Being temporarily Furloughed can affect your taxes

by | Feb 1, 2021 | 2021 Tax Returns, Back taxes, Blog, Tax Planning, Tax Preparation, Taxtips

Being temporarily Furloughed can affect your taxes

Being temporarily Furloughed can affect your taxes

By the pandemic COVID-19, many Americans have been affected by the financial perspective as some have lost their jobs while some have been furloughed from their work. When you lose your job or rather you are laid off, there is no assurance or promise that you would be re-hired by the same organization. However, if you are furloughed it means you can come back and start working again when the circumstances change. In the case of furlough, you will not have to face the formalities of the re-hiring process and even would be able to enjoy employer benefits such as health insurance benefits even during the times of being furloughed.

In case, you have been furloughed you must have received the Unemployment benefits and you may not be sure about the taxability of the Unemployment benefits. The Stimulus payment that has been received under the CARES Act is not taxable. However, the unemployment benefits are taxable and you would have to report them in your 2020 tax returns. After your return to work, you would be receiving your salary check and your Unemployment benefits would be coming to an end. The salary you are going to receive would remain taxable. However, if you are re-hired into your organization but with a lesser number of work hours then you would still be receiving the unemployment benefits.

What to expect while filing the tax returns?

 From a tax refund perspective, what can you expect while you are filing your tax returns for the year 2020? The tax refund you obtain would mainly depend on the amount you have taken out of your salary paycheck for the Income Tax withholding. In case you have taken out more in each pay period than the Income taxes you owed then while filing a tax return it’s obvious for you to obtain a tax refund.

  • During the year 2020, if you have received lesser paychecks as you were furloughed for a particular period of the year then there would have been few pay periods during which the withholding was taken out. So, this would result in a lower refund at the time of filing your tax returns.
  • Moreover, if you did not have any taxes that have been withheld from your unemployment benefits then you might not be having enough taxes withheld for covering taxes at the tax rate.  
  • Furthermore, you can make a voluntary request for withholding 10% of the unemployment benefit which you have received. This can be done by filling the Form W-4V i.e. Voluntary Withholding Request.
  • Since you have earned quite less during the year 2020 due to unemployment it would affect your tax rates too. This would mainly depend on for what duration you were furloughed and what was the amount of other income you had during that year.

Steps that can be taken for tax rates if furloughed

If you have been furloughed for some time during the year 2020 and there has not been enough withholding done from the Unemployment benefits, then the below-mentioned steps can be taken.

  1. You can easily adjust your withholding once you join back your work by filling the new Form W-4 Employee Withholding Certificate.
  2. You can claim various credits and deductions such as the Earned Income Tax Credit (EITC), some education tax benefits, or the Saver’s Credit, etc.  You might not have been eligible for taking these credits earlier as your income would have been higher than the income threshold.
  3. The Coronavirus Response and Relief Supplemental Appropriations Act have a special look back provision. The lookback provision would help those workers who had lower income during the year 2020 or received Unemployment income in compensation for their regular wages in obtaining more tax credits and larger refunds.

Conclusion

Hence, if you have been furloughed then the above-mentioned guidelines on the tax rules would be helpful for you to understand the credits, deductions along with tax refunds.

The erstwhile Tax Mistakes to avoid in 2021

by | Jan 25, 2021 | Tax Planning, Tax Preparation, Tax Refund, taxes, Taxtips

The erstwhile Tax Mistakes to avoid in 2021

The tax laws in the US are quite complicated but the taxpayers make quite simple mistakes while filing their tax returns. 

Let us have a look at the most common tax mistakes which are made by the US taxpayers and can be avoided during this tax year.

  • Not filing tax returns on time

According to the estimates made by the IRS, 20% of the US taxpayers would wait till the last date for filing their tax returns.  However, waiting till this last minute can cause them to miss the deadline.  Even if the taxpayers are filing a request for an extension in the deadline to file the tax returns there would be the need to pay any tax that is owed by the actual deadline. In case, the tax payments are not made by the due date then the taxpayer would be charged interest by the IRS.

  • Incorrectinformation

This is one of the most common mistakes made by the taxpayers while filing their tax returns. Some of them either leave some boxes blank or some make a typo error while filling important details like Social Security Number.

One of the easiest methods by which you can avoid this is by importing the tax return which has been filed in the previous tax year. By this, you can avoid any typo error associated with manual entry of the filing information.

 Not aware of the latest tax laws

The US tax laws are not only complicated but are subject to minor changes every year. It is imperative for the taxpayers to know in detail about the changes that have been made into the tax laws so that they do not miss the details on the tax deductions and credit.

  • Filing status errors

The filing status of a taxpayer would determine the tax rate of a taxpayer and his eligibility to avail the tax deductions. If a wrong filing status is being chosen by a taxpayer then he would have to either underpay or overpay the taxes which would have its own implications on the cost. For instance, married couples who are filing tax returns jointly have different rules than those who are filing their returns separately.

 Making wrong choices about itemizing

While filing your tax returns, you can either choose between itemizing or claim a Standard deduction. If you are itemizing then you would not be able to claim Standard Deductions. Out of the two, you can choose either one out of the two choices. 

There are certain deductions which you can claim easily without the need for any itemizing. These deductions can be making contributions into the IRA or the deduction related to the Student loan interest. However, some deductions can only be claimed if itemized which gives up the right for claiming the Standard Deduction. 

  • Not getting any help while tax filing

Tax filing is complicated and should not be done on your own. You can take the help of various software programs which are designed with the aim of making tax filing easier and simpler. You can answer a series of simple questions which would help you in identifying your deductions and credits and thus, simplifying your process of filing the returns.

Moreover, taxpayers can also take assistance from tax professionals then it would be a great option to avoid any mistakes while tax filing.

  • No copy of the return

Usually, the tax experts and professionals would advise on keeping a copy of the tax return filed for a period of at least two years. That’s a general time period for which the IRS would be able to legally audit the taxpayers for the gross under-reporting of their income. 

  • Not reporting all income

If taxpayers are not reporting all of their income, then the probabilities are quite high that the IRS would know about them. As the IRS receives forms like Form W-2s and Form 1099S for the entire income you earn, it is quite easier for the IRS to know even if you are not reporting. 

The IRS can carry criminal prosecutions for any wrong or non-reporting of income by the taxpayers. Taxpayers can be penalized for the non-reporting of all income and it is always advisable to report the correct income to the IRS.

Conclusion

So, now since the taxpayers have an idea about the erstwhile tax mistakes it is wiser to be careful, avoid these mistakes and rule out the possibilities of being penalized.

Do You get a tax benefit from your health expenditure?

Do You get a tax benefit from your health expenditure?

by | Jan 22, 2021 | Tax Planning, Tax Preparation, Tax Refund, tax return, taxes, Taxtips

Do you get a tax benefit from your health expenditure?

It is very common to dislike paying medical bills even if you have very good insurance and a low deductible. One of the very bright sides of big medical bills is the chance you get to claim your medical expenditure as a deduction on the federal tax return. If your medical bills are more than 7.5% of your total tax years * the adjusted gross income (AGI) then it is quite feasible to itemize your deductions. The deductions on medical expenses are applicable for self, your spouse and for the medical expenditure of your dependents as well.
In case, your medical bills are more than 7.5% of the income you obtain you must follow the below-mentioned rules for maximization of your tax refund.

  • Medical bills are not just ‘Medical’

The IRS would permit deductions on tax for vision and for dental care as well and also for the medical expenses too. This would imply that it is feasible to deduct the expenses incurred in the eye tests, dental-related visits, braces, contact lenses, glasses, root canal, etc. 

Some other expenses which are covered under the category of medical expense deduction are psychological treatment, surgeries, medical devices such as hearing aids, medicines which have been prescribed, preventative care, etc.

Even the cost involved in your monthly payments of health insurance can be deducted if taxes have not been deducted by plans provided by the employer. The deduction for medical expenses would include the bills that have been incurred for yourself, your spouse and your dependents.

  • Not-deductible

You must have a complete idea about what is not tax-deductible before you have filed the tax returns. Any expenses which have been reimbursed either by the insurance provider or by your employer cannot be claimed as tax deductions.  Moreover, if you are using a pre-payment plan for your medical expenses or are using a medical reimbursement plan then those expenses cannot be claimed as deductions. Some other non-deductible items would include your every-day supplies like toothpaste, soap, vitamins, etc.
 

  • Bill payment

Medical expenses can be deductible only if they are paid in the tax year in which you are filing the tax returns. Medical expenses can be claimed from the previous year or from any other future years. If a credit card has been used for the payment of medical bills in a tax year then it would be counted as being paid in a year and would be deductible as well.

  • Medical expenses can be deducted if your tax deductions are itemized

If you wish to receive the benefits obtained from the deductions obtained from medical expenses you must qualify for itemizing your deductions obtained on your taxes. Some of your itemized deductions such as property tax, State Income tax, home mortgage interest, etc. along with those medical expenses which are deductible need to be more than the Standard Deduction for the year 2020. In case you are self-employed, you would be able to deduct your premium for health insurance even if you are not able to itemize your deductions.

  • Track miles

You can track the medical mileage for the year 2020 and it is 17 cents for each mile. There can be travels related to the prescription pick up, emergency visits, appointments for the dentist and other medical check-up and follow up appointments. 

Conclusion

Hence, if you have had medical expenditure during a particular tax year it would be completely worth it by maximizing your deductions and opting for itemized deductions. This would be helpful mainly when your itemized deductions are more than your standard deduction.

How Much Will Future Retirees Receive in Lifetime Social Security and Medicare Benefits?

by | Jan 17, 2021 | IRS, Social Security Number, tax filing, tax form, Tax Planning, Tax Preparation, Tax Refund, taxes

How Much Will Future Retirees Receive in Lifetime Social Security and Medicare Benefits?

Millennial couples who would retire around 2060 would approximately be receiving around $2.2 million in the form of lifetime Social Security and Medicare Benefits. This amount would be approximately double of the amount that a couple who would be retiring this year would receive.  The total Social Security and Medicare benefits are expected to rise even more for those generations which are born after the year 1995 if these programs would provide the continued benefits.

The Lifetime Social Security and Medicare Benefits and Taxes are mainly based on the reports for the Social Security and Medicare trust funds. According to the projection of this trust, a single male that is earning an average amount of wage is working every year and is retiring at the age of 65 years would receive benefits of around $570,000. In case of those couples who are going to retire this tax year with one of the spouses having a higher wage and the one earning lower wage the amount that would be received as Lifetime Social Security and Medicare benefits would be around $1,113,000.

With the rise in Social Security and Medicare benefits, the gap which is present between the benefits and the payroll taxes the employees owe will keep on growing. The main reason behind this is that the low cost of Medicare was designed in such a manner that it would only provide cover for the hospital costs; but the program now would provide cover for visits made to doctor, outpatient procedures, drugs prescribed and other categories of medical costs.

The increase in benefit amounts

The amount of Social Security and Medicare Benefits would be seeing a significant increase in future retirees. The most important cause behind this is that there is an increase in Social Security Benefits and the Medicare expenses are increasing due to modern health care services. Moreover, when life expectancies are higher it would imply that the Americans who are going to retire in the future would receive many more years of this benefit.

However, the major cause behind the financing gap which is prevalent between the benefits obtained and the taxes is the decrease in the birth rate starting in the mid-1960s. There has been a resulting shrinking in the number of the workers relative to the retirees and this has a special force in the period in which the Baby Boomers had started collecting these benefits in between the tax year 2008 and the mid of 2030s.

These issues would very soon come under the supervision of one head as the Congressional Budget Office Projects. The Government would not be able to pay complete benefits out of the funds of the trust for Social Security by the tax year 2031. 

The new President Biden has also recommended a further increase in the benefits available for the retirees i.e. approximately 9% on an average for those retiring by the year 2065. Moreover, the work of the Urban Institute reflects the fact that these changes would be able to extend the life span of the Trust funds for Social Security by only 5 years. 

Many workers at present have to face an implicit trade-off irrespective of their level of income.  The Government has promised higher Social Security and Medicare Benefits at an older age, but it has also set a small portion of its budget for the younger people and families for other programs such as student loan balances, children fall, and other programs not related to retirement.

 A large scale budget is the only solution to this trending problem related to Social Security and Medicare Benefits. 

Conclusion

So, it is necessary to understand the issues that have been present across several generations related to retirement and health benefits along with the taxes which would be applicable across the country.

Financial Goals change with change in Income and Taxes as Well

by | Jan 13, 2021 | Financial and Mental Health, income tax, Tax Planning, Tax Preparation, Tax Refund, Taxpayers

Financial Goals change with change in Income and Taxes as Well If there are any minor changes into your Income such as a pay rise or a decrease in the duration of work hours, then it is quite easy to change your financial goals. However, if there are bigger changes in your income then it becomes quite difficult to change your financial goals.  It may be a case of a promotion, a pay hike or a pay cut during adverse times like pandemic. In both of these scenarios, it is quite difficult to manage your financial goals and objectives. Let us have a look at how to manage or rather change your financial goals as your income changes. A huge decrease in your income In case, there is a huge decrease in your income then the most important thing to consider is the impact of the decrease in your life on a daily basis. Suppose, you have lost your job and you are filing for unemployment then, in that case, your expenses would be more than your income. In such cases, the best idea is to look out for those areas where you can cut your expenses to get closer to positive cash flow. If such adverse situations occur, then it is best to put your long-term financial goals on hold for a temporary period.  There might be a need for goal adjustment and it can be started by reducing your contributions to align with the decrease in income. In these adverse times when the deadly coronavirus has taken a toll on the lives and the livelihoods of people, if there is a 50% reduction in your income then your contributions towards investments and other financial avenues must be reduced by half. With the economic situation worsening every single day due to the pandemic, it is wiser to remain careful about such situations and strategies to handle such scenarios.  A huge increase in your income If you are getting a pay raise or switching jobs, you must plan towards increasing your contributions for your financial goals. You should avoid spending more and stick to a particular budget for your expenses. The bottom line is that you must try to resist the temptation to spend in a limitless manner. It is quite obvious that you are accustomed to a particular lifestyle and when your income increases you can be able to save some more by maintaining the same lifestyle. There can be a temptation in your mind to accelerate your financial goals and you can use several financial tools which can help you in accelerating your goals and increasing your savings. In case you are saving more, you would be able to achieve your financial goals easily and on time so it would be quite sensible to adjust your timelines. If financial goals are not dependent on the stock market or any other factors you can adjust them as they fit into your financial plans.  One of the best examples explaining this is your retirement. The retirement accounts which you have would definitely be invested into the stock market and if there is a rise in your income it indicates that you can retire earlier with your financial plan reflecting this. It is imperative for you to adjust your allocation of assets with an updated time frame of retirement along with your projections.  In general, a big change in your income indicates a very big change in your goals associated with savings. You should not forget to adjust your savings goals with any unexpected increase or decrease in your income. Conclusion Hence, an increase or decrease in your income can have a great impact on your financial goals. You must determine your financial goals clearly whenever there are any changes in your income and work accordingly to achieve those goals.

All you need to know about Form 1099-R

by | Jan 6, 2021 | tax filing, tax form, Tax Planning, Tax Preparation, Tax Refund, tax returns, tax savings, taxes

All you need to know about Form 1099-R

Form 1099-R is being used by you for reporting the distribution of benefits associated with retirements like annuities or pension plans. Precisely, the Form 1099-R can be used for reporting the distributions which you might have received from your IRA, annuity, pension, or your retirement account. Form 1099-R can be considered as a record to denote any money paid or given to an American other than his employer.  The payer who pays will fill out the Form 1099-R and will send a copy to the payee and to the IRS as well.

Who can receive a Form 1099-R?

As said earlier, the main purpose of Form 1099-R is to record income. You can receive a Form 1099-R due to some of the below-mentioned reasons.

  1. Freelancers and contractors working independently usually get a Form 1099-MISC from their clients. If you are a freelancer or an independent contractor, this form would reflect the money which the client has paid you. Form 1099-R is for employees but it is not the same as the Form W-2.
  2. Form 1099 has a Social Security Number or Taxpayer Identification Number present on it. This indicates that the IRS will know that you have received money and it will also know if that income has not been reported on your income tax return.
  3. If you are receiving only the Form 1099-R, then it does not specifically mean that you would be owing money on that money reported in Form 1099-R. There might be some deductions which can be helpful in the offset of the income

Variations of Form 1099-R

The variations of Form 1099-R includes the following forms:-

  1. Form CSF 1099R
  2. Form CSA 1099R and
  3. Form RRB-1099-R

Mostly, public and private pension plans which are not a part of the Civil Service System use the Form 1099-R. You must receive a copy of the Form 1099-R or some other variation in case of receipt of a distribution of $10 or more amount from your plans related to retirement.

Pension plans and payment of annuity

Retirement benefits are said to be an extension of the compensation which has been arranged by an employer and employee. On most of the contributions made into the retirement plans, income tax is deferred. In simple words, this means you are not liable to pay any income tax on the funds contributed to the Retirement plans until they are withdrawn by you.

Usually, the pension and annuity distributions are being made to the retired employees, employees who are physically disabled and also for the beneficiaries of any deceased employee.

Loans

Many employers would have the provision of granting loans against pension plans. Usually, these loans are not taken as distributions and are repaid with interest. The issue of Form 1099-R occurs when you have taken a loan and are not able to make the necessary loan repayment on time.

  1. If this situation arises then the amount which is not being re-paid is treated as a distribution and would be mentioned in the Form 1099-R along with the code L i.e. Distribution Code.
  2. These distributions are treated as deemed taxable income and might be subject to penalties related to early distribution.

Rollovers

By a Rollover, retirement funds can be moved or transferred from one individual to another otherwise known as a custodian without any taxes paid on the money that has been transferred.

  1. By the use of Form 1099-R, direct rollovers can be easily identifiable. This is done by the use of codes G or H in box 7 of the Form 1099-R.
  2. Rollovers can be indirect if you are the owner of the account and you take up the responsibility of the amount in the Retirement Account and would transfer the deposited money into another Retirement Account.
  3. When there is a point when there is an amalgamation of rollover and IRS principles, the distribution made is not taxed. But, you should not forget to report the amount on your tax returns. 

Early distributions

Those benefits which are paid to you before you reach the age of 59 and half years are said to be Early Distributions. For avoiding the misuse of the retirement funds, an extra 10% federal tax is imposed on the Early Distributions.  Many states also levy penalties on these early distributions. This additional tax is applicable on the full amount of distribution which is taxable unless exceptions like disability, death, IRS levy, etc.

Conclusion

Hence, the above-mentioned information about Form 1099 would be helpful in understanding the details about this and be easier for use.