3 tax tips for second homeowners for NRIs in the US

by Mounica Kota | Jul 12, 2019 | Tax Extension, tax filing, Tax Planning, Tax Preparation, tax rate, Tax Refund, tax savings, taxes

3 tax tips for second homeowners for NRIs in the US

tax tips for second homeowners ,Buying a second home is a big decision and requires a lot of efforts on your end. It could well be that you already have a home and are planning for a holiday home or a weekend getaway or just for investment.However, amidst all this, do not forget that it comes along with a lot of tax considerations as well. Here are three major tax tips that you must consider before you write down that cheque.

Location

It is no secret, that the tax rates of property or house largely depends on the location that you are buying it at. Few states and municipalities have higher tax rates as compared to others. Thus, a quick check of the location that you want to buy the house in would help you save considerably on taxes.

Places such as Hawaii, Louisiana, Delaware and Alabama have the lowest tax rates for real estate in the country. Ranging between 0.28% to 0.53%, they can be great options to buy your second home. And on the other hand, places such as Illinois, New Jersey, Wisconsin have the highest tax rates in the country.

Buying a property outside the country is a different equation altogether. Unlike normal classifications such real estate taxes, you might have to pay a one-time fee.

Future Taxes

Should you pick a place and property smartly, the payoff can be quite satisfying. A good house in a good locality or upcoming locality will fetch you much better prices during selling. However, in hind sight do not forget the additional cost that they bring along with them.

While buying at lower prices and selling at higher prices means a lot of profit for you, being aware of the tax implication is also important. As the property value increases significantly, the taxes that you are eligible to pay would also increase considerably.

There is also a possibility that the White House decides to revisit the property taxes once every few years. If there is an increase in such prices, it would only increase the tax burden on you.

Interest on Mortgage

If you are planning to use the second property as a second home, there are some additional benefits to have had. However, these are possible only if you use the property as a second home and not rent the place out.

In such cases, the interest that you pay on your mortgage is deductible and behaves pretty much like the interest on the first house or property. Before 2018, taxpayers had the option to write off the entire interest amount that they paid if they had secured debts of up to $1.1 million on both the properties combines together. The amount is also valid if you choose to upgrade or improve the house in different ways.

The rules had been tweaked a bit where earlier the limit was set at $750,000. This can be a good and smart way of saving a substantial amount in taxes. It is quite common to rent out your second place. But you cannot avail the above benefits if you choose to do so. If you are looking to saves taxes, this method fares better results.

Whether it is your first property or second, if you have the option to save money on taxes, there isn’t any reason why you should not. The above tips are not only easy to follow but implement as well. If you are an NRI and are planning to buy your second home, these should help you save some money on taxes.

How to save taxes in 3 ways this summer?

by Mounica Kota | Jun 14, 2019 | tax deductions, Tax Planning, Tax Preparation, tax savings, taxes

How to save taxes in 3 ways this summer?

We are surrounded with a few mundane tasks that we must carry out, irrespective of we like them or not. Tax planning is a prime example of the same. though it is mundane and even borderline boring, it must be done. However, there is an upside to it. If you successfully plan your taxes, you can save a considerable amount of money. If that isn’t a good enough reason to plan for your taxes, nothing else will.

But where do you start from and how do you plan your taxes? To make matters easy for you, here are the top 3 tips by which you can save money on taxes this summer. If you do not want to pay extra to Uncle Sam, the following tips are for you.

Health Savings Account (HSA)

If your employer offers any health insurance plan, you can combine your health savings account along with it. In the event that your employer does not offer any health insurance plans, you can buy a health savings account on your own. The money that you put into a health savings account is pre-tax. You can then use the amount for various expenses such as medical bill for procedures, co-payment, deductibles and even certain expenses that are not covered as a part of medical insurance such as dental care or vision.

Your contributions towards HSA has several tax benefits. For starters, it is deducted pre-tax, the amount that you contribute is non-taxable. The amount that you invest then keeps on growing tax-deferred. And lastly, when you do withdraw the amount it is tax-free.

Flexible Savings Account

A flexile savings account is another smart way of handling your taxes. On the surface, it resembles the Health Savings Account to a great extent. The major difference being, that a flexible savings account is sponsored by employers only for healthcare plans. Per year, you can invest as much as $2,250 pre-tax. You can then use the amount for taking care of expenses such as deductibles. And, you do not have to pay anything on the $2,250, no state taxes or no federal taxes.

Unlike the HSA, you do not get the amount directly. And you must spend the amount by the end of the year. If you fail to do so, the amount will revert to your employer. Though, some companies now offer grace periods where you can use the funds. And in some cases, you can carry forward up to $550 for the next year.

Charitable Donations

When it comes to charitable donations, there aren’t a lot of restrictions. If you wish to donate a significant amount of money to charity, you can consider giving away your stocks or even mutual funds. Specifically, the ones that you have had with yourself for at least a year. Should you consider this option seriously, it is recommended to give away the stocks or mutual funds that are in the green or yielding profit. Charitable donations always consider the fair market value on the day of donation and not at which it was bought. This will boost your donations considerably. This will allow you to quietly walk away without having to pay taxes on your profits. To make the most of this method, you would have to itemize your deductions. But if your stocks or mutual funds are in loss, it is better to sell them off, claim the loses and donate separately.

The above methods will help you save money on taxes considerably. Which you can then spend on doing whatever you wish or invest for better returns in the future.

End of the year Tax Compliance for NRI’s in the US

by Mounica Kota | May 31, 2019 | Investment & Income, Tax Planning, Tax Preparation

End of the year Tax Compliance for NRI’s in the US

Tax compliance it is no secret, that a considerable number of Indians move out to other countries in the search of better opportunities. This obviously means that they are now liable to pay taxes in the new country that they have moved in to. However, this does not detach them from paying taxes back in India, as long as they have some income source of investments. It is essential for NRIs to be tax compliant in India as well. Knowing the residential status is the very first step in this ordeal.

Residential Status

As per the Indian laws, if an individual has stayed less than 60 days for a fiscal year, he/she would be tagged as a non-resident. Individuals who leave the country for opportunities in other countries, the threshold is at 182 days for the specific fiscal year. There is also a category called “resident but not ordinarily resident”. Individuals who have stayed in the country for 729 days or more in the last seven fiscal years before the current fiscal year, are put into this category. It is important to note that tax residents are individuals whose global income is taxed in India. However, non-residents only need to pay taxes on their income or investments in India.

Income Earned

Now that residential status is taken care of, the next step is to determine the income that an individual has earned in a fiscal year. The following are some of the major sources of income and their impact on taxation.

Any income generated from rental properties in the country will be taxed in India.
Any form of salary earned in the country is taxable for a non-resident.
Income generated from consultancy or business opportunities is taxable in India.
On the transfer of capital assets, the capital gains are also taxable.

Deductions

Once you have accessed the income that is taxable, the next step is to check if you are eligible for any deductions. Just as resident Indians can opt for deductions, non-residents can also do the same. Some deductions that they are eligible for include investments in Equity Linked Savings Schemes, premiums paid for life insurance, ULIPs, etc. up to INR 1,50,000 for a fiscal year. Similarly, the standard deduction of INR 50,000 is also available.

Compliance

An individual must obtain a Personal Account Number of PAN. This would come into the picture if the non-resident Indian’s income exceeds INR 2,50,000. This is the minimum threshold level for paying taxes.

Filing of Taxes

Should the income in India exceed the defined minimum threshold level, non-residents need to file tax returns. Taxpayers who don’t have to get their books audited need to file their tax returns by the 31^st of July. Other taxpayers need to file their taxes by 30^th of September. The Income Tax Department offers e-filing for its taxpayers through its official website. You can use the same for convenient and quick tax filing. The Income Tax Department is constantly working towards easier tax compliance. The intent is to expand the taxpayer base. It does not come as a surprise that several new measures are already in place. For instance, a vast majority of the tax filings, return filings and even returns are carried out online. With several plans in motion to reduce the turn around time furthermore. If you are a non-resident Indian, you can benefit from these new measures. You can duly report your income and file for tax returns at the end of a fiscal year to avoid any sort of complications.

NRI with Green Card in the US, what not to forget while filing your taxes this year

by Mounica Kota | May 23, 2019 | Blog, Deduction & Credits, Investment & Income, Tax Extension, Tax Planning, Tax Preparation

NRI with Green Card in the US, what not to forget while filing your taxes this year

The income tax system that currently in motion in the United States of America, requires corporation, trusts, estates and individuals to pay taxes. If you are an NRI, you must also pay taxes to Uncle Sam. Irrespective of whether you are filing your taxes for the very first time or have been doing it for years, here are a few things that you must not forget.

Reporting Foreign Assets (Form 8938)

The IRS introduced Form 8938 a few years ago to get additional information regarding foreign assets of their citizens. The Form 8938 or Statement of Specified Foreign Financial Assets should be filed along with their taxes. This form requires taxpayers to disclose additional information regarding their interests and investments in foreign financial assets. With the help of this form, the IRS can identify the non-compliance of its taxpayers. Your financial assets such as pension plans, mutual funds, insurance policies, ULIP plans and bank account balances must be declared as a part of Form 8938. The form is quite exhaustive, to say the least. You can get in touch with the company handling your finances or banker to get these details.

Global Income

The IRS outlines its residents and citizens (PIO, OCI or NRI) to pay taxes on their global income and not only the income generated in the US. Anyone who has stayed in the US for at least 31 days in a fiscal year and 183 days in the previous three years, gets the tag of a US resident. If you qualify, you must declare your global income. Global income includes any salary that you receive in India, either for consultation or freelancing. Income in the form of interests or dividends earned on bank deposits or other securities. Income generated from rent received on a property, agricultural income or capital gain on the selling of assets, all qualify. You will be taxed on all of these in the US. While income from agriculture is tax-free, it will be taxed in the US. However, if you have paid taxes in India for any of these incomes, you can claim for the foreign tax credit as per the DTAA.

Employee Stock Option Plan

Employee Stock Option Plan or ESOP is something that you must not forget in your tax filing. The IRS considers the granted value of ESOPs when a taxpayer opts for the same. The total ESOP compensation must be added to the gross income. If you had exercised a similar option in India and have paid relevant taxes, you can opt for tax credit while filing your tax return.

Form 8621

The IRS requires all its citizens and residents to declare their foreign investments such as mutual funds and private equities in the tax return. These investments come under the purview of the Passive Foreign Investment Company (PFIC). To summarize, according to the PFIC, a taxpayer must declare all such investments and any gains that they earn out of them. These gains must be declared and appropriate taxes paid. In the event that you fail to do so or did not receive any gains from them, the final sale value would be divided for the number of years and calculated. For instance, if you haven’t received any distributions over 5 years and you gain a total of $200, it would be considered as $40 for each year. Being on the top of these will help you from coming under the scrutiny of the IRS. And of course, sets yoo up for a smoother tax filing season.

What is the difference between Form 8938 and FBAR form in terms of reporting of Foreign Financial Assets?

by Mounica Kota | May 17, 2019 | Blog, Tax Extension, Tax Planning, Tax Preparation

What is the difference between Form 8938 and FBAR form

in terms of reporting of Foreign Financial Assets?

Form 8938,FBAR, FATCA, these are some of the acronyms that might confuse a lot of taxpayers. Especially when it comes to foreign financial assets, which one should a taxpayer choose and why.

Form 8938

The HIRE Act was the triggering factor behind the FATCA or the Foreign Account Tax Compliance Act coming in to effect in 2010. As per this Act, financial institutions are required to report the assets held by US-based account holders or run into the risk of withholding on certain taxes. As per the HIRE Act, US citizen also needs to declare their foreign financial investments. This is where Form 8938 comes into the picture. Taxpayers of the United States of America use Form 8938 to fulfil the FATCA obligations. The form must be submitted along with their annual tax return.

FBAR

The Bank Secrecy Act of 1970 was the deciding factor behind the introduction of Foreign Bank Account Reporting or FBAR. The intention of this Act was to discourage tax evasions by foreign investments. While the Act was ignored for a very large period of time, it has caught up quite a bit in recent years. The Government’s push towards this compliance has been a major factor. Couple that with hefty penalties and more people are filing FBAR forms as compared to previous years. The IRS also has a voluntary disclosure program for individuals who might have to file FBAR.

The Difference

While on the surface it might seem that both the forms are collecting exactly the same information, there are quite a few subtle differences.

Filing

FBAR form is for US persons having an interest in foreign financial accounts. Also, they must meet the specified thresholds.

Form 8938 is for specific US persons having an interest in foreign financial assets. Also, they must meet the thresholds mentioned.

Unmarried individuals with assets worth $50,000 or more on the last day of the fiscal year or $75,000 or more during anytime in the fiscal year.
Married individuals with assets worth $100,000 or more on the last day of the fiscal year or $150,000 or more during anytime in the fiscal year.

Reported Materials

For FBAR, individuals need to report the maximum value of their foreign financial accounts.

For Form 8938, individuals need to report the maximum value of their foreign financial assets.

Thresholds

The FBAR’s threshold value is $10,000. Thus, if the total financial value of accounts exceeds $10,000 it must be reported.

The threshold value for individuals filing Form 8938 who are living outside the country are:

Unmarried individuals with assets worth $200,000 or more on the last day of the fiscal year or $300,000 or more during anytime in the fiscal year.
Married individuals with assets worth $400,000 or more on the last day of the fiscal year or $600,000 or more during anytime in the fiscal year.

Where to file

FinCEN’s BSA e-filing system is how you should file your FBAR Form and it is all electronic.

Form 8938 must be filed along with your annual federal tax return.

Penalties

Failing to file FABR non-willingly results in a fine of $10,000. And the penalty for willful non-filing results in a fine of $100,000 or 50% of the balance in the accounts.

Form 8938 has a penalty of $10,000 for not filing the form. The amount increases by $10,000 for every 30 days passed, to a maximum of $60,000.

You can now decide for yourself, which form you need to file when it comes to Foreign Financial Assets reporting.

What Is IRS Form 1099-INT: Interest Income?

by Mounica Kota | May 9, 2019 | Blog, Tax Extension, Tax Planning, Tax Preparation

What Is IRS Form 1099-INT: Interest Income?

Tax filing season can be stressful, to say the least. With several documents, investments, proofs and bills to take care of, various Forms can make things a bit more overwhelming. Thus, the golden rule of starting early always pays off. When you start early, you have additional time at hands to review your filing and more importantly, fill the Forms as accurately as possible without much stress. IRS Form 1099-INT is one such form that the expects during your tax filing. What is it about? And when and why you should file it, let’s find out.

What is it?

Form 1099-INT by the IRS must be used by taxpayers to declare their earned interest. All investors receive the form by their payers of interest at the end of the year with a breakdown of the interests earned and any other related expenses. $10 is the minimum value, above which a payer must provide the Form to its investors. At the same time, you need not attach all the Forms 1099-INT with your tax returns.

Details of 1099-INT

It is essential that you understand the details of the Form, which will, in turn, help you fill the appropriate information in your tax return.

Box 1

This box contains any income that you receive which is taxable, such as interest earned on savings accounts.

Box 2

This box represents any penalties that you have been charged with, due to premature withdrawals.

Box 3

The contents of this box represent interests earned on bills, bonds or Treasury notes.You need to be a bit careful since some of them are tax-exempt.

Box 4

This box reports any taxes that were withheld by your payer.

Box 8

This box contains information about your investments that earn interests with state and local governments. A municipal bond would be a good example of it.

Information Contained in Report

Form 1099-INT contains the following information.

The name and address of any payer.
The name and address of the recipient.
Any foreign taxes paid.
Any form of state taxes withheld.
Any form of federal taxes withheld.
Identification numbers of the payers as well as recipients.
The amount of interest paid (only if it exceeds $10).
Total bond premiums.
Total bond premiums on the tax-exempt ones.
Total amount of interest that is exempt from taxes.
Total amount of interest earned on Treasury bonds, US savings bonds etc.

Reporting Form 1099-INT

The Box 1 income, as mentioned above, must be reported in the taxable income row of your tax return. The interests earned is taxed in the same way as other sources of income. Box 2 mentions about the penalties, for which you can opt for deductions when it comes to the adjusted gross income. One must not forget to report the taxes withheld mentioned in Box 4. You should include the amount in your tax return under Payments.

All the interest that you earn on deposits made to your bank accounts, amounts that were withheld from your federal taxes or foreign taxes, dividends paid by insurance companies, indebtedness etc. must be reported in Form 1099-INT.

Apart from the above, interests earned in the form of real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT) or collateralized debt obligation (CDO) must also be reported in the Form 1099-INT.

Individuals earning more than $1,500 in interests must declare all their payers in Part 1 of Schedule B of Form 1040. Also, you can only include income that you have received and not the ones that you are owed.

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