Taxable Refunds – It’s Details, Understandings and Taxable or Non-taxable

Taxable Refunds – It’s Details, Understandings and Taxable or Non-taxable

by | Nov 24, 2017 | Tax Planning, Tax Refund

Taxable Refunds – It’s Details, Understandings and Taxable or Non-taxable

Taxable Refunds ,The tax system and all of its mechanisms can be confusing at times and difficult to comprehend for a normal person. But if you put in some effort in understanding the system, it doesn’t seem all that difficult anymore. Of course, there are several aspects of taxes, but we will focus mainly on refunds. When you have paid more taxes than you are liable for, you become eligible for tax refunds, provided you meet all the criterion. Statistics show that about 80% of individuals filing for taxes are eligible for tax refunds in some form or the other. However, the fact that state tax refunds can be taxable, puzzles a lot of the tax payers, who find it in bad taste as they must pay taxes on the refunds that they received.

Understanding State Refunds

Most of us do resent the idea of having to pay taxes on tax refunds, but there is more than what meets the eye. When it comes to taxes, the IRS and the States use the terms Refunds and Overcharge identically. And as you might have guessed by now, overcharge is taxable. Let us take an example where Josh has a $1000 over payment to the state and receives a refund for the same amount. The $1000 is taxable and we will get to the reasons in some time. But if he chooses to pay a piece of the same, let’s say $200 in some charity, the refund now becomes $800. He can use the $200 for tax rebates in the tax filing for the coming year.

The Underpinnings

Here is how it works. When you file your federal tax returns, one of the itemized deductions allowed is the State income tax that you have paid. But here is the thing, you cannot prepare for the state tax returns without going through the federal tax returns. Thus, there are chances that you are not aware of the State taxes that you must pay and IRS asks you to provide a tentative amount for the same. If you have overshot or undershot the amount, you need to address those in the next year tax returns. Before you draw any conclusions, the IRS does help you out in figuring the tentative amount of State income taxes. Keeping the above in mind, let us assume Josh had $2500 to be paid as part of State taxes. But when he filed for the state returns, he finds out that he only owed $1500. Thus the remaining $1000 will act as a tax refund for Josh. To overcome this situation, the IRS allows you to declare the $1000 overpayment as one of your income items.

Taxable or Non-taxable?

The state or local tax refunds are taxable in some cases whereas they are non-taxable in other cases. We will look into both the scenarios now. The most common scenario where you end up not paying any taxes on the refunds is if you do not deduct the same. If you have not itemized your tax refunds as part of the deductions, then the overpayment does not become a part of taxable income for that year. Some people manage to deduct their sales taxes, rather than state tax refunds when it comes to the previous year, thus giving them immunity against taxable refunds.

But if you have itemized the state and local taxes and were able to secure a refund for the previous year, the same amount or overpayment becomes a taxable entity for the current year. Keeping a close eye on the Form 1099-G can help you out in such situations. But even if you do not receive the same, overpayments are taxable.

Financial Planning Month

Financial Planning Month

by | Nov 21, 2017 | Tax Planning

Financial Planning Month

One simply cannot emphasize enough the importance of financial planning. A small amount of time spent on it helps you go the extra mile in the long run or achieve that dream a wee bit faster. Chances are high that you haven’t started any financial planning till now. But as they say, it’s never too late and what better time to get started with it than the Financial Planning Month. October is the National Financial Planning Month and it ensures that more and more people are aware of the fact that financial planning is crucial to their financial survival.

What is it?

If you want to go on a trip with your friends, there is a long list of things that you need to consider; starting from mode of transport to the list of people joining the trip, from accommodation to other activities that you want to carry out during spare time. Essentially, you are planning your trip. Now take this into perspective, for a 3 to 4-day trip you put in so much of effort but when it comes to money management, we kind of take it for granted. A good financial plan then includes all your financial goals when it comes to different time frames such as short term, midterm and long term. It also includes ways that can assist you in achieving those goals. You need to have a good blend of savings as well as investments; otherwise, it is going to be a bit difficult to meet those goals.

How to Approach?

Getting a hang of the ground realities is the first step of financial planning. It includes understanding and jotting down all of your current investments, insurance(s) and of course liabilities. And it will not hurt at all if you can get the minor details such as interest rate of a loan or its tenure. The next logical step would be analyzing and budgeting your monthly expenses. Budgeting is just the beginning, as it helps you discover how many of those so-called important expenses are really important. With its help, you can also plan for situations that are not part of the scheme of things.

For an instance, that unwanted trip to the hospital or the unfortunate breakdown of your vehicle, needs immediate action and it can set your finances back a little bit. Thus, being proactive on budgeting helps you overcome such situations. Once you are done with the above two activities, now it’s the turn of defining financial goals. On completion of the goals, it is imperative that you segregate them into short term, midterm and long-term categories. A clearly laid out plan also gives you the confidence of tackling each of them. Your plan must also include ways to overcome unwanted situations and manage risks, while also looking at ways in which you can reduce the burden of taxes.

Do you really need it?

All of the above can seem to be a bit overwhelming. But not getting into this kind of planning will do more damage to your portfolio than anything else. A lot of us get into financial crunch at some point due to lack of proper financial planning. If you feel it is a bit too much, you can always take help of experts or advisors when it comes to financial plans. On the other hand, if you are confident that you can manage on your own, make the most of the Financial Planning Month and take that first step. No matter how small it might be, take the initiative and keep adding all the different pieces together for healthy finance.

 

IRS Process to File Tax Returns

IRS Process to File Tax Returns

by | Nov 10, 2017 | Tax Planning, Tax Refund

IRS Process to File Tax Returns

Getting through the tax returns process is a chore that most of us would not like to a part of. However, it is a necessity that needs to be covered at any costs. If you have somehow managed to face your demons and file your taxes and tax return, the next step is waiting for a tax refund if you qualify for any. But before we get to how long it is going to take for your refunds to be dispatched or credited, it is important to know the internal process as well.

Deadlines

The IRS is no stranger when it comes to deadlines. They have a very strict timeline that they have to follow and ensure that all the returns are filed for individuals as well as businesses. 15th of April is the final deadline before the returns have to be filed. Unless the same is on a holiday, in that case, the next working day acts as the deadline. In case of extensions, the modified timelines come into effect. The deadline for filing tax returns for individuals is the 15th of April. As far companies or organizations go, the deadline of March 15th mostly holds good. The last date for organizations and companies is the 15th day of the third month of a fiscal year. If you have opted for an extension of the tax return date, the deadline shifts to the 15th of October (6 months from the actual due date). The IRS starts processing the tax returns as soon as they receive them. No matter what the source is, electronic or paper submissions, the returns follow a first come first serve basis.

Post Tax Filing

As soon as you file or e-file your tax returns you can expect an acknowledgment from the IRS within 48 hours of the filing. If you have e-filed your taxes, you will receive an acknowledgment email within the prescribed time. Individuals who chose a different form to file their taxes will receive the acknowledgment via the same method. On receiving the acknowledgment letter from the IRS successfully, you can then visit the IRS website to track your application. You need to visit the IRS website and look for the “Where is my refund?” option. Once you fill in the necessary details, you should be able to track your application and its status. However, you will not be able to track the status of previous year filings or tax return files with amendments.

Tax Refunds

While filing up the tax returns, you need to specify a mode for refunds, if there are any. The only two modes available are a direct transfer to the account or mailing of a cheque. Even IRS prescribes using the direct transfer mode, as it eliminates any chances of the cheques getting lost in transit. Also, direct transfers allow for a much faster turnaround time. If you are expecting a tax refund and have opted for the direct transfer mode, the same would be reflected in your account in less than 21 days once you file the tax returns. For all the individuals who opted for physical tax returns or cheques, the time taken is relatively longer. The refunds usually take about 6 weeks of time. You can enter the details of the mode of refund in your tax return form under the Refund section. You can enter the same when you are filing for tax returns using websites as well.

In some cases, individuals do not receive their refunds within the allotted time. If you are facing such a situation where you haven’t received your direct transfer refunds in 21 days or physical refunds in more than 6 weeks, you should reach out to the IRS.

All About Property Taxes

All About Property Taxes

by | Nov 3, 2017 | Tax Planning

All About Property Taxes

If you own property in any form you would have come across the term Property Tax. Even though that’s a term you would like to avoid. For all those individuals that haven’t heard this term before, it’s a tax that you need to pay based on the value of your property.

The value of the property is usually assessed by any of the local or municipal bodies.

The Property Tax then helps the local bodies to maintain the roads, public schools, electricity and other similar services. The tax rates differ and vary from state to state and are mostly decided by the local bodies. Thus it makes a lot of sense to check the tax laws in the locality or area where you want to purchase a property. The simple and straightforward calculation for the tax is latest property evaluation value multiplied by tax rates for the area.

Definition of Property

Any property that is legally defined by a state body qualifies to be a real property and thus is eligible for property tax. The property might include land, house, building or any beautification or functional addition to the property that is immovable but adds value to the same. For an example, you can consider the addition of a barn to a farm to be one such instance or addition of a swimming pool to a house. These additions not only increase the functionality and beauty of the house but in turn also help in pushing the cover value of the property.

How they are calculated

Property taxes play crucial role in the proper functioning of a local body. Because it acts as a source of income. Not all the states in the country charge income tax to their residents. In such states, the proper maintenance and functioning of the amenities largely depend on accumulation of the Property tax. It is a common practice to assess the value of a house by more than one public entity, so as to have a more comprehensive evaluation. Local government bodies then set the mill rates for properties. The taxes collected from these properties are then capitalized in making the services of the community. That could be police, public education, and infrastructure more robust. It’s a known fact that the values of properties change on a regular basis. Thus regular evaluation ensures that fluctuations are well factored into the equation. The following are some of the terminologies that you should be aware of when it comes to property tax.

  • Assessed Value

Assessed value helps local bodies to determine the amount of tax that they can levy on a specific property. Once an inspector comes up with the appropriate value as per various parameters, the same is then used for calculating property taxes. Usually, the assessed value is on the lower side as compared to the property’s fair market value.

  • Millage Rate

It is the amount that you pay in taxes per $1000 worth of your property. The Millage rate is always expressed in the form of pennies and multiplication with the assessed value provides you with the taxes that you owe to the state. 5 mills would translate to $0.005 and for a property of value $200,000 the taxes turn out to be $0.005 * $200,000 = $1000.

  • Fair Market Value

The fair market value helps to calculate the assessment ratio of the property. There is almost always the difference between the valuation provided by the inspector and market value of a property. The assessment ratio differs based on the state that you live in. A house with a market value of $400,000 having an assessed value of $350,000 has an assessment ratio of 87.5%. So the final calculation for owed taxes becomes assessed value*assessment ratio*mill rate.

Whether you like it or not, the property taxes stay with you forever. Therefore taking a close look at the property tax for your state makes a lot of sense.

Check out must-read for Things You Didn’t Know About Rental Real Estate Income

Why Tax Consultant is Important

Why Tax Consultant is Important

by | Oct 27, 2017 | Tax Planning, Tax Preparation

Why Tax Consultant is Important

Before we get started with answering the question, let us first understand what a tax consultant is.

The simplest possible definition of a tax consultant is someone who can help you reduce your tax liabilities by following some of the best practices.

Individuals who qualify as tax consultants are trained with the law and accounts so that they can provide you with ways to manage your money and taxes as well. If you have ever been part of the tax filing process, you would be aware of the cumbersome and tiring process. The hiring of a tax consultant makes that part easy as he assists you with the entire process.

Do you really need a tax consultant?

If you are someone who values each and every penny, hiring a tax consultant might be a very effective decision. You can invest the money that you save by hiring a tax consultant somewhere else and make the most of it. Many times, getting the right advice and right direction towards tax planning can be the defining factor between the good and efficient use of your financial resources. Tax consultants are individuals who are thorough with the tax codes and know all the places where you can save money. By incorporating these practices, deductions and taking tax credits when and where possible you can save a substantial amount of money. What you should not confuse tax consultants with are individuals who help you find loopholes in the system. That is far from the truth and in fact misleading in a lot of ways. They merely educate you with the different clauses that you can benefit from.

  • Seasoned tax consultants have a ton of experience under their belts and you can definitely benefit from the same. Sure, there are tons of consultants available who will offer their services at much lower rates as compared to others. But when it comes to taxes and their filings, it is better to take the commonly used road and pick a seasoned or experienced consultant. The chances of seasoned consultants making mistakes are way less as to consultants who are fresh out of graduation.
  • Hiring a tax consultant can keep you away from the nightmares of technical details of the tax codes, which can be overwhelming for a lot of individuals. The tax experts or consultants undergo exhaustive training before they actually start practicing.
  • As the tax consultants are aware of both the government policies as well as the way the government works, it is much easier for them to route around. It is all about using your resources smartly without breaking any sorts of law or without getting into any troubles.
  • Though being aware of the laws might seem not all that significant, they play a critical role deciding a tax consultant for you. Knowing the laws in and out ensures that you do not get into any legal disputes by taking any of the routes mentioned by the expert. Also, the laws undergo amendments on a regular basis, which can be a bit difficult for a layman to keep track of. A tax consultant, on the other hand, is not only aware of these changes but also very well versed with the same.

If you have some additional source of income, filling up the forms properly can be quite challenging. Be it another job or rent a property, a tax expert would ensure the forms are filled up in the best possible way and at the same time also ensure that you do not pay more taxes than you owe to the government.

 

Taxable Income vs. Nontaxable Income: What You Should Know

Taxable Income vs. Nontaxable Income: What You Should Know

by | Oct 13, 2017 | Tax Planning, Tax Preparation

Taxable Income vs Nontaxable Income: What You Should Know

We all have that feeling that the government is always on the lookout for extracting more taxes from us. That feeling is not too far off if you take into consideration the definition of taxable income.

Once all your deductions are taken away from the gross income, taxable income is what is left on paper.

But things can get pretty confusing when it comes to gross income because as per the laws, income from any source qualifies to be gross income.

It becomes extremely important at such times to take some time off and reflect on the different sources of income and see which of them qualify as taxable and which all as nontaxable. So that you are not confused when the next time you win a jackpot or receive any compensation from your work place. Being aware of them also helps you plan for your taxes more efficiently.

You can also save some money on your taxes if you know it well enough which category a specific amount comes under.

Consider this as a rule of thumb, that any amount or source of money that helps increase your net wealth can be taxable.

Taxable Income

Though this list might turn out to be pretty big, we will try to cover as many sources as possible that qualify as a taxable source of income.

  • Salary from your employer
  • Wage from your employer
  • Any form of commission
  • Any kind of fees
  • Interest received on various fronts
  • Dividends from stocks
  • Compensation when you are unemployed
  • Any tips received
  • Awards and bonus (even if any trips are included)
  • Severance package received
  • Any notes that you receive as part of your service
  • Any form of non-cash income coming out of bartering
  • Rent from personal properties
  • Income or loss from gambling
  • Capital gain or capital loss
  • Financial counselling fees that your employer pays for you
  • Stock appreciation rights
  • Any debt that is cancelled or forgotten
  • Royalties received under any category
  • Back pay awards from any settlements

Any fringe benefits that you receive as part of the services that you provide is also taxable. Some common examples of fringe benefits include:

  • Gym membership paid by your employer
  • Gifts that you receive from your company, even in form of holidays or certificates
  • Vehicle provided by company for personal usage
  • Group life insurance if the same exceeds a certain amount.

Nontaxable income

Now you must be wondering, if there is anything left at all for nontaxable income. But in fact there are quite a few categories left, which are nontaxable. They are:

  • Most of the health care related benefits
  • Any child support money
  • Amount received as inheritance or gifts
  • Cash discounts that you receive when shop from a retailer or dealer
  • Any form of welfare payments
  • Reimbursements from qualifying adoptions

Apart from the above ones, there are a few more instances where certain items are nontaxable.

  • If you are the nominee on someone’s life insurance, the amount you receive on their unfortunate death is nontaxable
  • If your boss or employer provides you with any educational assistance, the same is nontaxable up to $5250
  • Certain companies provide financial assistance for adoption of kids, that amount is nontaxable
  • Compensation that you receive as part of any injury or illness that occurred during working hours or any other federal or state level compensation is also tax exempt
  • Earnings from certain types of bonds are non-taxable

Being aware of different taxable and nontaxable sources makes things a little bit easier when it comes to tax planning. The above points should help you assess if a certain source type is taxable or nontaxable so that you can take appropriate steps.

Don’t forget to check our blog for more Tax related information, Click here now to learn more.