tax planning
Reducing tax liability. An individual tax planner or tax planning agency focuses primarily on lowering liabilities or routing investments. When you have business income, planning throughout the year ensures you maximize tax credits, harvest losses from investments, and manage your wealth accordingly.
Flexible estate planning. Don’t just leave your assets, but add a legacy to your heirs. You can lower your own and your heirs’ tax liabilities with tax planning.
Know your investment returns. Your carefully thought-out investment plan can be ruined by expenses, capital gains, and even inflation, leaving you with considerably fewer returns than you anticipated.
Tax Planner vs. Tax Preparer
Tax preparation businesses cannot provide you with the expertise you need for tax planning. Planning your taxes and saving money are two ways tax planners can help you. A tax planning strategy must be implemented year-round to minimize your tax liability.
Tax planners typically offer the following services:
Strategy for harvesting tax losses.
Tax bracket management.
Constantly plan other investment strategies which could get deserved returns while saving on taxes.
Tax preparers typically provide the following services:
File tax returns.
Comply with state and federal tax laws.
Handle missed deadlines and resolution paperwork.
Finally, a tax planning agency is the best solution by weighing the differences. A tax planner will tailor the plan to meet your needs. They care about your individual or business financial goals and plan the future. Their meticulous planning strategies will help you reach those objectives while also fitting the taxation rules. Investing and taxes can sometimes seem out of reach. But not anymore with AOTAX. Get in touch today to get your free tax draft!
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.
There have been certain changes in the tax rules for the financial year 2020. Let us have a look at these changes that have taken place in the tax rules for the year 2020.
Unemployment benefits
For millions and millions of Americans, the unemployment benefits are a major area of concern this tax year. Moreover, reporting the unemployment benefits on tax returns stands as a problem for many as well. As per the IRS, the compensation obtained on unemployment is considered to be taxable and should be reported on your federal tax return for the year 2020. The taxable benefits would be including all the special unemployment compensation which is authorized under the CARES Act i.e. Coronavirus Aid, Relief, and Economic Security.
Forbearance for Student loan
Temporary relief has been offered from the Student loan debt to millions of students in the United States due to the pandemic. This has been quite helpful for those who have lost their employment due to the outbreak of the COVID-19.
In March 2020, the US Secretary of Education has instructed for the following:-
To stop loan collection in default
Temporary suspension of the payments related to Student loan
Interest rates would be set to 0% for the upcoming 60 days
These forbearances were valid until 31st December 2020 and are even would remain valid in the upcoming months.
Removal of withdrawal penalty
In these difficult times, many Americans are considering withdrawal of retirement funds as the last option to handle their financial crisis. In general, early withdrawals made from your IRA, 401(k), or the 403(b) account can lead to penalties. However, by the provisions of the CARES Act, those Americans making early withdrawals from their retirement accounts would not have to face the 10% penalty. This waiver of penalty is applicable for the borrowing that has been done during the financial year 2020.
Self-employed PPP
The PPP (Paycheck Protection Program) was expanded in April 2020. Additional funding of around $310 billion was included in this program. Sole proprietors, businesses that have employee strength of around 500, self-employed persons, etc. are mainly eligible for availing the benefits under the PPP. The loan taken under the PPP can be completely forgiven if the funds would be utilized in making payments that are related to rent, utilities, interest on mortgages or payroll costs, etc.
Stimulus payments
The Stimulus payments or otherwise known as the Economic Impact Payment was one of the main focuses of the CARES Act. By the mid of the last year, around $269 billion has been paid in the form of Stimulus checks to the Americans as a means to alleviate the financial adversities caused due to the pandemic COVID-19.
It is a common concern among Americans now if they need to report their Stimulus payments in their upcoming tax returns. However, according to the IRS, the Stimulus payments are not needed to be included in the Gross Income. So, the Americans do not need to include their Stimulus Payments in their taxable income and even do not need to pay any Income tax on that payment.
Additional eligible expenses
With the implementation of the CARES Act, there have been some modifications in the rules related to the accounts like HRA, HSA, Health FSA, and Archer MSA. Now, millions of Americans have been able to utilize these accounts for reimbursable products. Moreover, those products and medicines which are available over-the-counter can be reimbursed now without the need for a prescription. The taxpayers should keep their receipts of purchases intact to make their claim submission for reimbursement.
The new charitable contribution deduction
The American taxpayers are now able to take up the advantage of a new category of tax deduction i.e. Cash donation to qualifying charities. This can be up to $300 for the tax returns irrespective of the tax filing status of the taxpayer. This can be applicable even if the tax filers are not itemizing any deduction.
Another change is the removal of the deduction limit on charitable contributions. In general, the deduction limit on the charitable contributions for those who are itemizing their deductions is 60% of their AGI (Adjusted Gross Income). However, with the CARES Act, this limit has been lifted up to 100% for the tax filers who wish to claim their $300 deduction for charitable donations made.
Conclusion
Hence, with these important changes made into the tax system for the year 2020, the financial adversities faced by the Americans due to the pandemic can be reduced considerably.
Tax Tips for the Self Employed NR Indians in the US
If you are an NRI in the US and have just started your entrepreneurship, then you should be aware of the different tax implications related to self-employment. Some of these tax implications can even help reduce your tax liabilities.
Let us now have a look at the different facets associated with the tax rules for the self-employed NRIs.
Offices at home
When you are working comfortably from your home, it can help maximize your tax write-offs. In case, you are using a specific home office for your work or your business then that be claimed while filing the tax returns.
Those expenses which you can deduct as a part of your deduction for the home office can also include a part of expenses related to the home i.e. the mortgage interest, rent, taxes on real estate, utilities, insurance, etc. Moreover, you would also be eligible for the deduction of the total expenses that have been incurred in the repairs and the painting that is required for your home office.
Hiring part-time employees
If you have grown-up kids and they are on holiday, the best idea to keep them engaged is by hiring them for doing some of your office work. If you are hiring your kids for cleaning the office, running your deliveries, data entry, answering phones, etc. then you would be able to claim a tax deduction. You can claim that wages are deducted under Schedule C. However, this deduction can only be done until the compensation to be obtained is reasonable for the activity performed.
In case, your kids are below the age of 18 years the wages paid to them would be exempted from Social Security taxes and Medicare taxes. Moreover, if your kids are below the age of 21 years they would not owe the Federal Unemployment taxes. Even by these part-time hires, the tax liability of your family would be reduced as your children would not owe any income taxes on this income obtained.
Planning for retirement
By opting for a retirement plan, you would be lowering your taxable income. If you are a self-employed NRI the best retirement plan for you is the SEP (Simplified Employee Pension Plan). You have the option to put in up to less than around 25% of your earnings done from self-employment or put in up to $57,000 for the tax year/$58000 for the tax year 2021. You can compare this with the limit of $6000 which has been put on the contributions made to the IRA for the tax year 2020.
Mileage
If you would have been an employee who is traveling regularly to work then the expenses related to driving to your office and back could not have been claimed under tax deductions. Since you are self-employed then any work-related travel such as traveling to meet any client, going for work to some other location, etc. can be claimed as a tax deduction. In the year 2020, work-related travel done for a mile can be used to claim 57.5 cents along with the parking cost and any other tolls that have been paid. So, you must track your mileage coverage for work so that it can be used to claim deductions.
Business Travel
When you are a self-employed NRI and are traveling to another city in the US for work it is possible to claim a tax deduction for 100% of the costs incurred in the travel. Moreover, during the travel period, it can also be feasible for you to claim the expense incurred in your hotel stay and 50% of the expenses incurred in your meal. However, this is only possible for those days for which the travel has been work-related.
Moreover, under the provisions of the CARES Act, 100% of the expenses incurred in business meals can be claimed as tax deductions rather than 50%. This would be feasible starting in the year 2021 and would continue throughout the tax year 2022.
Conclusion
Hence, these tax guidelines would be helpful for you to lower your tax liability if you are an NRI and self-employed in the US.
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.
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.
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.
How to calculate Income Tax Benefits for your dependents?
Supporting dependents i.e. kids or even other dependents both can have an impact on your finances. However, having dependents can help you in availing certain tax advantages which can help increase your tax refunds.
We can list down some of the major things which you must know about tax benefits if you have dependents.
Related and unrelated dependents
You would be spending thousands of money on food, house, and education of your kids, taking care of other dependents, etc. The IRS helps you with provisions for tax breaks for your both related and unrelated dependents. These tax credits and deductions can help you in saving a considerable amount of money from a tax perspective.
Several tax credits and deductions for your kids
There is no doubt about the fact that raising your kids would be expensive but you must know about the tax credits and deductions which you can avail yourself if you have kids. You would qualify for availing credits such as Child Tax Credit, Child, and Dependent Care Credit, Earned Income Tax Credit, and other Education Credits as well.
Social Security Numbers
If you have become a new parent, then you must ensure that you have applied for the Social Security Number of your newborn baby. When you have this Social Security Number you would be able to claim the tax credits and deductions easily. Moreover, if you have any other dependent family member or relative then they must have their Social Security Number for being able to avail the tax credits.
Tax Credits and deductions for relatives and non-relatives
Tax credits and deductions can be extended for relatives such as your parents, your grandparents, your grandchildren, or any other blood relatives who do not need to stay with you. However, if you are availing any tax credit or deductions for your non-relatives such as boyfriend/girlfriend then they must have stayed with you for the whole year.
Now, let us have a look at some of the major tax credits which are related to your kids and other dependents.
Child Tax Credit
The Child Tax Credit would help reduce your tax liability dollar-for-dollar. Earlier in the year 2017, the Child Tax Credit available, if you had a dependent child below the age of 17 years, was $1000. However, with Tax reform, this Child Tax Credit has now increased to $2000 for a dependent child who is below the age of 17 years. If you are filing your tax return as a Single, then the income threshold at which you would be able to avail of the Child Tax Credit is $200,000 whereas it is $400,000 if you are married and filing jointly.
Child and Dependent Care Credit
You would be eligible to claim Child and Dependent Care Credit if your dependent child is below the age of 13 years and you are working or looking for work. There is no age limit for the dependent child if he is disabled. This credit would usually range from 20% to 35% of the childcare expenses that have been incurred based on your level of income. Expenses incurred in Nursery and Kindergarten schools, daycare, after-school programs would qualify for this credit.
Other Dependent Credit
In case you are supporting a relative or your dependent kid is above the age of 17 years, you can still be able to claim tax credits. This credit is the Other Dependent Credit which is up to $500for each qualifying individual. However, this credit would phase out if you are filing taxes as a Single with an AGI greater than $200,000 or if you are married and filing taxes jointly with an AGI more than $400,000.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is mainly useful for those Americans who are self-employed and have income below a certain level. The amount you can receive as a credit in Earned Income Tax Credit would mainly be based on your filing status, your level of income, the number of qualifying kids you have, etc. The EITC is refundable and in case your credit is more than your tax liability you can easily obtain a refund. For the year 2020, you can receive EITC ranging from a maximum value of $6660 if you have three or more than that qualifying children to $538 in case if you have no children.
Conclusion
Hence, your children and other dependents can help you in obtaining these tax credits and thus pay lower federal income taxes.
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