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

by Mounica Kota | 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.

You can purchase substantially identical securities.
By a fully taxable trade, you can acquire substantially identical securities.
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.

You must wait for a minimum of 31 days before you start re-investing into another Stock Fund.
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.

Is your income tax refund guaranteed?

by Mounica Kota | Oct 21, 2020 | income tax, IRS Tax Refunds, tax filing, Tax Refund

Is your income tax refund guaranteed?

You would file a tax return claiming the refund of your income tax if the excessive deduction of tax has been done at the source or during the payment of self-assessment tax. Your income tax refund is guaranteed if you and the IRS are on the same terms related to your refunds. Mostly, the IRS pays back the refunds within 10-15 days of the receipt of the tax return filing.

There are some major factors that would help you to determine how fast you can receive your tax refund.

How early you have filed your income tax return?
If you e-filed the tax refund or have sent by mail?
If you are claiming any tax credits such as EITC and CTC
If you have any existing debts with the Federal Government or not

Once your tax returns have been e-filed, you can check the status of your tax returns by

You can use the Where’s My Refund tool by the IRS to find out the status of your income tax refund.
You can also call the IRS on the Customer Support number to understand the status of your tax refund.

Can your tax refund be held back?

Your tax refunds can be held back by the IRS and then obtaining your tax refund may not be guaranteed under the below-mentioned scenarios.

a.The inaccuracy of your tax return

Your tax refund can be held back by the IRS if there has been an error made by you while filing your tax returns. There are chances that there is a discrepancy in the return that has been filed in the past.

If the IRS thinks that there has been an error made by you while filing your tax returns, then your refund can be changed by the IRS. In case, you feel that the change has done is incorrect, you can prove this to the IRS and ask for a reversal. You have 60 days within which you can do so. After 60 days are over, you will have to file for an amended return so that the IRS would issue your refund.
If you have claimed some erroneous deductions, then the IRS can conduct an audit to find out about the accuracy of your tax returns. If you can prove to the IRS that the claimed deductions are correct then the IRS will issue your refund.
The IRS has the authority to freeze your refund if your previous tax returns are being audited and it feels that you owe additional taxes to the IRS.

b.You owe back taxes

If you have pending taxes to be paid to the IRS, then the IRS would keep your refund to pay your taxes. The IRS can also take your refund if you are on a payment plan known as an Installment Agreement. However, if you are unable to pay your taxes in one go you must get into a payment agreement with the IRS for minimizing your penalties. This would also help in the prevention of collection enforcement actions.

c.You have unfiled back tax returns

In case, you have unfiled tax returns then the IRS can freeze your refund and start a delinquent return inquiry. This will continue until you have filed your pending tax returns and have also cleared all the associated pending tax bills.

d. A problem in your tax account

The IRS might suspect some problem with your IRS tax account and thus hold your tax refunds.

Victim of tax identity theft –

The IRS might suspect that there has been a tax identity theft. You will have to contact the IRS for proving your identity. Once, your identity is proved you can obtain your tax refund easily.

Dependent related discrepancy –

This might happen when someone else has claimed your child as a dependent on his tax return. You will have to explain and prove it to the IRS that you should be able to claim the dependent on your tax refund.

e.Other debt

There are some other categories of debts that might be pending on you such as Student loans, Child Support, Unemployment compensation re-payments, or the State Taxes. These debts can be collected from the IRS by holding on to your refunds. However, to resolve this problem you would have to get in touch with the source of your debt and not the IRS.

So, if any of these reasons are not expected in your case then your income tax refund is guaranteed.

Penalties highlight for tax returns filed after 14-Sep

by Mounica Kota | Oct 12, 2020 | Tax Refund, tax return, tax returns, taxes, Taxtips

Penalties highlight for tax returns filed after 14-Sep

The IRS has very recently urged the US citizens to act immediately if they have taxes due and have not filed their tax returns for 2019. After 14^th September 2020, the IRS would be imposing huge penalties on those who owe taxes and are not updated concerning their tax returns.

The deadline for tax filing was 15^th July 2020 due to the adverse consequences caused by the pandemic COVID-19. Several taxpayers have submitted their request for an extension to file their tax returns would not be paying any penalties until 15^th October 2020. However, it is an essential point to keep in mind that this extended period is for the filing of tax returns only and not for the payment of tax. Any tax which is due after the 15^th July 2020 deadline would be considered as a failure to pay penalty and interest would be charged on it.

There are still many taxpayers who did not make an extension request but owe taxes; will be facing the failure to file the tax returns and also the failure to pay the penalties. It is advisable for these taxpayers to immediately file their tax returns and pay as much as they can before huge penalties are levied from 14^th September 2020 onwards.

The penalty charged for non-filing of the tax returns by the specified date or by the extended date even is 5% of the tax which is unpaid for each month.
It can also be charged for that part of the month for which there has been a delay in the tax return filing at the rate of 25% of the tax unpaid.
If there has been a delay of 60 days in the filing of tax returns, a minimum penalty is charged.
In case, there has been no filing of tax returns even after 60 days; the minimum penalty charged is either $435 or 100% of the unpaid tax whichever is lower.
This year, this period of 60 days starts after 14^th September 2020. After 14^th September 2020 heavy interest or penalties would be charged on the tax defaulters.
Apart from the penalties, interest would also be charged for any tax which has not been paid by the tax payment due date of 15^th July 2020.
However, if there is a refund due for a taxpayer no penalty would be charged for the filing of tax returns late by the taxpayer.

Probabilities of Penalty Relief may be available

If there has been no assessment for any penalties for taxpayers for the past three years would be eligible for an abatement of penalties.
If a taxpayer is not eligible for the relief of his first-time penalty relief, still he can qualify for penalty relief if the cause for non-filing of tax returns or non-payment of tax was due to some reasonable reason.
The different types of penalty relief which are offered by the IRS are

Reasonable cause

The reasonable causes for failing to file tax returns are:-

Natural disasters, fire, or any other disturbances
Inability in obtaining the necessary records
Death, any serious illness, unavoidable absence of the taxpayer or his immediate family member
Other causes which state that despite using all care to meet the tax obligations, the taxpayer has not been able to do so.

Administrative Waiver and Abatement of a first-time penalty

A taxpayer would be eligible to qualify for the administrative waiver from the penalties due to filing of tax returns late or for non-payment of taxes on time under the below circumstances:-

The taxpayer did not have to file tax returns previously or he has no penalty for the previous three tax years which are before the one in which penalties have been received.
If the taxpayer has paid or rather has made the arrangement for making the payment all due taxes.
If the taxpayer has filed the current tax returns or has filed an extension in the time to file a tax return.
A taxpayer can also be eligible for an Administrative waiver if he has received incorrect oral advice related to tax returns and payment from the IRS.

Statutory Exception

A taxpayer would qualify for a Statutory Exception if he has received incorrect written advice from the IRS. The taxpayer would have to submit various evidence to prove this such as

The written request made for advice
The erroneous written advice which was sent by the IRS
Report on any tax adjustments which have been made due to the erroneous advice obtained from the IRS.

The taxpayer can file Form 843, Claim for Refund and Request for Abatement to request for penalty relief in case of incorrect advice obtained by the IRS.

Get extra time for the tax payment

If a taxpayer owes tax but is not able to make the full payment, then he can opt for payment of taxes by a payment plan which includes an Installment Agreement. A qualified taxpayer or an authorized representative is eligible to apply for a payment plan to make payments of the taxes over time. A taxpayer who is unable to pay the full amount must contact the IRS to know about the options available.

The IRS might provide options like short-term extension, and installment agreement or offer in compromise can be offered, etc.

Conclusion

Hence, taxpayers must be alert and file their tax returns before the deadline if they have not done so to avoid huge penalties.

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

by Mounica Kota | 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 15^th April 2020 which was later on extended to 15^th 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.

SBA Debt Relief for small business owners

by Mounica Kota | Oct 9, 2020 | Blog, income tax, IRS, Tax Deduction, tax filing, Tax Payers, Tax Refund, tax return, Taxtips

SBA Debt Relief for small business owners

The pandemic COVID-19 has created a lot of financial problems for people across the country. People from every profession are facing several economic issues due to the coronavirus and are continuously struggling to lower the impact of the pandemic on the profession/work-related front. However, if you are a small business owner then your business must have been impacted badly by the spread of the COVID-19. So, one of the ways by which you can be able to obtain some financial aid during these challenging times is through the US Small Business Administration (SBA) Debt Relief Program.

SBA Debt Relief Program

The SBA is a part of the $2 trillion packages offered by the US Government under the provisions of the CARES (Coronavirus Aid, Relief, and Economic Security) Act. It can be described as a debt-payment assistance program that would help in providing immediate relief to the various small businesses in the United States with the help of Small Business Administration Loans.

By the SBA Debt Relief Program, financial assistance can be provided to small business owners by making a payment of principal, interest, and any other fees which the borrowers owe for the current 7(a) loans, 504 loans, and other Microloans as well.

How to participate in the SBA Debt Relief Program?

If a business is eligible to participate in the SBA Debt Relief Program there is no need for any application. Participation is automatic. The SBA has given instructions to the different lenders for not collecting any loan amount during the debt relief period. The SBA has said that it would make the loan payments for these borrowers. According to the provisions of the CARES Act, the SBA should start making the payments within a month of the date on which the first payment of the loan taken needs to be done.

In case the loan payment of a borrower was to be collected after 27^th March 2020, then the lenders were provided with the instruction to inform the borrower about having the option of loan payment returned or applying the payment for even more reduction in the loan balance after the payment has been made by the SBA.
If the loans are not deferred then the SBA can start making the payments on the due date of the next payment and will be making the payments for 6 months.
For those loans which are on deferment, the SBA will be making the payments with the immediate next payments that are due after the end of the deferment period. The SBA will be making the payments for the upcoming 6 months.
In the case of those loans which have been made after 27^th March 2020 and have been fully disbursed before 27^th September 2020, the SBA will make the payments. The SBA will start with the first payment which is due and would do the payments for the upcoming 6 months.

Can the SBA Debt relief program be applied to PPP and EIDL loans?

The Debt Relief Program by the SBA does not apply to the Paycheck Protection Program (PPP) loans to or to the Economic Injury Disaster Loan (EIDL).
EDILs which have the status of regular servicing which means when the loan is in a closed state with accordance to the Terms and Conditions of the loan authorization, the payment for the final disbursement has been made and the SBA guarantee fee has also been paid as of 1^st March 2020, automatic deferments would be provided by the SBA through 31^st December 2020.
However, interests would keep on accruing during this period.

Can you get a PPP loan even if you have received the SBA debt relief?

Yes, even if you have received the SBA Debt Relief you can fill an application for obtaining the PPP loan. You must keep in mind that the procedure for obtaining a PPP loan is different from that of the process for obtaining the SBA Debt Relief.

Conclusion

So, the SBA Debt Relief is an excellent initiative by the Government to alleviate the distress caused to the economic condition of the small businesses within the country due to the pandemic COVID-19. The borrowers might have several queries related to the SBA debt relief program and must contact their lenders for this purpose.

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

by Mounica Kota | 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

Filling status
Other income
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 31^st 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.

You cannot deduct Student Loan Interest.
You cannot claim the Earned Income Tax Credit
You cannot claim the Child and Dependent Credit
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.

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