Details and Understanding for Casualty and Theft Losses

Details and Understanding for Casualty and Theft Losses

by | Feb 13, 2018 | Deduction & Credits, Tax Planning

Casualty and Theft Losses

Casuality and Theft Losses.It is not unknown for people to suffer a loss in the form of theft and casualty for their personal properties. If you are one of them, you can claim the same as itemized deduction for your tax returns. To do so, you need to fill up the Form 4684 to understand how much of yours loses you can report and then mention the same in the Schedule A of the Form 1040.

It is important to note that you can claim only for those losses that are not covered or reimbursed by any insurance company. Also, in order to qualify for the deductions, your loss should amount to more than 10% of your adjusted gross income. You cannot claim a deduction otherwise.

Understanding Casualty and Loses

There are various reasons or aspects that can result in damage or destruction or even loss of property. However, not all of them enable you to deductions under the casualty and loss clause. The following are the only conditions in which casualty comes into the picture.

  • An event occurs swiftly, as opposed to a progressive event
  • Any event that does not occur on a day to day basis
  • An event which is unintentional or something that no one anticipates

Apart from the above points, casualty is also considered if you undergo any of the following.

  • Natural disasters such as earthquake, flood, volcanic eruptions, hurricanes, tornadoes etc.
  • Any form of terrorist attack or vandalism
  • Money that you lose if you the financial institution you deposited your money in, goes bankrupt
  • Any demolition or relocation initiated by the government if the same is deemed unfit for habitat due to any disaster
  • Draught is one of the major reasons behind loss of property, but for you to claim it, you should be involved with any transactions that leads to profit or must have some sort of farming or trading with the property

Though casualty loss covers a lot of ground, there are still a lot of exclusions such as:

  • Setting up a fire willingly or asking someone to do it on your behalf
  • Damage to trees due to any disease or fungus or pests etc.
  • If you break items accidentally
  • If the damages occur due to negligence or not taking proper care, like termites or moth

It is important to note that you should reach out to your insurer immediately to claim for those  loses you underwent, if the property is insured.Inability to do so will be a hindrance in your casualty and theft loses claim. But if the loses are not covered as part of the insurance, then you can claim the same.

Understanding Theft

If the intent of any action is to reduce the property of an individual by removing or taking away money or some portion of the property, it is theft. For the same to qualify as theft it must be done with a criminal intent and must be illegal as per the local laws. The most common forms of theft are as follows:

  • Blackmailing someone
  • Breaking into someone’s house and carrying out a burglary
  • Any form of fraud or denote facts wrongly
  • Any robbery on the property
  • Kidnapping someone and asking for ransom
  • Extorting an individual
  • Misuse of the property or portions of it

If you have been subject to any of the above, you first need to check the adjusted basis of your property before any of these events took place. Post that, you need to figure out what has been the change in your property value due to these actions and deduct the same from the insurance amount;you can claim the remaining amount.

Self-employed Health Insurance

Self-employed Health Insurance

by | Feb 6, 2018 | Tax Planning

Self-employed Health Insurance

Self employed Health Insurance.Things have changed a lot for the better for self-employed individuals post the introduction of the Affordable Care Act. Things were a bit different for self-employed individuals prior to the Act, as they either had to pay for pre-existing conditions or even worse could not get cover for the same. The ones who did manage to get health coverage for themselves would be severely restricted in the form of caps. In fact, insurers took the liberty of canceling the insurance over smaller technical issues as well.

There are no doubts that a health insurance is one of the larger expenses that one has to undergo. But thanks to the Affordable Care Act, self-employed individuals now have access to better protection and some even benefit from tax credit systems. However, it is essential to understand the health insurance in and out so that you can make the most of it. Here are some important details.

Exchanges

As per the Act, each state must put up an exchange or marketplace where insurers can sell their health plans. The Act also made way for subsidies for individuals who could not afford the plans on their own. If your annual income is less than a certain level, you qualify for tax credits as well. As per the official statistics, people who took the tax credits saw a dip in their insurance cost by as much as 73%.

Subsidy

Being aware of your health insurance plans was never this beneficial. You can easily reduce the premium costs by knowing details of the plan. The usual $396 plan is prior to any form of tax credit. If you factor in all of those, the effective price is just $106 per month. The subsidies are also valid for middle class families. To be more specific, if your income as an individual is less than $47520 and $97200 for a family comprising of four members, you qualify for the subsidy. However, it is important that you purchase your health insurance from the marketplace.

Deductibles

There are quite a few means by which you can reduce the premium costs of your health insurance. Opting for a higher deductible is one of the better approaches. If you are someone who is healthy and does not want to spend a lot on your health insurance, you can take this road. By opting for higher deductibles, you agree to pay a higher amount from your pockets if you fall sick as compared to someone with lower deductibles or no deductibles at all. It is at times referred to as catastrophic plans. But it doesn’t qualify for any tax credits and you must be within the age limit of 30 years to avail the same.

Tax Planning

The Affordable Care Act brings down the cost of the premiums after accounting for subsidies up front. Unlike some other tax credit systems where you must pay and wait for credits post filing your tax returns. When you opt for a health insurance you must provide your projected earnings for the rest of the year and the subsidy, if any, is then calculated on that amount. The tax credits are adjusted to your monthly premium amounts so that you do not get the pinch of it. When you file for taxes, ensure that you have been taking the right subsidy amount. There are chances of over or underestimation, but that can be taken care of during tax filing.

Another benefit for self-employed or freelancers is that they use the health insurance premiums as deductions. This is applicable even if your other deductibles do not cross standard deduction set.

Details about Capital Gains

Details about Capital Gains

by | Jan 20, 2018 | Investment & Income, Tax Planning

Details

about Capital Gains

Details about Capital Gains.Who wouldn’t like to see their assets growing on a regular basis? As much as we enjoy seeing our assets swell up, there is a different side to it that we must deal with, capital gains. A capital gain is a type of tax than an investor has to pay if he/she sells his/her assets at a higher value than what they had purchased the same for. It must be noted, that if you as an investor are holding on to assets and their net value increases, you are not liable to pay any capital gains.

It only comes into picture when you sell the same. For an example, you could hold on to stocks of your favorite company. The value of the stocks would appreciate year over year, but you do now owe any capital gains tax unless you sell those stocks. Anyone who sells their assets for a profit would come under the purview of the capital gains tax unless an individual does it for a living. The simplest example would be that of a day trader. They indulge in the selling of stocks on a daily basis when then gain a certain amount. For them, the gains are calculated under the head of business income.

Tax Rates

The tax rates when it comes to capital gains are primarily split as short-term or long-term. As the names suggest, these primarily depend on how long you are holding the assets along with you.

Any profits that you accumulate within a short span of time will be calculated under the normal income tax rates.

However, if you hold on to assets for more than a year, the tax rates come down significantly. In fact, some individuals might even qualify for 0% tax rates for holding assets for more than a year. We will take a couple of examples and see how the tax rates come into the picture.

When it comes to single filers, taxpayers who qualify for the 10% and 15% tax bracket are not liable to pay any capital gains tax when it comes to long-term gains. Short-term gains are taxed at the same rates as income tax for people in the 10-15% brackets.

When the tax bracket for income increases, so do the short-term and long-term capital gains. For people in the 25-35% bracket of income tax, the short-term capital gain remains the same.

However, the long-term capital gain is set at 15%. Similarly, individuals taking home in excess of $418,401 a year are taxed at 39.6% for short-term gains, while the long term-gains remain at 20%.

The capital gains tax on short-term gains remains the same as income tax, irrespective of your status while tax filing. Similarly, irrespective of whether you are married filing jointly, married filing separately or are head of household, the long-term capital gains remain the at 15% for people coming in the 25-35% tax bracket and 20% for people who come under the 39.6% income tax rate slab.

Qualification

The capital gains tax system comes into the picture primarily for assets such as real estate, bonds, and stocks. It is usually not applicable to cars, boats and other similar stuff. When you sell these eligible assets and make money off it, is labeled as capital gains. Any loss you make also qualifies as a capital loss and can be used to check the profits.

For an instance, if you sold stocks of a company with a profit of $2000 and sold another stock at a loss of $400, your net capital gains will be valid on $1600.

If you someone who regularly buys and sells the above assets, it is worth spending some time on understanding your capital gains liability.

Progressive Taxation – Thought Process It’s Pros, Cons

Progressive Taxation – Thought Process It’s Pros, Cons

by | Dec 5, 2017 | Tax Planning

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Progressive Taxation – Thought Process It’s Pros, Cons

Progressive Taxation A progressive taxation system is one where the tax slab increases considerably as the income increases. Thus, high-income individuals end up paying more taxes than what normal individuals would do. For that matter, the United State of America has a progressive taxation mechanism in place for its citizens. As an example, in the year 2016 individuals whose taxable income was below $9275 they ended up paying only 10% as taxes. On other hand, individuals whose taxable income was above $415,050 they ended up paying up to 39.6% as taxes.

Thought Process

There are two primary schools of thoughts when it comes to progressive taxation.
The first says, that the high-income individuals can bear the burden of more taxes.
However, the other school of thought says that this system kind of punishes the higher individuals who earn a lot. And in turn, also removes some motivation for people who want to earn more.

Pros

The first advantage of this system is that it lets people with lower income save more money from taxes so that they can spend or save.
As compared to flat taxation system or even regressive taxation system, a progressive taxation has the ability to extract more taxes.
As the income slab of individuals increase so does their tax liability. Individuals with access to greater amount of funds have the ability to improve the standards of services available for everyone.

Cons

The flip side to progressive taxation is its capability of being discriminatory towards the high earning individuals. A lot of people think this is a way of bringing down the income gap, as the taxes collected are used for social welfare programs. But reports suggest otherwise as social welfare programs gather up only a small portion of what the government spends usually.

Progressive Tax Vs Flat Tax

Flat taxation mechanism is on the other end of the spectrum when compared with progressive taxation. As the name suggests, the tax amount remains the same for everyone, regardless of how much they earn. An example of it would be income tax of 10%. It would remain the same despite the fact if you have low income or high income. As the tax is flat, it is same for everyone. Few countries have such a mechanism in place.
When you consider income tax for individuals under a certain slab, the taxation becomes a flat tax. All the individuals with income lower than the prescribed levels would end up paying the pre-fix flat tax.

Progressive Tax Vs. Regressive Tax

A Regressive tax is the opposite of progressive tax when it comes to the implementation. In this mechanism, individuals with lower income levels end up paying more taxes as compared to people who earn much more. If you consider goods or services, the charges levied on the same (sales tax) is lower for higher income individuals and higher for lower income individuals. Sales tax of the same amount on a particular good or service would comprise of higher percentage when you consider someone with lower income and compare it with high income individuals. The current taxation system followed in the US is progressive by nature. The system aims at charging individuals with low income, lesser taxes. Individuals with medium level income end up paying medium level taxes and high earning individuals pay a higher amount of taxes. It primarily follows a tax rate system that is incremental. The debate of it being fair or unfair for the wealthy is an ongoing process and there doesn’t seem to be an end to it. But by large and far this taxation system, according to several critics is the most reasonable system available to us. [/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
Early Withdrawal Penalties

Early Withdrawal Penalties

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

Early Withdrawal Penalties

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

Can you avoid the penalty?

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

  • Maturity age

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

  • Medical Expenditure

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

  • Purchase of Home

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

  • Disability

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

  • College Expenses

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

  • Health Insurance

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

  • Passing it on

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

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