The top 7 Tax Changes in 2020

by Mounica Kota | Mar 31, 2021 | Blog, Tax Planning, Tax Preparation, Tax Refund

The top 7 Tax Changes in 2020

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 31^st 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

by Mounica Kota | Mar 24, 2021 | tax deductions, Tax Exception, Tax Planning, Tax Preparation, Tax Refund

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.

Tax Benefits that can be availed for a Newborn

by Mounica Kota | Mar 21, 2021 | 2021 Tax Returns, Blog, Tax Planning, Tax Preparation, Uncategorized

Tax Benefits that can be availed for a Newborn

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?

by Mounica Kota | Mar 18, 2021 | Blog, Tax Planning, Tax Preparation, Uncategorized

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.

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

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

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

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

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

Tax Withholding and its importance

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

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

How to review the Form W-2?

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

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

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

Conclusion

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

All about Unemployment Income Reports

by Mounica Kota | Mar 5, 2021 | 2020 Tax Returns, Blog, income tax, Tax Planning, Tax Preparation

All about Unemployment Income Reports

The US economy has suffered from a great setback due to the pandemic COVID-19. Millions of Americans have either lost their jobs or have been furloughed. However, the US Government has started the initiative of providing several unemployment benefits for the affected Americans. These unemployment benefits are either a part of the CARES Act or are also sponsored by the State Government.

If you have been facing the problem of unemployment due to the pandemic and have received the unemployment benefits, then your taxes must have been affected. So, it is very important for you to understand how to report your unemployment income on your tax returns.

Taxability of the Unemployment Income

Unemployment income would be considered as an income and hence is taxable as per the laws. According to the norms of the IRS, the unemployment income or compensation obtained should be reported on the tax return of the year 2020.

The IRS and the Government want their cuts of the funds which you are receiving in the form of Unemployment income. Income is income and the source of income is not to be considered when it comes to filing your tax returns.

Unemployment Income to be reported

Before you start filing your tax return for the year 2020, you should be aware of the below-mentioned facts.

You must check out if you have been a participant involuntary withholding. If you have been a participant in the Voluntary Withholding, then you should have done it by filing the Form W-4V which denotes the Voluntary Withholding Requests. In case, you had filled out the Form W-4V then withholding of a flat 10% of your unemployment benefits would have occurred. This would mean that you have already paid 10% of your federal income taxes on your income earned due to unemployment.

In case, you are not making payment for the taxes of any of your unemployment income then a lump sum of your taxes would be paid while filing your tax returns. In such cases, the IRS would however offer payment plans by which you would be able to make the payment of your taxes.

Reporting your unemployment income

In your federal tax returns, you can mention the unemployment income which you have received under the Income Section. Before starting the process, one mandatory step is to receive Form 1099-G. This Form would help in highlighting the certain Government payments which have been issued by the State’s unemployment office and shows how much amount you have received as Unemployment Income.

You must keep that Form and match it to your own records which you have. Under the Income Section of your Tax return, the amount mentioned in Form 1099-G must be mentioned. Unemployment Income is usually reported in your federal tax return in Schedule 1 in the “Additional Income Section”. Then the full amount would be carried forward to the main Form 1040.

Exceptions for COVID-19

At this point, the IRS has clearly stated that there are no exceptions related to the taxes with respect to COVID-19. It has been stated by the IRS that you will have to pay the taxes related to unemployment on both the income received for unemployment from the State and also any extra funds if received from the Federal Government due to unemployment.

If you cannot pay the bills

In case you are not able to pay your tax bills on time you should not panic. You should not refrain from filing your tax returns due to this. It would be best for you to file your tax returns for the year 2020 even if you are not able to pay your bills on time. You would have to pay penalties in case of missing the tax return filing deadline.

You can contact the IRS and discuss the delay in tax payments. The IRS would help you by providing an extension in the tax payment, creating instalments in making the tax payment, or temporary late collection of taxes, etc.

Conclusion

Hence, reporting Unemployment income is a must for Americans and the given information would help understand the tax implications associated with Unemployment income.

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