Correlation between Exempt and Refund

by Mounica Kota | Mar 3, 2021 | 2021 Tax Returns, Blog, Tax Planning, Tax Preparation, Tax Refund

Correlation between Exempt and Refund

According to the IRS guidelines, a tax refund would be obtained by a taxpayer only when extra money has been paid by the taxpayer to the Government. It is quite usual that additional money has been withheld from a taxpayer’s paycheck and this can result in a tax refund. Moreover, there can be additional tax deductions and credits which can help reduce a taxpayer’s tax liability thus, resulting in a tax refund.

However, there can be a scenario when money has not been withheld from the paycheck of a taxpayer. In such a case, will the taxpayer be eligible to obtain a tax refund even though he is tax-exempt?

What does it mean to be tax-exempt?

When a taxpayer is filling the Form W-4 from his employer, he would be adding up his withholding allowances. If the income of the taxpayer is less than his Standard deduction then he would be exempted from paying any Federal Income Tax.

But, in case a taxpayer has some tax liabilities in the previous year or owes to have some tax liabilities in the present year then he cannot be tax exempted. If a taxpayer had $1 of tax in the previous year or even expects earning more than the sum of his Standard Deduction i.e. $12,400 for Single taxpayers, $18,650 for the Head of the Household or $24,800 for those who are married and filing tax return jointly then it is not possible to be tax exempted in the current year. When a taxpayer is exempt, he has no amount being withheld from his paycheck thus, leading to no refunds as well.

However, there can be certain conditions in which a taxpayer can be eligible to receive a tax refund even if he is exempted from paying any taxes.

Refundable Tax Credits

Taxpayers can receive tax refunds even if they are tax exempted if they can qualify for obtaining a refundable tax credit. Refundable tax credits are those which can help in creating negative tax liability thus, resulting in a tax refund even if taxes have not been paid by you.

Let us have a look at the most common Refundable Tax Credits which can help in obtaining a tax refund even if tax-exempt.

The most common Refundable Tax Credit is the Earned Income Tax Credit. The Earned Income Tax Credit can mainly be available to those taxpayers who are earning in the low to moderate-income bracket. In case a taxpayer is exempt and he has earned any income, he can be able to claim this credit. This can help obtain a tax refund even if there have been no taxes withheld from the taxpayer’s paycheck.

Another common refundable tax credit is the American Opportunity Credit. This refundable tax credit would be helpful to offset the certain costs that are associated with higher education and would be refundable up to 40%.

Exemption claim from withholding

If a taxpayer is not able to claim exemption from his withholding, he would still be able to reduce the amount withheld from his paycheck. This can be done easily by updating the Form W-4 and changing the withholding. The IRS has redesigned the Form W-4 and now the form available in the W-4 Employee’s Withholding Certificate. The earlier version was known as the W-4 Withholding Allowance Certificate and it has been updated for reflecting the changes. The major change in the tax system was that there has been an elimination of the personal allowances as allowances are connected with the dependents of taxpayers and with personal exemptions which have been removed. The Form W-4 which has been redesigned would consider if a taxpayer would be able to claim the Child Tax Credit and if he would be able to claim tax deductions that are different from the Standard Deduction.

Conclusion

Hence, before considering that any tax refund would not be received from the Federal Government taxpayers must understand their eligibility for the Refundable Tax Credits. Taxpayers might get some tax refunds even after being tax-exempt, but this is only feasible if the tax returns are filed.

2nd Generation Indians in the US: Did you know that you can avail Family Tax Deductions and Credits?

by Mounica Kota | Mar 1, 2021 | 2020 Tax Returns, 2021 Tax Returns, Blog, Tax Planning, Tax Preparation, Uncategorized

2nd Generation Indians in the US: Did you know that you can avail Family Tax Deductions and Credits?

In the US, due to various practical and cultural causes, many families reside in their multi-generational homes. Over more than 60 million Americans tend to live with their families due to the various benefits this can offer. Sometimes, living together with families can be the reason for certain chaos; however, the advantages would always be more than chaos.

If you are an Indian staying with your family in the US, then while filing your tax returns there are certain benefits related to family which you must be aware of. You must ensure that you are taking the advantage of these tax deductions and credits while you file your tax returns.

Tax deductions on home

If you are the owner of a house, then you would be eligible to claim certain tax deductions. Let us check out some of these deductions.

Points

In case, you have origination fees or points being paid for your new house to obtain a particular rate from your lender then that fee is deductible from your taxes. Moreover, if you had paid points when your house was purchased then you would be able to deduct those points in the year you had paid them. In the case of refinancing your home, you would have to do a points deduction over the loan life.

Interest

In case of a home purchase with the help of a home loan then you must have paid the mortgage interest. You are eligible to make a deduction for the mortgage interest that has been paid during the current tax year and has been reported on Form 1098.

Taxes on property

Taxes paid on property are very expensive and can be deductible from your taxes if you have paid them. For the tax year 2020, your taxes on property or State Income tax withholding should not be more than $10,000 in total.

Tax Benefits on Family

As a parent, you would be able to avail various tax benefits while filing your tax returns.

If your child is below the age of 13 years and was using daycare facilities in the last year then you would be eligible to claim the Child and Dependent Credit. For one dependent child, you can claim up to 35% of the $3000 that has been incurred in the daycare. For two or more than two dependent children, you would be able to claim up to 35% of the $6000 incurred in the child-care expenses.
If you are working, then another tax benefit that would be advantageous for you is the Earned Income Tax Credit. If your family has three kids, then you can claim a tax deduction of up to $6,660. Last year around 25 million taxpayers were able to receive the Earned Income Tax Credit and the average Earned Income Tax Credit for each taxpayer would be around $2,476.
Under the tax reforms, the dependent exemption was eliminated. But by the Child Tax Credit, you would be able to claim up to $2000 for each child who is below the age of 17 years and is a dependent. In case of your children being above the age of 17 years, you can claim the credit for non-child dependents which would be $500.
You can also be eligible to avail of the American Opportunity Tax Credit (AOTC) if your kids are dependents and are studying in college. The American Opportunity Tax Credit is a refundable tax credit that would be up to $2500 for each student for the first four years of their college.
In case, you are not qualifying for the American Opportunity Tax Credit, you can avail the option of Lifetime Learning Credit. The limit for this credit is up to $2000 for each tax return and you can claim it even if your dependent has attended one class in the college.

Financial support for elderly family members

If you have been providing monetary support for your parents or grandparents, then it is feasible to claim them as dependents while filing your tax returns.

You can be a qualified relative to claim dependents only when you have provided more than half of the financial support for your parents/grandparents in the year 2020.
In the year 2020, the taxable income of your dependents must have been less than $4300.

Conclusion

Hence, you might be staying in a nuclear family or a joint family setup; you must be aware of the tax deductions which you can claim for your dependents and family members.

How to check the status of your Second Stimulus check?

by Mounica Kota | Feb 28, 2021 | Tax Planning, Tax Preparation

How to check the status of your Second Stimulus check?

The US Government has come up with a new coronavirus relief package and the second stimulus check for providing a considerable amount of financial support to the Americans during times of pandemic.

The dispatch of the Second Stimulus Check for millions of Americans had already started. However, there had been an error committed by the IRS while the dispatch of the Second Stimulus Checks. This has caused a lot of Second Stimulus payments to be deposited into different wrong accounts. As a result, millions of Americans have not been able to receive their Second Stimulus payments yet.

However, the IRS has confirmed that it has been working very fast on this error and the funds have been re-deposited into the respective accounts again. So, those Americans who are waiting anxiously for obtaining their Second round of Stimulus payment would be receiving it soon.

Get My Payment Portal

If you are wondering about the status of your Second Stimulus check or payment, then the “Get My Payment” tool of the IRS would be of great help to you. This tool can be considered as an updated version of the IRS tool that was used to track the status of your First Stimulus Check payment.

The “Get My Payment” Portal would help obtain the below-mentioned information.

It would help in checking the status of your Stimulus payment.
The tool would also help in the confirmation of the type of payment to be used for obtaining the Second Stimulus Payment i.e. either by the Direct Deposit method or by the Paper Check method.
The “Get My Payment” tool would also help receive a tentative or projected delivery date for the Direct Deposit or the Paper Check method.

However, there are some changes in the tool for the Second Stimulus Payment round. The bank account information in the “Get My Portal” cannot be changed or entered for the payment to be directly deposited into the bank account. The IRS is using the information it already has in the Tax return file to issue the Second Stimulus payment.

The IRS would obtain the bank account information for an individual from the below-mentioned:-

The tax returns of 2019 or
The online registration tool of the IRS that was used by the non-filers for receiving the first round of the Stimulus payments or
Any federal agency which is sending benefits such as the Railroad Retirement Board, Veteran Affairs, Social Security Administration, etc. or
“Get My Payment” Portal if the information has been entered before 22nd December 2020.

Moreover, it might have happened that the Second Stimulus check payment was sent with the help of mail as the deposit was not accepted by the bank. The major reason underlying this can be incorrect bank account information. There might have been a delay in your receipt of the payment if the post office would not have been able to deliver the payment to you. However, you cannot use the “Get My Payment” tool for updating your current address.

Access denial with the Get My Payment tool

Taxpayers might face the issue of access denial while trying to check their Second Stimulus check payment. Some of the major causes which can be responsible for the access denial can be:-

If you have not filed your tax returns for the year 2019
If you have not used the tool “Non-filers: Enter Payment Here” by November 2020 for receiving the first round of your Stimulus Check payment.
If the IRS does not have adequate information from any federal agencies for processing your payments as you had been receiving Social Security benefits and other federal benefits from these agencies.

Conclusion

So, with financially difficult times dooming all over the US it is quite obvious for people to be anxious about the status of their Stimulus payment. The “Get My Payment” tool would help have an idea about your payment and even understand the cause behind the delay.

If your Holiday Bonus was also taxed?

by Mounica Kota | Feb 19, 2021 | Tax Extension, Tax Planning, Tax Preparation

If your Holiday Bonus was also taxed?

December is the holiday season and the perfect time for giving gifts. It is the time when your employer might even plan about giving bonuses to you. This would reflect a sense of gratitude towards you for the good services you have provided across the year. When you come across the news that you would be receiving a bonus this holiday season, it’s obvious for you to make certain plans about how to spend your extra income you receive.

However, you must remember that the holiday bonuses you receive would be considered as compensation exactly in the same way as that of your salary paychecks. So, taxes would be withheld from the holiday bonus you receive.

Now, let us have an idea on how and in which way the holiday bonus you receive would be taxed.

Social Security Tax

In the year 2020, you would have to pay Social Security tax on all the compensation you have received up to $137,700.However, if you have not reached up to that limit, and then your employer would deduct around 6.20% from the bonus you would obtain for the purpose of Social Security.

Federal Income Tax

When you are receiving your bonus and it is an additional income for you, then the IRS would definitely withhold a flat percentage from your bonus. Earlier, the federal income tax rate which would be withheld on the bonus was 25% which has been reduced to 22% now. Moreover, your employer can combine your salary and bonus and then withhold the taxes from the entire amount. This would be much higher than 22% but you should be assured that the money which has been withheld would not be lost. The tax rates on your bonus would be much higher than the actual tax rate levied on the total income you have earned. So, while filing your tax returns you would get back some of the amounts as your federal tax return.

Medicare Tax

You would be paying Medicare taxes on all the compensation that you have received and hence, another 1.45% would be deducted in the form of Medicare Tax.

State Income Tax

Most of the states would impose Income Tax separately on the bonus that you have received. So, the State Income Tax would be withheld at the same rate as determined by the State Law.

Contributions towards Retirement Plan

In case, you have decided along with your employer to withhold a particular percentage from your salary as a contribution made towards your retirement plans such as a 401(k)plan or any other plan then it would be withheld from your supplemental income or bonus.

For example, if you and your employer have decided together on the withholding of 15% from your salary towards your retirement plan then 15% would be withheld from your bonus currently. So, this might be harder on your finances as of now but it will help in having a larger fund for your future after you retire.

So, now by adding all this resulting amount would be deducted together from your supplemental income/bonus. However, you must keep in your mind that today you would be obtaining the bonus and you can even get some amount back in the form of a tax refund

Conclusion

Hence, if you are having some supplemental income in the form of a bonus then you are supposed to pay taxes on them.

Indians in the US must file taxes irrespective of their immigration status

by Mounica Kota | Feb 16, 2021 | Tax Planning, Tax Preparation, Tax Refund, Taxtips

Indians in the US must file taxes irrespective of their immigration status

You might have moved to the US a few days ago or some years back, but if you have earned any kind of income in the US which might be cash or check the IRS should be intimated about it irrespective of your immigration status.

Since the tax filing has opened for the US taxpayers, this is the right time to file your taxes even if you are a non-resident in the United States.

For the Indians residing in the US, the tax filing time can be confusing with a lot of scenarios making it difficult to understand if tax filing should be done or not. Let us check out some such circumstances or scenarios where tax filing can be confusing for the Indians in the US.

If you do not have your Social Security Number

The tax returns with the IRS should have a Personal Identification Number. Mostly, taxpayers use their SSN (Social Security Number) for this purpose. But, if you do not have an SSN or you are not eligible to have an SSN then what needs to be done?

Since 1996, the IRS has been handling such a situation by issuing ITINs i.e. Individual Tax Identification Numbers. This would be helpful for those taxpayers who are not eligible for obtaining a valid Social Security Number (SSN). The ITIN can be obtained by the use of the W-7 Form and it takes around 6-10 weeks for receiving it after the completion of the processes. However, if you are a Non-resident Indian and do not have an ITIN then you can even send your tax returns along with your Form W-7. You would also have to send some documentation for the confirmation of your identity. If you are filing your tax returns for the first time then this option is a convenient one.

One more step that would be necessary here is to have enough documentation for supporting the income and expenditure which you can claim on your tax returns. A major part of these documents is mainly provided by either your employer, the Government, or any financial institution.

If your immigration status has not been formalized

Even if your immigration status has not been formalized, you can still file your tax returns in a hassle-free manner. The information present on your tax returns would remain confidential and would not be shared by the IRS with any entities except a few Government entities. The law “Taxpayer Bill of Rights” provides the right to privacy for each taxpayer which means irrespective of your immigration status if you are filing your tax returns the IRS would not make any unnecessary investigations. So, you are filing your tax returns and maintaining your compliance with the law.

Will there be any benefits if you decide to file your tax returns irrespective of your immigration status?

Even if your immigration status is not formalized, you can get a couple of benefits by filing your tax returns. If you are an employer, then you must have paid taxes during the entire year and there are chances that you might have paid much more than you owed. So, you can file your returns and get tax refunds.

Moreover, some tax credits can be very beneficial irrespective of your immigration status. With these tax credits, you can get tax refunds even in case you do not owe any taxes to pay. The Child Tax Credit (CTC) can give you up to $2000 tax credits and the Additional Child Tax Credit (ACTC) would give $1400 refundable tax credits.

Furthermore, by filing your tax returns you are beginning the process of becoming a permanent resident of the United States. You can prove your good moral character by filing your tax returns on time.

If you are self-employed

If you are self-employed or have your own business, then you would have to maintain a lot of records related to your income and expenditure. This is quite tedious and you would have to do a lot of work for this record maintenance. However, you can find various tax return filing online tools which would provide you with QuickBooks to track your income and expenses throughout the year.

Conclusion

So, the immigration status of an individual residing in the US cannot be a blocker while filing his tax returns. Filing tax returns diligently and on time is a sign to be compliant with the law which must be practised by all the individuals living in the country.

What exactly is Earned Income Tax Credit?

by Mounica Kota | Feb 12, 2021 | 2021 Tax Returns, tax filing, Tax Planning, Tax Preparation, Taxtips

What exactly is Earned Income Tax Credit?

The Earned Income Tax Credit (EITC) is helpful in obtaining a tax break for those individuals and families who have low-to-moderate income categories. In case, you are eligible to claim this credit you would be able to reduce your taxes and increase your tax refund. The refund you would obtain would be the amount of your credit if the EITC credit is more than the amount of taxes you owe.

According to the IRS report, around 25 million taxpayers from the US have received EITC last year and the average EITC received was approximately $2,461. However, millions of Americans are still unaware of the advantages that can be availed by the Earned Income Tax Credit. There are a lot of Americans who miss out on the EITC as they are qualified for claiming the credit newly or they do not file the tax returns as their income falls below the filing limit of the IRS.

Eligibility to claim the Earned Income Tax Credit

You would be eligible to claim the EITC in case you can meet the income limits that are mentioned below.

You must be a US citizen.
You are above the age of 25 years or you are having qualifying children.
You are not filing your tax returns under the status “Married filing separately”.
You are obtaining your Earned income from employment and the unemployment income does not count.
You would be qualifying for EITC if you are obtaining your income from any home business or you provide services.

Income limits to be eligible for claiming EITC

The income limits are adjusted every year and for every year the earned income and AGI (Adjusted Gross Income) must not be more than the below-mentioned figures.

$50,594 for those filing tax returns as single with three or more qualifying children or $56,844 for those married and filing tax returns jointly with three or more qualifying children.
$47,440 for those who are filing their tax returns as single with two qualifying children or $53,330 for those who are married and filing tax returns jointly with two qualifying children.
$41,756 for those filing tax returns as single and having one qualifying child and $47,646 for those who are married filing their tax returns jointly and having one qualifying child.
$15,820 for those filing tax returns as single and having no qualifying children and $21,710 for those who are married filing their tax returns jointly and having no qualifying child.

What is the amount of credit?

The actual amount of credit you can claim would depend on your income and the number of your qualifying children. The maximum credits that can be obtained for the tax year 2020 are mentioned below:-

$6,660 for those who are having three or more than three qualifying children
$5,920 for those who are having two qualifying children
$3,584 for those taxpayers having one qualifying child
$538 for those taxpayers who have no qualifying children

What do you mean by a qualifying child?

For a child to be qualifying for the EITC, there are some tests which the child must meet.

Age –
The child must be below the age of 19 years or the age of 24 years if he is a full-time student or he can be of any age if he is permanently disabled.

Residency –
You and your child should have lived in the US together for at least a period of more than half a year.

Relationship –
Your qualifying child can be your son, daughter, stepchild, foster child, or your brother, sister, half brother or sister, or step brother/sister.
Joint Return – Your child would not be a qualifying child for claiming the EITC if he has filed a joint return.

Conclusion

Hence, EITC (Earned Income Tax Credit) is one of the best credits which can be of great advantage for those Americans who are struggling with their finances. Qualified tax software must be used by the Americans to maximize their EITC. However, it is advisable not to commit any fraud to obtain the credit as it can lead to being penalized by the IRS.

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