How to make the most of your capital losses in 2020?

by | Oct 24, 2020 | capital losses, tax filing, Tax Planning, Tax Preparation, Tax Refund, Taxtips

How to make the most of your capital losses in 2020?

Capital gains can be said to be the profits that are made when you can sell an investment for more price than at which you have purchased them. On the contrary, if the investments you have made sell at a price which is less than the price at which you bought them is known as Capital Loss.

 If you have incurred some capital gains this year and you also have some capital losses in your portfolio, then you can consider the harvesting of these capital losses. By harvesting these losses, you would offset the gains as a result of which you would not have to pay any taxes on the Capital gain income. This process is also termed as Tax-loss harvesting.

 Let us check out the process by which you can begin the process of offset of your capital gains by the harvest of capital losses.

 

Computation of the gains

 You should make a list of the sale you have done related to your stocks, bonds, and real estate during the year. You can add the capital fund dividend which you are expecting into your mutual funds.

 

Offset the losses which have been realized

 This would include the various stocks you had purchased when the stock market was high. You even thought or expected the stock market to go higher. However, you had to sell your stocks at a point when the stock market dropped.  You also had to sell your stocks at a price that was lower than your purchase price. Moreover, while this process of loss offset you should not forget about the loss carryovers from the previous years. You would be able to find the loss carryovers on Page 2 of the previous year’s Schedule D of your income tax return.

 

If gains are more than losses, check out for unrealized losses

 It might be the scenario that you are holding on to a stock whose prices have dropped. You might be hoping that the prices of the stocks would increase or they will regain their value. You can consider this time as the best time to sell the stock that you have been holding.

 

Checking of the Income Tax bracket

 Before you decide to sell your stock which has dropped in value, you must think about taking some advantages out of the lower capital gain tax rates. For most people, the maximum capital gains rate is around 15%. The rate at which the capital gains are taxed varies according to your taxable income and your filing status i.e. Single, Married and filing jointly, Married and filing separately, Head of the Household.

 

Wash Sale Rule

 The awash sale is said to occur at a point in time when you are either selling or trading securities/stocks at a loss. This wash sale occurs within 30 days of before or after the sale of the securities.

  1. You can purchase substantially identical securities.
  2. By a fully taxable trade, you can acquire substantially identical securities.
  3. Substantially identical securities can be acquired by the use of a contract or option.

If this is done then any loss incurred on the sold assets can be disallowed by the IRS.  However, there are a few steps that can be taken to ensure that the capital loss incurred can be used to offset your capital gain.

  1. You must wait for a minimum of 31 days before you start re-investing into another Stock Fund.
  2. The next step is to invest in a similar type of fund.

 In case, you have disallowed the loss incurred from a wash sale, then you must add up the cost of the disallowed loss into the cost of new securities. This would lead to an increase in the cost of your new stock and also reduce the gains on the sale of the newly purchased stock.

 

Avoid harvesting too many losses 

 After you have offset the losses which you have incurred against the gains, the excess losses could reduce up to $3000 of the ordinary income obtained from employment or different other sources. In case, your capital losses are much more than that then the excess losses can be carried over to the upcoming year.

 

Conclusion

 So, these above-mentioned techniques and strategies would help you in making the complete use of capital losses in the year 2020.esting.

Covid-19 tax implications for the unemployed NRI’s in the US

by | Oct 12, 2020 | capital losses, Tax Extension, Tax Planning, Tax Preparation, Tax Refund

Covid-19 tax implications for the unemployed NRI’s in the US

The pandemic COVID-19 has led to a complete economic setback across the United States. Many businesses have been closed down some partially and some completely. Millions of Americans have become unemployed and are facing various financial crises. The US Government has provided various tax reforms to alleviate the economic stress faced by the Americans during these challenging times.

Let us talk about some of the major tax implications for the unemployed NRIs during this distressful COVID period.

Unemployment compensation

For Income Tax, the unemployment compensation offered is taxable. This would include the unemployment benefits obtained from State and the $600 which has been received from the Federal Government. You will have to inform us about this total amount received on Form 1099-G. You must spend your benefits after considering the consequences.

Federal Income Tax Withholding

To avoid surprises, you can opt to choose for Federal Income Tax Withholding from your unemployment benefits obtained during the year. This process would be almost similar to withholding on from your paycheck thus; you would owe less at the tax time.

Estimated Payments

You might be feeling that you would owe more at the tax time; to avoid this you can make estimated tax payments throughout the year. You can keep on making estimated tax payments throughout the year and thus, avoid a potential penalty. Moreover, the IRS has waived any penalty and interest on the tax payments which were due on 15th April 2020 which was later on extended to 15th July 2020.

Retirement Plans

Any withdrawal which you are making from your retirement plans or pension plans is considered to be taxable unless they are being transferred to an IRA. Under the provisions of the CARES Act, this tax is not due at once. You can make the payment of this tax in three years. You must check with a tax advisor if you are planning to make a withdrawal from your retirement plan as the taxability of the retirement income can be complicated.

No penalty on early withdrawal from retirement income

In general, there is a 10% early withdrawal penalty on making any withdrawal from your Retirement account before you reach the age of 59-1/2 years unless it is an exceptional case. However, this year you are eligible to withdraw up to $100,000 from your IRA or 401(k) plan without having to pay any penalty. But, you will have to pay Income Tax on the withdrawal you make in the form of Retirement Income or Accrued benefit.

Loan against 401(k)

If you need extra cash, you can take a loan against your 401(k) plan. You would be able to borrow up to 100% of your account balance or $100,000, whichever is less. At the time of re-payment, you would be able to defer the payment and pay back the loan in five years without any taxes applied. However, you must check with the authorities before opting for this as the implications might vary for different plans.

Contributions made to the IRA

If you have made any contributions to your IRA and now to need the money back, you can avail of this benefit as well. The contributions made to the IRA if returned before your date of tax return filing can be withdrawn without paying any penalties. You are eligible to take out the contribution and any dividend which has been earned. However, even if you make the contribution back you will not be able to claim a deduction for the contribution made initially on your return.

Insurance premium costs

Now since you are unemployed, you will be responsible for making the payment of your health care costs. So, you are eligible to deduct the cost of the health insurance premiums including the COBRA costs as the Medical expenses. You can include the costs related to these premiums and other eligible medical expenses on Schedule A when you itemize your deductions. However, you should keep in mind that only those expenses are deductible which can exceed 10% of your AGI i.e. Adjusted Gross Income. Moreover, you can also use the money from your HSA (Health Savings Account) for making the payment of the medical expenses. Even if you lose your job, the money present in the HSA is yours. 

Available Tax Credits

You should not overlook those credits for which you had not qualified when you were employed. In the previous years, your income might have exceeded the threshold for the Earned Income Tax Credit (EITC) but you would be eligible to avail the credit now. If you meet the Earned Income Restrictions and other criteria now you can obtain the credit.

Conclusion

So, even if you are unemployed there are several methods by which you can avail of certain benefits, credits. You must resolve any queries which you have about the credits and deductions so that the tax which you owe can be reduced.

The 2020 guide for tax checklist for newly married couples in the US

by | Oct 8, 2020 | 2020 IRS Form W4, 401(k), Tax Planning, Tax Preparation, Tax Refund

The 2020 guide for tax checklist for newly married couples

in the US.

On your wedding day, taxes can be the last thing in your mind; but, tying the knot can have a huge impact on your tax situation. 

  • In the tax year 2020, single people would pay tax at the rate of 37% on the taxable income which is above $518,400.
  • For those married couples who are filing their tax returns jointly, the threshold is just $622,051 which is far from double the amount which is available for the single taxpayers. This can be a very significant tax penalty.
  • However, there are some cases in which the married would also get a marriage bonus. This means married couples would pay less income tax than they would have paid in case of being single.

 Here is a checklist of the important items which you must review if you are a newly married couple.

 

Change of name and address

 Name Change

 If you are changing your name through your marriage, you must report it to the Social Security Administration. Your name on your tax return must match the name which is present on the file at the SSA. If there is a mismatch, then it can lead to a tax refund. For updating this information, you can fill out Form SS-5. You can take the completed form to the local office of the SSA along with the documents which would prove your identity and a certified copy of your marriage certificate.

 In case, you are already at the tax filing deadline but have not changed your name with the SSA then you can file a joint return with your spouse by using the name mentioned in your Social Security Card.

 Address Change

 If there has been a change in your address due to marriage, then you must inform it to the IRS and the US Postal Services. You can do this by filing the IRS Form 8822 Change of Address. The postal services must be informed to forward your mails to your new address by going online at USPS.com or by visiting the local post office.

 Withholding

 After marriage, you and your spouse must change the withholding. This can be done by filling out a new Form W-4. Newlywed couples must give this new Form W-4to their employers within 10 days. When both the spouses are working, they would move into a higher tax bracket or can be affected by the Additional Medicare Tax. The IRS Withholding Estimator on the website IRS.gov can be used to complete the new Form W-4.

 

The IRS has revised the Form W-4 for the tax year 2020. The new form would help determine how much federal income tax must be withheld from your paycheck based on your

  1. Filling status
  2. Other income
  3. Credits and deductions

 Filing Status

 Married people would be able to choose to file their income taxes either jointly or even separately. Even if filing jointly is more beneficial, it is good if you find out which works the best among both the ways. If you are married as of 31st Dec of the tax year, the IRS would consider you to be married for the full year.

 However, after marriage the process of filing tax returns with the Married filing separately Status would rarely work in reducing your tax bill. If you are choosing “Married but filing separately” Status, then it would have some special rules such as.

  1. You cannot deduct Student Loan Interest.
  2. You cannot claim the Earned Income Tax Credit
  3. You cannot claim the Child and Dependent Credit
  4. Your deduction related to Capital losses is limited to $1500 instead of $3000 which can be in case of a joint return.

 Scams

 You need to be aware of and avoid the various tax scams. Any contact by the IRS will not be initiated by using the email, phone calls, or any other text messages. You can check out your details or if you think you owe money to the IRS, and then you must visit the IRS webpage and view your tax account.

 

Conclusion

 So, these tax rules and checklist would give you a clear idea about how your tax is going to be impacted after your wedding. You must know about the changes that would occur and the steps you must take to be eligible for availing the tax benefits after being a married couple.

Types of interest that is eligible for Debt-Tax Deductible

by | Oct 7, 2020 | income tax, IRS, Tax Planning, Tax Preparation, Tax Refund, taxes

Types of interest that is eligible for Debt-Tax Deductible

There is a number of debts that would accrue interest on them such as student loans or home mortgage, etc. When the interest accrual is for a longer period, the repayment amount goes on increasing and it turns out to be quite expensive to repay them. If you have several debts then, it is quite obvious for a lot of interest to get accumulated quickly. You might be having low-interest rates but then the only way to pay off is by reducing your outgoing expenses.

 Is the interest levied on debt tax-deductible?  It might be sometimes; however, it might depend on the type of interest and many other criteria.

 Let us find out the types of interest which can be eligible for a tax deduction.

 

The interest which is eligible for a tax deduction

 

Student Loan Interest

 A large number of the students are under the burden of debts due to the Student loan and to reduce the burden caused by these debts, the IRS provides a tax deduction on the interest which is levied on the Student loan. By the Student loan interest deduction, you can deduct a maximum of $2500 from your income which is taxable as long as the Modified Gross Income (MAGI) of your previous year is less than $70,000. The student loan must be taken either by you, your spouse, or a dependent. The loan must have been taken by you for educational purposes during the period in which you, your spouse, or dependent was enrolled for at least part-time into a degree course.

 

Home Mortgage Interest

If you are borrowing money for purchasing a home, then you might have the eligibility to avail of the mortgage interest deduction. According to the regulations of the IRS, if you have bought your house after 15th December 2017 you can be eligible to take up to $750,000 in the form of the interest deduction. Moreover, this is also applicable to those mortgages which are up to $1 million and have been purchased before 15th December 2017.

 If you are paying home equity loan debt, you can be eligible to take the advantage of the home mortgage interest deduction. However, this is feasible only if you are utilizing the home equity loan for purchasing, constructing, or improving the home which secures your home equity loan.

 If you want to claim your interest deduction on a home mortgage, you will require the IRS Form 1098 or the mortgage interest statement which you would obtain from your lender. You would also need proper records that would document the details of your home and mortgage. Moreover, you would obtain the need to obtain the Schedule A too for claiming your itemised deductions. You must carefully read the IRS Publication 936 to get more detailed insight into the types of documentation that the IRS would need to check for your deduction approval. 

 

Margin Debt Interest

 In case you are borrowing money from a particular lender for investing, then you would be able to claim a deduction for the interest on the margin debt that has been incurred by you. The value of the deduction is capped at the net taxable income obtained from the investment which you would be able to claim during a tax year; however if you do not have any net taxable income obtained on the investment to claim you can easily carry forward the remaining interest expense.  By this, you will have the ability for interest deduction from the net taxable investment income in the next tax-filing year.

 The tax deduction for the margin debt interest can be calculated by the use of the IRS Form 4952.

However, you can even calculate the margin interest which is deductible by the below-mentioned steps.

  1. You consider your gross income and perform subtraction of qualified deductions, net gains, and all other expenses incurred from investment.
  2. The remaining number obtained is your net investment income.

Let us suppose, you have $1000 as your investment income and $500 as your interest expenses you would be able to deduct $500 on your tax returns obtained.

 

Business Loan Interest

 Business loans would help in providing funds for the expenses incurred in the operation and growth of your business. There are several uses of business loans and can include the accommodation of lines of credit to property mortgages. Business loans also accrue interest over time and this interest accrued is tax-deductible.

 The major conditions which determine the tax deductibility of the business loan interest would include the type of business loan you have procured, the relationship between lender-debtor, legal liability for the debt and a proper agreement from both lender and debtor for the debt to be repaid.

 Some of the common categories of business loans which would be eligible for small business deductions are:-

  1. Term loans
  2. Short-term loans
  3. Business lines of credit
  4. Personal loans
  5. Business Purchase loans

You should use the IRS Form 8990 for calculation of the amount of business interest you can deduct for a particular tax year.

  • Sole proprietors and single-member LLCs must claim their deductible interest in the Section –Expenses of Schedule C on Line 16.
  • In the case of partnerships and multiple-member LLCs, the expenses related to these interests on business loans can be claimed by recording in Form 1065 and the “Other Deductions” section.

 

What are the benefits of deducting paid interest?

Your taxable income can be reduced by using the benefit of the interest deduction.

  • By taking the advantage of interest deduction, you would be able to move into a lower tax bracket.
  • Also, you can be taxed at a lower federal rate by utilizing the benefit of the interest deduction.

 

Conclusion

 Hence, the above-mentioned categories of interest are eligible for the deduction of debt tax and would be beneficial for you to have low taxable income.

The top 10 FAQs answered for taxpayers in the US-2020.

by | Oct 4, 2020 | Tax Payers, Tax Planning, Tax Preparation, Tax Refund, Taxtips

The top 10 FAQs answered for taxpayers

in the US-2020.

There have been various changes in the tax laws due to the outbreak of the pandemic COVID-19. Due to the adverse impacts of the pandemic, millions of Americans have become unemployed and are facing a huge financial crisis. To alleviate the situation of economic distress which is being faced by the Americans the IRS has introduced various changes into the tax laws for the year 2020.

 The major change which was announced by the IRS was the postponement of the due date for filing federal income tax returns and for making the payment of the Federal Income tax. This due date was on 15th April 2020 which was postponed to 15th July 2020. Moreover, there would be no accrual of any interest or no penalties for failure in payment of taxes or failure of tax return filing by 15th April 2020. The interest accrual and penalties will begin after 15th July 2020. This relief has been made available for all types of taxpayers such as individuals, an estate, a trust, a corporation, or any business entity.

 Now, since there have been such important tax reforms introduced by the IRS there must be several queries in the minds of the taxpayers.  So, let us have a look at some of the major queries of the taxpayers related to the reforms in the tax laws. 

  • What do I need to do to avail of the extension of tax return filing due date from 15th April 2020 to 15th July 2020?

 No, you do not have to do anything to avail of the extension of the tax return filing due date to 15th July 2020. You will not have to file any additional forms or contact the IRS to avail of this relief in the tax filing deadlines. If you have to pay any taxes that are due, you can do that by 15th July 2020. After 15th July 2020, if you need a further extension then you would have to file a request for an automatic extension.

  • Is there a need to be sick, quarantined, or have any impact from COVID-19 to qualify for this relief?

No, you do not have to be sick, quarantined, or impacted by the COVID-19 in any form to avail of this tax relief introduced by the IRS.

  • How and by when do I need to make the payment for my first and second quarter Estimated Income Taxes 2020?

 The due date for the first quarter and second quarter Estimated Income Taxes was on 15th April 2020 and 15th June 2020. However, you can make both the payments by 15th July 2020. You can do this in the form of a single payment with an amount that is adequate for covering both the first and second quarter Estimated Income Taxes 2020.

  • What would be the due date for the rolling over of the entire or a portion of a qualified plan loan offset into a retirement plan?

If you are filing your Federal tax returns by 15th July 2020, then the due date to roll over a part of a complete qualified plan loan offset into an eligible retirement plan is by 15th October 2020.

  • I had made an excess contribution to my IRA during the year 2019. Is it feasible to avoid the excise tax if I withdraw the excess amount by 15th July 2020?

Yes, you can avoid excise tax if you withdrew the excess amount contributed by 15th July 2020. But, you must not have taken any deduction for the excess contribution which you have done. Moreover, you can even avoid the excise tax if you withdrew the excess amount not only by 15th July 2020 but also by 15th October 2020.

  • Are the tax return filing and payment deadline for exempt organizations, businesses, or any other entities which have the due dates for filing on 15th May 2020 or 15th June 2020 have been extended?

All the tax return filings and payments related to the Federal taxes which are from 1st April 2020 till 1st July 2020 have been postponed to 15th July 2020.

  • I wanted to file a claim for my Tax Refunds for the year 2016. This has to be done by 15th April 2020. Do the tax relief laws allow this claim to be done later?

   Yes, with the changes in tax laws you can file your claim for obtaining tax refunds for the year 2016 by 15th July 2020.

  • What do I need to do in case I have filed for an automatic extension for filing the 2019 tax returns? I owe Federal taxes to the IRS.

 You can file your tax returns by 15th October 2020; but, you will have to pay your taxes by 15th July 2020.

  • Has the IRS postponed the tax return filing deadlines for partnership firms and S-corporations which were due on 16th March 2020?

No, there has been no postponement by the IRS for the tax return filing deadlines for the partnership firms and S-corporations that were due on 16th March 2020. This tax relief is only for filings and payments which are after 15th April 2020 and before 15th July 2020.

  • Does this relief give me more time to contribute to my IRA, HSA, and Archer MSA?

Yes, you can make contributions to your IRA, HSA, and Archer MSA at any time in a year or by the tax return filing due date.

Hence, these common FAQs on the tax payments related to 2020 will resolve your queries related to the tax return filing and tax payments.

Does it make sense to file your taxes early?

Does it make sense to file your taxes early?

by | Jan 20, 2020 | income tax, tax filing, Tax Planning, Tax Preparation, Tax Refund, taxes

Does it make sense to file your taxes early?

Filing taxes can be a bit boring and overwhelming. Apart from your life and work, you need to devote some time and energy to file your taxes early. A lot of taxpayers barely are able to file their taxes on time, let alone before time.

What if there are some strong reasons and benefits for filing your taxes early? Would that pull you into the idea of filing your taxes early? If yes, here are some of the most prominent reasons why you must seriously consider filing your taxes early.

1.To Avoid Missing Out On Tax Benefits

Usually filing your taxes at the end means, that you are running against the clock. In such cases, the chances of missing out on some information are quite possible. A common mistake made by taxpayers filing their taxes in the end if using a wrong SSN or forgetting to mention their SSN, or their dependent children’s SSN or spouse’s SSN. Missing out on SSN is a sure way of missing out on certain tax deductions and tax credits.

2.A quicker Tax Refund

When you consider data from the previous years, you will find out that about 72% of taxpayers receive tax refunds up to $3,000. That is a decent chunk of money that you can use as rainy-day savings or paying off some debt. Filing your taxes earlier allows for a quicker tax refund.

3.Possibly Bigger Refunds

When you file your taxes early, you can benefit from certain life changing milestones. Milestones such as marriage, or the birth of your child, starting your own business, etc. can translate into better tax refunds or deductions. Which ultimately will help you save money. Thus, filing your taxes early can be beneficial.

4.Debt Management

In the event that you are struggling with some of the debts, opting for an early tax filing can save the day for you. The IRS expects to issue tax refunds within 21 days of your filing tax returns. The earlier you file your taxes, you boost the chances of an early refund and thus, it can help you manage some of your debts as well.

5.Leverage Your Time and Money

When you file your taxes early, you are firstly not under any pressure of filing them before the deadline. It enables a smoother filing. Secondly, the chances of mistakes are also minimal, thereby allowing you to spend less time on tax filing. And more importantly, you can expect an earlier refund as well. You can then use these funds either for a quick trip while your friends and colleagues are busy filing their taxes or use them for other purposes.

6.File Taxes Online

Once you have made up your mind to file your taxes early, you can visit online portals to help you file your taxes. There are a lot of trusted portals, which can help you file your taxes within a few minutes. All you need to do is provide some basic information and answer simple questions. The portals can help you extract the most out of your refunds as well. And the best part is, you can do this from the comfort of your home or office or even while you are vacationing. If you need additional help in the form of an Enrolled Agent or a CPA, the portals would be able to help you with that as well.

Apart from the most obvious benefit of peace of mind and no stress during the tax filing season, the above are some of the other benefits of filing your taxes early. If you have never filed your taxes early, now might be the best time to give it a shot and reap its benefits.

Reference

https://blog.turbotax.intuit.com/tax-refunds/6-reasons-it-pays-to-file-your-taxes-early-19100/