Individual Retirement Arrangements – Do you want savings for the future + less taxing?

Retirement is that phase of our lives when, though we incur lifestyle expenses, our income stream has either stopped or has trickled down.

To meet the ever increasing expenses, a retirement corpus becomes a necessity.

If you are employed, the chances are that your employer has made retirement provisions for you. If you are self-employed, you make your own retirement arrangements. In fact, even salaried employees make their own retirement arrangements? Why, you must wonder. Well, who doesn’t like saving for their future and also save tax in the process?

Individual Retirement Arrangements (IRAs) are like retirement savings accounts.

You can save money in IRAs and use the money to invest in various saving instruments.

IRAs help in creating a retirement corpus while at the same time save taxes. Let us understand how IRAs work –

IRAs are of two types. One is the traditional IRA and the other is the Roth IRA.

Traditional IRAs – in case of traditional IRAs, the contributions you make are tax exempted. It means that you can claim tax exemption on the contribution made to traditional IRA. Later, when you withdraw from the account, the proceeds would be taxable. Thus, traditional IRAs help in deferring your taxes. You pay taxes not on your contributions but on your withdrawals.

Roth IRAs – Roth IRAs are completely opposite from traditional IRAs. In this instance, the contributions you make are included in your taxable income. Thus, you don’t get any tax relief on your contributions. Withdrawals, on the other hand, are tax-free.

You can have both types of IRAs for retirement funding. However, the contribution to both or one account is limited in nature. For 2017, you can make a total contribution of $5500 to any one or both IRAs.

IRA contributions and taxes

Contributions to Roth IRA are a part of your taxable income. So, you cannot claim tax deduction on them. In case of traditional IRAs though, you can claim deduction from your taxable income on your contributions. However, the amount of tax deduction available on your contributions depends on whether you or your spouse has an employer-sponsored retirement plan and the following factors:

• Your filing status
• Your Modified Adjusted Gross Income (MAGI)

Let’s see how:

If you or your spouse are covered by an employer sponsored retirement plan –

If you are not covered by an employer sponsored retirement plan –

IRAs help you create a retirement corpus and also provide tax reliefs either immediately (in case of traditional IRAs) or when you withdraw (in case of Roth IRAs). So, make the most use of IRAs to create savings for your future and also save you tax.

Things You Didn’t Know About Rental Real Estate Income

Having a spare property which you can give out on rent is a very good opportunity of earning additional income. In fact, for some, real estate forms a part of  their only source of income.

Renting and leasing property brings in income and such income is, obviously, subject to taxation.

While you might know that your rental income is included in your taxable income and you pay tax on it, there are some aspects of this rental real estate income which might escape your attention. When it comes to filing your taxes correctly, any error might result in either high taxes or high penalties. Do you want to be a victim of either of these?

I hope your answer is a firm ‘No’ because mine definitely is. So, here are some facts which you might not have known about your rental real estate income:

Your accounting basis determines the inclusion of the rental income in your tax returns

There are two bases of accounting. One is the cash basis wherein transactions are accounted on the date when cash is received or paid for them irrespective of the actual date of such transactions. Other is the accrual basis where you record transactions on their actual date irrespective of when you receive/pay cash for them. For instance, for a transaction done in November where cash is received/paid in December, the cash basis would record the transaction in December while the accrual basis would record the transaction in November itself. In case of rental income too the same concept applies.

If you follow the cash basis of accounting, record your rental income in the tax return in the year you receive it.

For accrual basis, record it in the year for which the rent would accrue.

Tax treatment of advance rent and security deposits

Advance rents are always included in your return on the cash basis irrespective of the accounting basis you follow. In case of security deposits, there are two situations.

If you intend to use the entire security deposit as final rent payments, it becomes an advance rent.

In this case you should include it in the year when you receive the deposit. However, if you intend to return the security deposit at the end of the lease, do not include it in your tax return. If you ultimately return it there was no income on your part. But, if you use any part of the deposit or the total deposit for meeting the rent or any other payment from your tenant, you should include the money used in that year’s tax return.

Rental income can also be in kind

While most of us associate rental income to be in cash, your tenant might also render you some services or pay your rent in kind. Does this mean your income would not be taxed? Alas, no!

Rental income received in kind or by way of a service is also an income and is taxable.

To assess the absolute value of such income, use the Fair Market Value approach. The Fair Market Value of the service or the item received against rent payment would be your rental income for taxation purposes.

Using the property for both personal use and for renting

While you might usually rent out your property, at times, you might use it for personal use as well. In this case, the tax treatment of rental income would be different.

The periods for which the unit was used for personal use and for which it was rented would be used to determine whether or not the rental income would be chargeable to tax.

If, in a month, you used the property for personal use but rented it out for more than 15 days, the entire rental income should be included in your tax return. If, however, you rented it out for less than 15 days and also used the property for yourself, the rental income would not be taxable.

Did you know these facts? I bet you didn’t. Well, these are some common things which we don’t know about rental real estate income and so we err when filing our returns. So, understand these technicalities before you file your return so that the returns are filed correctly and you pay the correct tax due.

Tax Payers, You Need To Know About AMT!!!

Are you earning a handsome income? Do you belong to the upper-middle class society? If you answered ‘Yes’ to these questions, you must be aware of the Alternative Minimum Tax rule when you file your federal income tax.

AMT was introduced to enable high-income generating individuals to pay higher taxes as they often benefitted from tax deductions and exemptions allowed.

AMT recalculates the taxable liability of such individuals using a different method which increases the tax outgo. So, do you know what Alternative Minimum Tax (AMT) is?

What is Alternative Minimum Tax?

Alternative Minimum Tax, or AMT as it is popularly called, is a method of computation of taxable income which is different from the regular computation methods.

While the regular income tax computation method provides tax exemptions and deductions in various aspects, the AMT computation method does not allow many of these deductions and exemptions.

It recalculates the taxable income adding back disallowed deductions and exemptions. So, AMT is a parallel, supplemental tax computation system for individuals with higher incomes.

How is AMT calculated?

The AMT calculation is different from regular tax computation. To calculate AMT, the following steps should be taken:

Step 1 – ascertain your Adjusted Gross Income (AGI) for the year if you have not itemized your deductions.

Step 2 – deduct the itemized deductions allowed for AMT computation. Such deductions include:

• Medical expenses and dental expenses which are more than 10% of the AGI
• Donations to charity
• Interest in AMT investments up to net AMT investment income
• Qualified housing interest
• Casualty losses
• Other miscellaneous deductions which are not subject to the 2% of AGI limitation, etc.

Step 3 – you get the Alternative Minimum Taxable Income (ATMI)

Step 4 – subtract the allowed AMT exemption to arrive at the final taxable liability. The AMT exemption limit changes every year and is different for different filing statuses. For the year 2016, the AMT exemption limits are as follows:

Step 5 – the income post the deduction of AMT exemption is then taxed. This tax is progressive in nature. The first $186, 300 of the taxable income is taxed @ 26% and any income exceeding $186, 300 is then taxed @ 28%.

Step 6 – the aggregate tax computed above is called the Tentative Minimum Tax (TMT). If the TMT is higher than the tax liability computed using the regular process, you have to pay the full TMT.

How AMT differs from regular tax computation?

The process of calculating AMT is very different from the process of calculating the normal tax liability. When calculating AMT, personal exemption (valuing $ 4050) cannot be claimed this is allowed under normal tax computation. Also, various deductions which were allowed in normal tax computations are to be added back to the income as they are not allowed in ATM computation. For instance, the tax-exempt interest from private activity bonds is taxable under AMT as is the difference between the fair market value and the strike price of Incentive Stock Options. State and local income taxes, investment expenses, mortgage interest on home equity debt, medical expenses, etc. are not deductible in AMT computations.

Even your passive income and losses, net operating loss deduction and foreign tax credit are recalculated as per AMT rules.

These adjustments highlight the difference between AMT and regular tax computation methods.

So, to conclude, if you are earning good, calculate your AMT when you file your taxes. Form 6251 helps in calculating your AMT liability and should be carefully filled in. If you are confused, take the help of a tax professional but ensure that you file your returns correctly so that you don’t end up owing the IRS and incurring a penalty for the same.

Should You File Your Taxes Early?

As the New Year begins, most of us have one thought in the first three to four months – filing our tax returns. With the financial year ending on 31st December every year, no doubt that tax filing is on our minds as we progress into the New Year.

The IRS allows you to file your tax returns starting from January while the last date of filing tax return is sometime in April.

For instance, for the year 2016, 23rd January 2017 is the date from which IRS is accepting your tax returns and the deadline is extended till 18th April, 2017. So, when are you filing your taxes?

Procrastination is a very common habit in most of us especially when we are required to part with our hard-earned money. In case of filing our federal tax returns too, most of us delay filing our returns till the last possible time. However, there are many of us who are smarter about filing tax returns. We file our returns early to enjoy the corresponding benefits. Yes, filing your taxes early has various benefits. Want to know what? Find them below:

Benefits of filing your taxes early

Faster tax refunds

The proposition of getting your tax refunded sounds good, doesn’t it? Wouldn’t you like to get the refunds at the earliest? When you file your taxes early, the IRS also refunds any extra tax paid by you faster. As the IRS predicts, more than 75% of tax-payers are eligible for a tax refund which they try and pay within 21 days of your tax filing, you should file your taxes and get the refunds at the earliest.

Lower chances of tax frauds

Believe it or not but there are fraudsters out there who use your personal details to claim your tax refunds. These fraudsters file your taxes in your name at the earliest so that by the time you file your returns (when you are filing late), they can already pocket your refunds. When you file early, you are eliminating the possibility of such fraudsters claiming your tax refunds.

Better chances of arranging the funds to pay the due tax

When you prepare and file your returns early, you get a clear picture of the actual amount of tax you owe the IRS. Since you can pay the outstanding tax by the deadline in April, you would have enough time to arrange for the funds which would be required to pay off your taxes due. When you file late, you discover the tax amount late too and by that time you might not be able to arrange for funds before the deadline. Non-payment of your taxes by the deadline would then incur penalties and fines. To avoid this situation, you should, ideally file early.

Higher chances of preparing the correct return

When you have time, you can prepare your tax return slowly and correctly. This way you could avoid the mistakes while preparing your returns which ultimately lead to penalties and fines. When you delay till the latest possible date, you tend to hurry which causes errors in your tax returns.

No need to file for an extension

You can file for a tax extension if you feel that you wouldn’t be able to file your return by the expected deadline. Though the IRS allows such extensions, you need to undertake a lot of paperwork and complete different formalities. Moreover, if you are not able to pay your taxes even within the extension tenure, you would be penalized or charged a fine. You can avoid all this when you file early as early filing gives you enough time so that you don’t have to file for an extension.

Wise men have said that the early bird catches the worm and so, an early tax-filer also gets to enjoy the benefits. Since filing your taxes is a mandatory requirement, why delay, especially when delaying has so many disadvantages? File your tax today and get rid of worrying about your tax returns.