Top 5 Tips to build your Retirement Corpus from your Tax Refunds

by Mounica Kota | Jul 26, 2019 | IRA, tax deductions, Tax Extension, Tax Planning, Tax Preparation, Tax Refund, tax savings, taxes

Top 5 Tips to build your Retirement Corpus from your Tax Refunds

Should I start investing for my retirement? When is the right time to start my retirement planning? These are some of the questions that a lot of us ponder over. And in the process of just thinking and not acting, we miss out on some crucial investments.If you have received some tax refunds, instead of spending it away, it is worth investing it for your retirement corpus. Today is the right time for you to start planning for your retirement. Here are some important tips that will help you build your retirement corpus.

401(K)

This might seem very obvious, yet a lot of taxpayers forget to exercise this option. If your employer offers a traditional 401(K) plan and you have the right eligibility, do not shy away from it. What makes this option interesting is that your investment is pre-tax. In simple words, the amount will be deducted even before any tax is calculated on your income. This allows you to make the most of it and invest more. Some employers offer Roth 401(K), which essentially deducts the amount after taxes have been calculated. Consider the tax bracket that you might retire in and choose a plan accordingly.

Catch-Up Contributions

Since there is a cap on the amount that you can contribute towards 401(K) for a fiscal year, it is recommended to start early with your retirement plans. However, it all changes as soon as you reach 50 years. The restrictions on the amount that you can invest are no more valid, thus you can invest more for your retirement. If you have missed out on some payments in the past, this is the time to do the catch-up.

IRA

The IRA or the Individual Retirement Account is another way by which you can invest for your retirement. You can either choose between a traditional IRA or Roth IRA. The Traditional IRA can be beneficial depending on whether you and your spouse have retirement plans in place from your employer. Based on your tax eligibility the contributions can e tax deductible and your funds will grow tax-free until you withdraw the funds. Roth IRA makes for a good choice if you qualify for phased out income limits. The investments are tax free if you reach 59 and a half years.

Match your employer

If you work for an employer that offers 401(K) it might be worth matching their contributions. Your employer can invest as much as 50% of your contributions, up to a maximum of 5% of your salary. Thus, if you are taking home $60,000 a year, you can contribute $3,000 for your 401(K). Your employer will have to contribute another $1,500. You would not want to miss out on this amount.

Automatic savings

Another smart way of ensuring that you save and money on a regular basis for your retirement is to set up automatic monthly contributions. This will save you from putting in efforts on a monthly basis and get your contributions some discipline. You can reach out to your bank to see the available options to invest automatically on a monthly basis towards your retirement funds.

If you have received any funds as income tax refunds, retirement investment is one of the smartest things that you can do with those funds. There are enough options available for you to either enhance your existing contributions or start fresh if you have not already. Individuals who haven’t yet started, you can start today and make the most of the different options available.

3 tax tips for second homeowners for NRIs in the US

by Mounica Kota | Jul 12, 2019 | Tax Extension, tax filing, Tax Planning, Tax Preparation, tax rate, Tax Refund, tax savings, taxes

3 tax tips for second homeowners for NRIs in the US

tax tips for second homeowners ,Buying a second home is a big decision and requires a lot of efforts on your end. It could well be that you already have a home and are planning for a holiday home or a weekend getaway or just for investment.However, amidst all this, do not forget that it comes along with a lot of tax considerations as well. Here are three major tax tips that you must consider before you write down that cheque.

Location

It is no secret, that the tax rates of property or house largely depends on the location that you are buying it at. Few states and municipalities have higher tax rates as compared to others. Thus, a quick check of the location that you want to buy the house in would help you save considerably on taxes.

Places such as Hawaii, Louisiana, Delaware and Alabama have the lowest tax rates for real estate in the country. Ranging between 0.28% to 0.53%, they can be great options to buy your second home. And on the other hand, places such as Illinois, New Jersey, Wisconsin have the highest tax rates in the country.

Buying a property outside the country is a different equation altogether. Unlike normal classifications such real estate taxes, you might have to pay a one-time fee.

Future Taxes

Should you pick a place and property smartly, the payoff can be quite satisfying. A good house in a good locality or upcoming locality will fetch you much better prices during selling. However, in hind sight do not forget the additional cost that they bring along with them.

While buying at lower prices and selling at higher prices means a lot of profit for you, being aware of the tax implication is also important. As the property value increases significantly, the taxes that you are eligible to pay would also increase considerably.

There is also a possibility that the White House decides to revisit the property taxes once every few years. If there is an increase in such prices, it would only increase the tax burden on you.

Interest on Mortgage

If you are planning to use the second property as a second home, there are some additional benefits to have had. However, these are possible only if you use the property as a second home and not rent the place out.

In such cases, the interest that you pay on your mortgage is deductible and behaves pretty much like the interest on the first house or property. Before 2018, taxpayers had the option to write off the entire interest amount that they paid if they had secured debts of up to $1.1 million on both the properties combines together. The amount is also valid if you choose to upgrade or improve the house in different ways.

The rules had been tweaked a bit where earlier the limit was set at $750,000. This can be a good and smart way of saving a substantial amount in taxes. It is quite common to rent out your second place. But you cannot avail the above benefits if you choose to do so. If you are looking to saves taxes, this method fares better results.

Whether it is your first property or second, if you have the option to save money on taxes, there isn’t any reason why you should not. The above tips are not only easy to follow but implement as well. If you are an NRI and are planning to buy your second home, these should help you save some money on taxes.

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

by Mounica Kota | 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.

What is the difference between Form 8938 and FBAR form in terms of reporting of Foreign Financial Assets?

by Mounica Kota | May 17, 2019 | Blog, Tax Extension, Tax Planning, Tax Preparation

What is the difference between Form 8938 and FBAR form

in terms of reporting of Foreign Financial Assets?

Form 8938,FBAR, FATCA, these are some of the acronyms that might confuse a lot of taxpayers. Especially when it comes to foreign financial assets, which one should a taxpayer choose and why.

Form 8938

The HIRE Act was the triggering factor behind the FATCA or the Foreign Account Tax Compliance Act coming in to effect in 2010. As per this Act, financial institutions are required to report the assets held by US-based account holders or run into the risk of withholding on certain taxes. As per the HIRE Act, US citizen also needs to declare their foreign financial investments. This is where Form 8938 comes into the picture. Taxpayers of the United States of America use Form 8938 to fulfil the FATCA obligations. The form must be submitted along with their annual tax return.

FBAR

The Bank Secrecy Act of 1970 was the deciding factor behind the introduction of Foreign Bank Account Reporting or FBAR. The intention of this Act was to discourage tax evasions by foreign investments. While the Act was ignored for a very large period of time, it has caught up quite a bit in recent years. The Government’s push towards this compliance has been a major factor. Couple that with hefty penalties and more people are filing FBAR forms as compared to previous years. The IRS also has a voluntary disclosure program for individuals who might have to file FBAR.

The Difference

While on the surface it might seem that both the forms are collecting exactly the same information, there are quite a few subtle differences.

Filing

FBAR form is for US persons having an interest in foreign financial accounts. Also, they must meet the specified thresholds.

Form 8938 is for specific US persons having an interest in foreign financial assets. Also, they must meet the thresholds mentioned.

Unmarried individuals with assets worth $50,000 or more on the last day of the fiscal year or $75,000 or more during anytime in the fiscal year.
Married individuals with assets worth $100,000 or more on the last day of the fiscal year or $150,000 or more during anytime in the fiscal year.

Reported Materials

For FBAR, individuals need to report the maximum value of their foreign financial accounts.

For Form 8938, individuals need to report the maximum value of their foreign financial assets.

Thresholds

The FBAR’s threshold value is $10,000. Thus, if the total financial value of accounts exceeds $10,000 it must be reported.

The threshold value for individuals filing Form 8938 who are living outside the country are:

Unmarried individuals with assets worth $200,000 or more on the last day of the fiscal year or $300,000 or more during anytime in the fiscal year.
Married individuals with assets worth $400,000 or more on the last day of the fiscal year or $600,000 or more during anytime in the fiscal year.

Where to file

FinCEN’s BSA e-filing system is how you should file your FBAR Form and it is all electronic.

Form 8938 must be filed along with your annual federal tax return.

Penalties

Failing to file FABR non-willingly results in a fine of $10,000. And the penalty for willful non-filing results in a fine of $100,000 or 50% of the balance in the accounts.

Form 8938 has a penalty of $10,000 for not filing the form. The amount increases by $10,000 for every 30 days passed, to a maximum of $60,000.

You can now decide for yourself, which form you need to file when it comes to Foreign Financial Assets reporting.

What Is IRS Form 1099-INT: Interest Income?

by Mounica Kota | May 9, 2019 | Blog, Tax Extension, Tax Planning, Tax Preparation

What Is IRS Form 1099-INT: Interest Income?

Tax filing season can be stressful, to say the least. With several documents, investments, proofs and bills to take care of, various Forms can make things a bit more overwhelming. Thus, the golden rule of starting early always pays off. When you start early, you have additional time at hands to review your filing and more importantly, fill the Forms as accurately as possible without much stress. IRS Form 1099-INT is one such form that the expects during your tax filing. What is it about? And when and why you should file it, let’s find out.

What is it?

Form 1099-INT by the IRS must be used by taxpayers to declare their earned interest. All investors receive the form by their payers of interest at the end of the year with a breakdown of the interests earned and any other related expenses. $10 is the minimum value, above which a payer must provide the Form to its investors. At the same time, you need not attach all the Forms 1099-INT with your tax returns.

Details of 1099-INT

It is essential that you understand the details of the Form, which will, in turn, help you fill the appropriate information in your tax return.

Box 1

This box contains any income that you receive which is taxable, such as interest earned on savings accounts.

Box 2

This box represents any penalties that you have been charged with, due to premature withdrawals.

Box 3

The contents of this box represent interests earned on bills, bonds or Treasury notes.You need to be a bit careful since some of them are tax-exempt.

Box 4

This box reports any taxes that were withheld by your payer.

Box 8

This box contains information about your investments that earn interests with state and local governments. A municipal bond would be a good example of it.

Information Contained in Report

Form 1099-INT contains the following information.

The name and address of any payer.
The name and address of the recipient.
Any foreign taxes paid.
Any form of state taxes withheld.
Any form of federal taxes withheld.
Identification numbers of the payers as well as recipients.
The amount of interest paid (only if it exceeds $10).
Total bond premiums.
Total bond premiums on the tax-exempt ones.
Total amount of interest that is exempt from taxes.
Total amount of interest earned on Treasury bonds, US savings bonds etc.

Reporting Form 1099-INT

The Box 1 income, as mentioned above, must be reported in the taxable income row of your tax return. The interests earned is taxed in the same way as other sources of income. Box 2 mentions about the penalties, for which you can opt for deductions when it comes to the adjusted gross income. One must not forget to report the taxes withheld mentioned in Box 4. You should include the amount in your tax return under Payments.

All the interest that you earn on deposits made to your bank accounts, amounts that were withheld from your federal taxes or foreign taxes, dividends paid by insurance companies, indebtedness etc. must be reported in Form 1099-INT.

Apart from the above, interests earned in the form of real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT) or collateralized debt obligation (CDO) must also be reported in the Form 1099-INT.

Individuals earning more than $1,500 in interests must declare all their payers in Part 1 of Schedule B of Form 1040. Also, you can only include income that you have received and not the ones that you are owed.

The top 3 things to keep in mind if you are returning to India in this financial year 2019-20

by Mounica Kota | Apr 9, 2019 | Blog, income tax, Tax Extension, Tax Planning, Tax Preparation, Tax Refund

The top #3 things to keep in mind if you are returning to India in this Tax financial year 2019-20

For a non-resident Indian, who lived in another country for many years, the decision of returning to India permanently is never an easy one. There are a lot of considerations to be made for this transition, specifically on financial year matters. To avoid financial loss during transition, Investments, transfer of assets most importantly, taxation process and planning needs to be done thoroughly. Tax Here are the three most important things to keep in mind for NRIs returning to India in this financial year.

Understand your tax status and tax implications

As you return to India permanently, your tax liability for the financial year largely depends on your tax status for the year. You are considered as Non-Resident Indian (NRI)if you satisfy any of the below conditions.

Your total stay in India is less than 182 days during the financial year. Or,
You are not present in India for 60 days or more and 365 days or more in the four financial years prior to the relevant tax year.

If your tax status is NRI for the year, your income earned outside India is not taxable. Only, income earned in India are taxable for the year.

There is another category of NRI called ‘Resident but Not Ordinarily Resident’ (RNOR).You can become RNOR, if your stay in India in the seven financial years immediately preceding the relevant financial year is less than 729 days or if you have been Non-Resident Indian (NRI) in nine out of ten financial years preceding the relevant tax year.

If you are returning to India, you can keep your RNOR status for up to three financial years after your return to India. You can benefit hugely out of this as your income earned in India is only taxed not the global income. With RNOR status, you can enjoy many tax benefits on various incomes. Here are some of them.

Pensions from pension scheme held overseas
Capital gains from sale of properties and shares held overseas
Interest income from Resident Foreign Currency (RFC) and Foreign Currency Non-Resident (FCNR) deposits
Interest on deposits held overseas
Dividends earned on securities held overseas
Rental income from properties held overseas

Once you lose RNOR status, you will become ordinary resident of India and then your global income will be taxed in India. If your overseas income is taxed abroad, then you can claim tax benefits under Double Taxation Avoidance Agreement (DTAA).

Act oninvestments and assets held overseas

Firstly, you need to jot down list of investments and assets held overseas. This can help you plan properly. If you are planning to dispose overseas investment and assets, you need to plan for transfer of proceeds. If you plan to hold the investments and assets as it is overseas, reporting of such assets for the taxation purpose overseas need to be planned carefully. In order to avoid double taxation, experts recommend to dispose foreign assets and investments and get the proceeds transferred to India when you are an NRI or RNOR.

Re-plan your financials

As you close your overseas bank accounts, investments and get the assets transferred to India, it becomes necessary to re-work on your financials. As you return to India, your bank accounts held in non-resident status needs to be re-designated as resident accounts. However, your Resident Foreign Currency (RFC) account and Foreign Currency Non-Resident (FCNR) accounts can be held till maturity. Similarly, all your investments in India needs to be updated with the change in status. Not just there will be change in your investments, assets and tax implications on them, but also there can be change in your income and expenses. Hence, re-planning your finances need to be kept in mind while returning to India.

Conclusion

To ensure smoother transition, every aspect needs to be well thought out and planned. You can take help of tax experts and financial planners to experience easy transition and for better financial decisions.

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