The top 7 Tax Changes in 2020

by Mounica Kota | Mar 31, 2021 | Blog, Tax Planning, Tax Preparation, Tax Refund

The top 7 Tax Changes in 2020

There have been certain changes in the tax rules for the financial year 2020. Let us have a look at these changes that have taken place in the tax rules for the year 2020.

Unemployment benefits

For millions and millions of Americans, the unemployment benefits are a major area of concern this tax year. Moreover, reporting the unemployment benefits on tax returns stands as a problem for many as well. As per the IRS, the compensation obtained on unemployment is considered to be taxable and should be reported on your federal tax return for the year 2020. The taxable benefits would be including all the special unemployment compensation which is authorized under the CARES Act i.e. Coronavirus Aid, Relief, and Economic Security.

Forbearance for Student loan

Temporary relief has been offered from the Student loan debt to millions of students in the United States due to the pandemic. This has been quite helpful for those who have lost their employment due to the outbreak of the COVID-19.

In March 2020, the US Secretary of Education has instructed for the following:-

To stop loan collection in default
Temporary suspension of the payments related to Student loan
Interest rates would be set to 0% for the upcoming 60 days

These forbearances were valid until 31^st December 2020 and are even would remain valid in the upcoming months.

Removal of withdrawal penalty

In these difficult times, many Americans are considering withdrawal of retirement funds as the last option to handle their financial crisis. In general, early withdrawals made from your IRA, 401(k), or the 403(b) account can lead to penalties. However, by the provisions of the CARES Act, those Americans making early withdrawals from their retirement accounts would not have to face the 10% penalty. This waiver of penalty is applicable for the borrowing that has been done during the financial year 2020.

Self-employed PPP

The PPP (Paycheck Protection Program) was expanded in April 2020. Additional funding of around $310 billion was included in this program. Sole proprietors, businesses that have employee strength of around 500, self-employed persons, etc. are mainly eligible for availing the benefits under the PPP. The loan taken under the PPP can be completely forgiven if the funds would be utilized in making payments that are related to rent, utilities, interest on mortgages or payroll costs, etc.

Stimulus payments

The Stimulus payments or otherwise known as the Economic Impact Payment was one of the main focuses of the CARES Act. By the mid of the last year, around $269 billion has been paid in the form of Stimulus checks to the Americans as a means to alleviate the financial adversities caused due to the pandemic COVID-19.

It is a common concern among Americans now if they need to report their Stimulus payments in their upcoming tax returns. However, according to the IRS, the Stimulus payments are not needed to be included in the Gross Income. So, the Americans do not need to include their Stimulus Payments in their taxable income and even do not need to pay any Income tax on that payment.

Additional eligible expenses

With the implementation of the CARES Act, there have been some modifications in the rules related to the accounts like HRA, HSA, Health FSA, and Archer MSA. Now, millions of Americans have been able to utilize these accounts for reimbursable products. Moreover, those products and medicines which are available over-the-counter can be reimbursed now without the need for a prescription. The taxpayers should keep their receipts of purchases intact to make their claim submission for reimbursement.

The new charitable contribution deduction

The American taxpayers are now able to take up the advantage of a new category of tax deduction i.e. Cash donation to qualifying charities. This can be up to $300 for the tax returns irrespective of the tax filing status of the taxpayer. This can be applicable even if the tax filers are not itemizing any deduction.

Another change is the removal of the deduction limit on charitable contributions. In general, the deduction limit on the charitable contributions for those who are itemizing their deductions is 60% of their AGI (Adjusted Gross Income). However, with the CARES Act, this limit has been lifted up to 100% for the tax filers who wish to claim their $300 deduction for charitable donations made.

Conclusion

Hence, with these important changes made into the tax system for the year 2020, the financial adversities faced by the Americans due to the pandemic can be reduced considerably.

Tax Tips for the Self Employed NR Indians in the US

by Mounica Kota | Mar 24, 2021 | tax deductions, Tax Exception, Tax Planning, Tax Preparation, Tax Refund

Tax Tips for the Self Employed NR Indians in the US

If you are an NRI in the US and have just started your entrepreneurship, then you should be aware of the different tax implications related to self-employment. Some of these tax implications can even help reduce your tax liabilities.

Let us now have a look at the different facets associated with the tax rules for the self-employed NRIs.

Offices at home

When you are working comfortably from your home, it can help maximize your tax write-offs. In case, you are using a specific home office for your work or your business then that be claimed while filing the tax returns.

Those expenses which you can deduct as a part of your deduction for the home office can also include a part of expenses related to the home i.e. the mortgage interest, rent, taxes on real estate, utilities, insurance, etc. Moreover, you would also be eligible for the deduction of the total expenses that have been incurred in the repairs and the painting that is required for your home office.

Hiring part-time employees

If you have grown-up kids and they are on holiday, the best idea to keep them engaged is by hiring them for doing some of your office work. If you are hiring your kids for cleaning the office, running your deliveries, data entry, answering phones, etc. then you would be able to claim a tax deduction. You can claim that wages are deducted under Schedule C. However, this deduction can only be done until the compensation to be obtained is reasonable for the activity performed.

In case, your kids are below the age of 18 years the wages paid to them would be exempted from Social Security taxes and Medicare taxes. Moreover, if your kids are below the age of 21 years they would not owe the Federal Unemployment taxes. Even by these part-time hires, the tax liability of your family would be reduced as your children would not owe any income taxes on this income obtained.

Planning for retirement

By opting for a retirement plan, you would be lowering your taxable income. If you are a self-employed NRI the best retirement plan for you is the SEP (Simplified Employee Pension Plan). You have the option to put in up to less than around 25% of your earnings done from self-employment or put in up to $57,000 for the tax year/$58000 for the tax year 2021. You can compare this with the limit of $6000 which has been put on the contributions made to the IRA for the tax year 2020.

Mileage

If you would have been an employee who is traveling regularly to work then the expenses related to driving to your office and back could not have been claimed under tax deductions. Since you are self-employed then any work-related travel such as traveling to meet any client, going for work to some other location, etc. can be claimed as a tax deduction. In the year 2020, work-related travel done for a mile can be used to claim 57.5 cents along with the parking cost and any other tolls that have been paid. So, you must track your mileage coverage for work so that it can be used to claim deductions.

Business Travel

When you are a self-employed NRI and are traveling to another city in the US for work it is possible to claim a tax deduction for 100% of the costs incurred in the travel. Moreover, during the travel period, it can also be feasible for you to claim the expense incurred in your hotel stay and 50% of the expenses incurred in your meal. However, this is only possible for those days for which the travel has been work-related.

Moreover, under the provisions of the CARES Act, 100% of the expenses incurred in business meals can be claimed as tax deductions rather than 50%. This would be feasible starting in the year 2021 and would continue throughout the tax year 2022.

Conclusion

Hence, these tax guidelines would be helpful for you to lower your tax liability if you are an NRI and self-employed in the US.

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.

All you need to know about your Income Tax Refund Status

by Mounica Kota | Feb 20, 2021 | Blog, Income Tax Refund, Tax Refund

All you need to know about your Income Tax Refund Status

One of the most common questions of the taxpayers during the tax season is “Where is my tax refund?” The IRS would start its tax refund processing from 12th February and the refunds would have to go through mainly three stages.

The Return received
The Return approved
The Refund sent

The time is taken for the refund processing

In general, the time taken for processing the Income Tax Refund by the IRS would depend upon the mode that has been used for filing Income Tax Returns.

Tax returns filed by Direct Deposit

When you are filing your tax returns electronically with the Direct Deposit method, you can obtain your tax refunds soon. According to the IRS, within 21 days after acceptance of the Income Tax returns the refund is done for most of the citizens.

Tax returns filed by mail

If the Income Tax returns have been filed by paper then it will take some time and this time might be longer due to the outbreak of the pandemic COVID-19. It has been advised by the IRS to wait for 4 weeks after filing your tax returns before you start checking the status of your tax refund. Also, this processing of tax refund can take longer and can be around 6 to 8 weeks.

Refunds obtained with EITC or ACTC

The IRS would not be issuing any refunds before mid of February for those tax refunds which would include the EITC (Earned Income Tax Credit) and the ACTC (Additional Child Tax Credit). This rule is applicable under the PATH (Protecting Americans against Tax Hikes) Act. This Act mainly aims at the detection and prevention of tax fraud and applies to all tax preparation methods. By this extension in the refund period, it will give the IRS much more time to ensure that the taxpayers are claiming the tax credits properly. For the filers of the EITC and the ACTC, the IRS considers completing the refund by the first week of March.

The Process of Income Tax Refund

Let us have a look at the process which is involved in the processing of the Income Tax refund for US citizens.

Status checking after 24-48 hours from e-filing

After filing Income Tax returns, the taxpayers can easily check their status by the use of the IRS tool i.e. “Where’s My Refund?” The major requirements for checking your refund status are the Social Security Number or the ITIN, the exact amount which must be refunded, the filing status of the taxpayer, etc.

Notice of the Return Received

Once the processing for the Income Tax return has been started by the IRS, the “Where’s My Refund” tool would highlight the status as “Return Received”. Taxpayers would not be able to view their Tax refund date unless the tax return processing has been finished by the IRS and the tax refund has been approved by the IRS.

Change in status

With the IRS finishing the processing of tax returns and providing confirmation about the approval of tax refund, the status of the “Where’s My Refund” tool would be changing to “Return Approved” from “Return Received”.

Refund Date on Refund tool

Once the status of the tax refund has changed to “Refund approved” a personalized refund date would be specified by the IRS.

Refund Status on the tool

In case of your status on the “Where’s My Refund?” tool shows “Refund Sent”, then it means that the tax refund has been sent to the taxpayer’s financial institution for Direct Deposit. If opted for direct deposit, then it usually takes around 1-5 days for the financial institution to fund the deposit into the taxpayer’s account. However, if opted for a tax refund via electronic mail it can take some weeks for the tax refund’s arrival.

However, despite the simplified procedure taxpayers can have many other questions related to their Tax Refund such as “I have not received my tax refund even the tax return has been received by the IRS since 21 days”, “I have got my tax refund in the form of a cheque even though I had opted for Direct Deposit”, etc. In many cases, the refund can take a long time if there has been an error in the tax return filing or if incomplete information has been received. Moreover, the limit for direct deposits into a particular bank account has been limited to 3 tax refunds in a year. Your limit might have been exceeded.

Conclusion

So, if the tax refund processing timeline has been exceeded and the anxiety is rising about its status the “Where’s My Refund?” tools can be helpful. Or else you can consider connecting with the IRS support over the phone and enquire more about your status.

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.

The erstwhile Tax Mistakes to avoid in 2021

by Mounica Kota | Jan 25, 2021 | Tax Planning, Tax Preparation, Tax Refund, taxes, Taxtips

The erstwhile Tax Mistakes to avoid in 2021

The tax laws in the US are quite complicated but the taxpayers make quite simple mistakes while filing their tax returns.

Let us have a look at the most common tax mistakes which are made by the US taxpayers and can be avoided during this tax year.

Not filing tax returns on time

According to the estimates made by the IRS, 20% of the US taxpayers would wait till the last date for filing their tax returns. However, waiting till this last minute can cause them to miss the deadline. Even if the taxpayers are filing a request for an extension in the deadline to file the tax returns there would be the need to pay any tax that is owed by the actual deadline. In case, the tax payments are not made by the due date then the taxpayer would be charged interest by the IRS.

Incorrectinformation

This is one of the most common mistakes made by the taxpayers while filing their tax returns. Some of them either leave some boxes blank or some make a typo error while filling important details like Social Security Number.

One of the easiest methods by which you can avoid this is by importing the tax return which has been filed in the previous tax year. By this, you can avoid any typo error associated with manual entry of the filing information.

Not aware of the latest tax laws

The US tax laws are not only complicated but are subject to minor changes every year. It is imperative for the taxpayers to know in detail about the changes that have been made into the tax laws so that they do not miss the details on the tax deductions and credit.

Filing status errors

The filing status of a taxpayer would determine the tax rate of a taxpayer and his eligibility to avail the tax deductions. If a wrong filing status is being chosen by a taxpayer then he would have to either underpay or overpay the taxes which would have its own implications on the cost. For instance, married couples who are filing tax returns jointly have different rules than those who are filing their returns separately.

Making wrong choices about itemizing

While filing your tax returns, you can either choose between itemizing or claim a Standard deduction. If you are itemizing then you would not be able to claim Standard Deductions. Out of the two, you can choose either one out of the two choices.

There are certain deductions which you can claim easily without the need for any itemizing. These deductions can be making contributions into the IRA or the deduction related to the Student loan interest. However, some deductions can only be claimed if itemized which gives up the right for claiming the Standard Deduction.

Not getting any help while tax filing

Tax filing is complicated and should not be done on your own. You can take the help of various software programs which are designed with the aim of making tax filing easier and simpler. You can answer a series of simple questions which would help you in identifying your deductions and credits and thus, simplifying your process of filing the returns.

Moreover, taxpayers can also take assistance from tax professionals then it would be a great option to avoid any mistakes while tax filing.

No copy of the return

Usually, the tax experts and professionals would advise on keeping a copy of the tax return filed for a period of at least two years. That’s a general time period for which the IRS would be able to legally audit the taxpayers for the gross under-reporting of their income.

Not reporting all income

If taxpayers are not reporting all of their income, then the probabilities are quite high that the IRS would know about them. As the IRS receives forms like Form W-2s and Form 1099S for the entire income you earn, it is quite easier for the IRS to know even if you are not reporting.

The IRS can carry criminal prosecutions for any wrong or non-reporting of income by the taxpayers. Taxpayers can be penalized for the non-reporting of all income and it is always advisable to report the correct income to the IRS.

Conclusion

So, now since the taxpayers have an idea about the erstwhile tax mistakes it is wiser to be careful, avoid these mistakes and rule out the possibilities of being penalized.

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