Does the new tax deadline by IRS mean a new deadline for your IRA contribution?

by Mounica Kota | Mar 23, 2020 | federal income tax, global income tax, IRA, IRA Contribution, IRS, Tax Extension, tax filing, Tax Payers, Tax Refund, tax return, tax savings, taxes, US Government

Does the new tax deadline by IRS mean a new deadline

for your IRA contribution?

The IRS Tax Deadline, The federal tax filing deadline in the US has been extended up to 15th July 2020 to combat the effects of economic hazards caused due to the outbreak of COVID-19. This extension would also mean that you can make contributions to the IRA up to 15th July 2020.

IRA and how it works?

In the US, IRA or Individual Retirement Account helps you in saving money for retirement in a tax-advantaged way. The money which you would invest in this account can grow in a tax-deferred manner until you are ready to retire. Usually, traditional IRAs and Roth IRAs are opened by individuals whereas SEP IRAs and SIMPLE IRAs are meant for small business owners and self-employed individuals.

All the IRAs offer tax benefits which can be considered as a reward for saving. With the help of an IRA, you can even invest in stocks, bonds, and other assets. By making contributions to a traditional IRA, your tax bill would be reduced for the year in which you are contributing and you would not have owed income tax on the money until you withdraw it on your retirement. However, in a Roth IRA investments can grow in a tax-free manner but the contributions are not eligible for tax deductions. The withdrawal of the money can be done on retirement in a tax-free manner by investing in a Roth IRA as well.

The major benefits of an IRA can be listed below.

Saving tool for retirement
Cutting of tax bill
The wider option of investments available
Savior in any unexpected situation

By the IRA withdrawal rules, you can withdraw your money anytime from the IRA but by paying a penalty of 10% and a tax bill if your money has been withdrawn before the age of 59-1/2 years unless there is an exception.

Extension in IRA

contribution deadline

In case you have not been able to save much for your retirement in the last year, you can do that now as the IRA contribution deadline has also been extended. The IRS has extended this for 90 days without charging any penalties or interest for this.

You can contribute a maximum of $6000 towards the IRA. If you are above the age of 50 years then you can contribute an additional $1000 as a catch-up contribution. For making further contributions to your IRA you must contact the brokerage where your IRA has been held so that any additional funds that are added by you into the IRA are correctly filed.

Extension in the deadline for tax

owed on the income from IRA

If you have taken an early distribution from your IRA or any other work-based retirement plan then you will owe an additional tax. This will be a 10% additional tax on the amount that can be included in

gross income obtained from the early distribution. The deadline for reporting and payment of this additional tax has also got an extension up to 15th July 2020.

The major cause behind this is that this additional 10% tax is calculated and even paid at the same time as the income tax owed on the gross income. In case you are filing before 15th July 2020, then this extra 10% tax would be calculated at the time of filing itself.

Remove excessive

deferrals

In case, excessive deferrals have been made by you to your work-based retirement plans then those deferrals must be removed from the plan. This removal must be done by 15th April 2020 as those distributions need to be removed from the income and there has been no extension in this deadline.

Conclusion

Hence, the current situation is quite stressful for the people as the COVID-19 has led to several lay-offs and business closures in sectors that are customer-facing in nature. If you have extra cash now, you must contribute it towards your IRA and take one step ahead for your secure retired life.

References

Tax relief measures for small businesses during the coronavirus pandemic

by Mounica Kota | Mar 21, 2020 | COVID - 19, federal government, global income tax, income tax credit, Investment & Income, Tax credits, tax deadline, Tax exemption, Tax Extension, tax filing, Tax Payers, Tax Refund, taxes, US Government

Tax relief measures for small businesses

during the coronavirus pandemic

The entire nation has been affected by the dreadful coronavirus. The rapid spread of the COVID-19 across the country has affected the economy on a very massive scale. The business operation across the country has come to a standstill especially in the case of small businesses that are tax relief measures. Social distancing and quarantining have led to a decrease in the number of customers coming to purchasing impacting sales. Numbers of employees are also not going on work as everyone is forced to stay inside for preventing further spread of the disease. In such adverse situations where there are huge economic disruptions, the Government is working towards passing legislation that would help in providing financial relief to the businesses and taxpayers.

The Families First Coronavirus Response Act

On March 13th, 2020, President Trump had declared a situation of national emergency along with open access of States and Territories to $50 billion for the shared fight against the disease. Again on 18th March 2020, the Senate had passed the Families First Coronavirus Response Act. This bill was signed by the President on that day which included the below-mentioned highlighted points.

1.Federally mandated paid leave benefits and paid sick leave are to be provided to the eligible employees. The paid sick leave must be provided to the impacted employees for 14 days at the regular rate of pay i.e. max $511 per day. Moreover, employers should also provide the benefits of paid leave to the eligible employees for three months.

2.The availability of tax credits for both employers and self-employed taxpayers have been mandated to reduce the burden of employers arising due to the paid leave

Extension in tax payment and tax return filing deadline

The US Treasury Department and the IRS had announced that the deadlines for filing tax returns and tax payments that are due on 15th April 2020 are extended up to 15th July 2020. This extension is applicable for making filing tax returns for 2019, Income Tax payments for 2019 and the estimated income tax payments for 2020.

If there is a tax refund due, then the Income tax returns must be filed as soon as possible so that the refund can be obtained immediately and put to use in this time of crisis.

Low-interest loans guaranteed by the SBA

When there is a tremendous drop in sales, it becomes quite difficult to manage business expenses, employee wages, bills, etc. In such a situation, a business loan can be taken but then it will have a very high rate of interest. So, to ease down these worries the President has announced that the Government would provide more funds in the federal disaster loans which are backed by the Small Business Administration (SBA). The loans provided by the SBA are known as the Economic Injury Disaster Loan.These loans would help in providing relief for the qualifying businesses in the below-mentioned forms.

Loans at low-interest rates i.e. 3.75% for businesses and 2.75% for non-profit organizations.
Repayment plans are long term in nature i.e. up to a maximum period of 30 years.

If a small business is facing financial issues and is not able to afford bills related to the payroll expenses, fixed debts and accounts payable then it can apply for an “Economic Injury Disaster Loan”.

Moreover, the federal and state financial regulators have been encouraging the financial institutions to work in a co-operative manner with those borrowers who belong to the affected communities.

Cash Payment by the Government

Another measure taken by the Government to provide relief to the small businesses is by providing the Stimulus package. Under this package, stimulus checks would be provided to US adults. On 27th March 2020, President Trump signed the CARES Act into law.

By this Act, cash payments would be provided to adult taxpayers up to $1200 for a single person and up to $2400 for couples. If there is a child, then the amount of the stimulus cheque will include an additional $500.

Those individuals who have earned $75,000 in the adjusted gross income (AGI) on the Income-tax returns of 2018 will be receiving a lower amount. Also, those individuals who do not have a federal tax liability will receive $600 under this proposal.

Deferment of

any amount

The IRS has also announced any amount can be deferred related to the Federal tax. In the Notice 2020-18, the IRS had stated that “there is no limitation on the amount of payment that may be postponed”. Previously, there was a dollar limit on the tax that can be deferred but later on 21st March 2020 this limit has been withdrawn.

This deferment or the postponement of tax payment has only been announced for the federal taxes and is not applicable for any other tax like excise taxes and payroll taxes.

Conclusion

Hence, the various legislations and implementations of new tax laws would be helpful for small business owners to avoid sleepless nights due to tax payments in times of low sales and disrupted business.

References

https://ssfllp.com/coronavirus-covid-19-tax-relief-for-small-businesses/

https://www.patriotsoftware.com/blog/payroll/small-business-relief-coronavirus-pandemic/

How to sign your tax refund electronically after the tax refund is submitted?

by Mounica Kota | Feb 12, 2020 | IRS e file Return, Personal Identification Number, Practitioner PIN, Self Select PIN, Tax Refund

How to sign your tax refund electronically after the tax refund is submitted?

Tax returns when filed electronically are convenient and can help you in getting back your tax refund very quickly as compared to filing a tax return by paper. In case of electronic filing of tax returns, after filing of the tax return you will have to do your signature electronically.

A tax return can be signed electronically by the use of a PIN (Personal Identification Number). PIN is a six-digit number that is assigned to taxpayers to prevent the misuse of their SSN (Social Security Number) in making fraudulent tax returns. By a PIN, IRS can identify an eligible taxpayer and thus, accept his tax return which has been filed electronically. So, if you have your PIN then it will not allow anyone else to file a federal tax return by using your SSN.

For signing your tax return which you are filing electronically, you will need the use of

Self-Select PIN
Practitioner PIN

Self-Select PIN

By the self-select PIN (SSP) method, you can select any five-digits except all digits being zero. This five-digit number helps in serving as your electronic signature. You can use your date of birth, prior SSP or your original prior-year adjusted gross income (AGI). This will help in authenticating your identity and no one can misuse your identity.

Original Prior Year Adjusted Gross Income (AGI) is used by many taxpayers as SSP for authenticating their identity. Usually, tax-preparing software will use the information of the previous years for the returning customers but if you are using tax-preparing software for the first time then there are various methods to determine your AGI such as

In your Form-1040 of last year, you would find out the AGI on Line 7.
If you have used a paid tax-preparer last year, then you will be able to obtain a copy of the tax return done last year from the preparer.
In case you are using the same tax-preparer as that of the last year, it will most probably have your prior year Adjusted Gross Income.
Also, if you are using different tax-preparing software this year you can access the previous year software and get a copy of the tax return filed.
In case you are above the age of 16 years and are filing the tax returns for the first time then you can use one single zero as your AGI.

Practitioner PIN

By the practitioner PIN method, you are authorizing your tax practitioner to generate your PIN. By this method, the tax-preparer will verify your identity and then give a signed Authorization form to the tax practitioner. This form is Form-8879 which is the IRS e-file Signature Authorization form and you must provide this form to your tax professional along with your SSP which you would have determined. However, in this method, there is no need for determining your previous AGI, date of birth, etc.

Some of the taxpayers such as primary taxpayers who are below the age of 16 years and have never filed a tax return previously or secondary taxpayers who are below the age of 16 years and have not filed the tax return in the previous year cannot use SSP method for identity authentication. However, they can use the Practitioner PIN method for making an electronic signature after-tax refund is filed.

Again while filing your tax returns; if you have to submit specific documents then you can do that by Form-8453 which is the US Individual Tax Transmittal for an IRS e-file return. This form will help in the transmission of paper documents or any supporting documents. IRS always advises the taxpayers to keep a copy of your tax returns and Form-8879 for future form.

Conclusion

Hence, even though the electronic medium of filing tax has made the entire process easier there is a need for maintenance of security while the operation is being performed. This is feasible by authenticating your identity through your electronic signature and the use of self-select PIN, practitioner PIN.

Reference

How to return an incorrect Tax Refund?

by Mounica Kota | Feb 7, 2020 | paper treasury cheque, Tax Refund, Tax refund cheque

How to return an incorrect Tax Refund?

There might be situations in which you might have obtained an incorrect tax refund. You are not entitled to obtain that tax refund or you might have obtained more than what you should obtain; in such cases, you can return the incorrect tax refund.

There can be several scenarios related to incorrect tax refunds obtained from the IRS.

In case of the refund obtained was a paper treasury cheque and has not been cashed.
In case of the refund obtained was a paper treasury cheque and has been cashed.
In case of the refund obtained being a direct deposit.

Refund is paper treasury cheque and has not been cashed

In this scenario, the below-mentioned steps can be followed.

On the back of the cheque in the endorsement section, “Void” has to be written.
The paper cheque must be submitted immediately to the correct IRS location but by 21days of receipt of the refund. The appropriate location i.e. the name of the city is mentioned in an abbreviated form in the bottom text line. It is mentioned just in front of the words “Tax Refund” in the Refund cheque.
You should simply place the cheque within the envelope without bending it, putting any staple or paper clip on it.
You will have to add a note highlighting “Return of erroneous refund cheque” and should explain in brief the actual reason for returning the refund cheque.

Refund is paper treasury cheque and has been cashed

In case the refund received is erroneous, is in the form of paper treasury cheque and has been cashed then the below-mentioned steps need to be taken.

In this case, you must submit a personal cheque or a money order to the appropriate IRS location. The location i.e. the name of the city must be mentioned in the form of an abbreviation in the bottom text line just in front of the words “Tax Refund”.
This should be done immediately within 21 days of the receipt of the tax refund.
Suppose, you do not have access to the copy of the cheque then you can contact the operations team of the IRS and connect with the assistor. The assistor will give you detailed information on what to do for returning an erroneous tax refund.
You need to mention certain details on the cheque or money order which you are submitting to the IRS.

You need to write “Payment of erroneous refund” on the cheque or money order.
You will also have to mention the tax period for which the tax refund was issued and TIN (Tax Identification Number).

5. Along with these details, you should also give a brief explanation of the reason for which the refund is being done.

6. Since you have cashed an incorrect refund cheque you might have to pay some additional interest to the IRS.

Refund is done by direct deposit

You will have to contact the Automated Clearing House (ACH) department of the bank or the financial institution where the direct deposit has been received. You can inform them about the actual cause and request them to return the refund received to the IRS.
You will have to call on the IRS toll-free number and explain to them the reason underlying the return of the refund obtained in the form of a direct deposit.
There may be a need for paying interest on the erroneous refund.

In general, when there is a change in the tax refund by the IRS then there would a notice sent by the IRS to your mailing address. This notice would explain to you the reason for the adjustments made by the IRS in the tax refunds. You should review the information given and check the refund. Moreover, you can contact the toll-free number for further support or information on this.

Conclusion

So, obtaining an incorrect tax refund can be quite a common happening but when you have an idea of what to do next then it would be easier. You can easily return your incorrect refund obtained and generate the request for obtaining the correct refund soon.

Reference

https://www.irs.gov/taxtopics/tc161

How exactly do you process a tax refund as an NRI in the US?

by Mounica Kota | Feb 5, 2020 | 1040-NR-EZ, Form 1040-NR, tax filing, Tax Refund

How exactly do you process a tax refund as an NRI in the US?

In the US, Do you process a tax refund if you are an NRI then while filing your tax return you would be considered as a Non- resident alien in the country. A non-resident alien is an alien who has not cleared the green card test or has not cleared the substantial presence test. However, in case if you are a nonresident alien at the end of the tax year but your spouse is resident alien, then you can be treated as a ‘Resident alien’ for tax purposes. This can be done by your spouse by filing Form-1040 and using the status ‘Married filing jointly’.

When an NRI must file a tax refund in the US?

You should file a tax return when you are engaged or being considered to be engaged in any trade or business in the US during that particular year.

Even when you are not a part of any trade or business of the US but you have income in the US upon which the tax withheld at the source does not seem to be satisfactory.

You should file a tax refund under the below-mentioned circumstances.

When you are willing to claim a return of any excess withholding or tax overpaid
When you are willing to avail of the benefits of any credits and deductions. For instance, you are not involved in business activities in the US but have income from US property which you are considering as effectively connected income.

Which income needs to be reported?

The income of an NRI which is taxable in the US is mainly classified into two categories.

The US source income is fixed, determinable, annual or periodical.
Income which is effectively connected with either trade or business in the US.

Which forms to be filed by NRIs in the US?

Non-resident aliens are required to file their income tax returns by using the below-mentioned forms.

Form 1040-NR, US Non-resident Alien Income Tax Return or
Form 1040-NR-EZ, US Income Tax Return for Non-resident aliens having no dependents.

You will have to fill Form 1040-NR in case of the below-mentioned circumstances.

You are a non-resident alien who is engaged in any trade or business happening in the US.
You represent a deceased person who needed to file Form 1040-NR.
You represent an estate or a trust which had to file Form 1040-NR

For Form 1040-NR-EZ, you must be having income from the various sources in the US in the form of salaries, wages, tips, scholarship or fellowship grants, refunds from State or local income taxes, etc. Moreover, you must not have any dependents for being able to file Form 1040-NR-EZ.

What is the deadline to file Income Tax Refund by an NRI?

In case you are an employee in the US and you receive wages that are subject to taxes under the US tax laws, then you must file your taxes by the 15th day of the 4th month after the end of the tax year.
In case, you have an office or you have a place of business in the US then you should file your tax refund by the same schedule mentioned above i.e. 15th day of the 4th month after the tax year’s end.

Ideally, if you are filing your tax returns as per the calendar year then you must do it by 15th April of the year.

3. In case, you are not an employee who receives wages or you do not have any office/business in the US then you can file your tax return by the 15th day of the 6th month after the end of the tax year. This means if you are filing your tax return according to the calendar year, you must do it by 15th June.

The Form 1040-NR and 1040-NR-EZ must be sent to the addresses which are mentioned in the instructions of the forms while filing. Suppose, you are not able to file your return by the due date you can request for an automatic extension by filing Form 4868.

Conclusion

Hence, by filing your tax refund on time and in the correct procedure you would be able to avail the benefits on deductions and credit.

Reference

Should capital gains taxation affect me?

by Mounica Kota | Jan 24, 2020 | capital gains, income tax, Investment & Income, tax deductions, Tax Refund, Taxation, taxes

Should capital gains taxation affect me?

Capital gains taxation a lot of things that we own for either personal use or for investment purpose usually qualifies as a capital asset. Some common examples of capital assets include house, property, bonds, and stocks held as an investment, home furnishings, etc.

When you sell any of these capital assets and make some profit on them, the capital gains taxation come into the picture. The basis of capital gains taxes is that when you sell or exchange your capital assets, you do so at a higher price than you had bought them. Similarly, if you sell a capital asset at a lower price than you paid to buy the same, it would be tagged as a capital loss.

Classification

Capital gains are either classified as long term capital gains or short term capital gains. Here are some details about each category.

Long Term Capital Gains

If you hold on to a capital asset for a minimum of 1 year and then decide to sell or exchange it, any gains that you make would be long term capital gains. And the applicable taxes also vary depending on the type of capital gain. For long term capital gains, most individuals would end up paying no more than 15% as taxes.

There is a possibility that some or all your capital gains might be even taxed at 0% if your income is less than $78,750. The standard rate of 15% is applicable if your income ranges between $78,750 and $434,500 for single taxpayers and between $78,750 and $488,850for taxpayers who are married and filing jointly.

Citizens with annual income exceeding the above, the capital gains tax works out to be 20%. Certain capital assets such as collectibles, selling stocks of small businessses, etc. are taxed at a maximum of 28%.

Short Term Capital Gains

Any assets that you sell or exchange within a year of buying or acquiring it qualifies as sort term capital gain. In the case of any short term gains, the gain is added to your annual income and taxed accordingly.

One of the major benefits of categorizing these gains is that you are entitled to lower taxes. If the same amount were to be taxed like your income, you would end up paying higher taxes. However, with short term and long term capital gains, you can reduce the tax liability by a considerable margin.

As a rule of thumb, short term capital gain taxes tend to be on the higher side. Since it is dependent on the annual income, the maximum taxes can go up to 37%. On the other hand, long term capital gains can be up to a maximum of 20%.

On the other hand, if you sold a capital asset at a lower price than what you acquired it for, you would incur a capital loss. And it is important to know that you can use those losses to offset any of your capital gains. They can offset gains up to $3,000 with the help of capital losses.

If you stay in the house that you are putting up for sale for a minimum of two years, capital gains up to $250,000 for individuals and $500,000 for married couples is tax free. Thus being aware of the taxes can save the day for you.

If you own any of the capital assets mentioned above, you are entitled to pay capital gains taxes on the selling of these assets. The presence of capital gains taxes impacts you in more ways than you realize. For starters, unless it is short term capital gains, you will end up paying fewer taxes.

Reference:

https://www.taxpolicycenter.org/briefing-book/how-are-capital-gains-taxed

https://taxfoundation.org/capital-gains-taxes/

https://www.irs.gov/taxtopics/tc409