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.

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.

Can the market losses be utilized to adjust tax payment?

by Mounica Kota | Jun 5, 2020 | capital losses, stock market, Tax Deduction, Tax Rules

Can the market losses be utilized to adjust tax payment?

Losses incurred in the stock market can be termed as Capital Losses. Capital Losses are said to be incurred when a capital asset such as an investment or a real estate decreases in its value. When this capital asset is sold at a price which is much lower than the actual purchase price of the asset, then the capital loss is realized. There are always fluctuations in the stock market and your investments might give you huge profits or even bring your losses. Losses are always demotivating; however, you can note that capital losses can be used to reduce the income tax bill which you owe to pay to the IRS.

Tax Rules related to Capital losses

Like it is mandatory to report Capital gains as income, similarly, Capital losses can be used as deductions on your tax returns.

Capital losses are mainly of three categories which are listed below.

Realized Capital Loss – Realized capital loss occurs after you have sold your asset or investment.
Unrealized Capital Loss – These losses are those capital losses which do not need to be reported.
Recognizable Loss – Recognizable loss is defined as the amount of loss that can be declared in a given year.

According to the US Tax laws, your realized capital losses can have an impact on your income tax bill. Moreover, realized capital losses can be used for lowering the income tax bill only if the asset you have sold was owned for investment. Also, you need to think wisely and create realized capital loss; for instance, if you sell a coin collection for a price lower than its cost price intending to utilize it as a deduction on income tax bill it would not be acceptable.

Determination of Capital Loss

For calculation related to income tax purposes,
Amount of capital loss = Number of shares sold, times the pre-share adjusted cost basis – the total sale price.
Cost Basis price refers to the fact that it provides the basis from which any capital gains or capital losses are figured, of the stock share, is the total of the purchase price and any fees(such as any commission or brokerage fees).
There is a need to adjust the cost basis price if there was a stock split during the period you had owned the stock. You will have to adjust the cost basis concerning the magnitude of the stock split.

Deduction of Capital Losses

Capital losses can be used to offset the capital gains in a taxable year. By this, you would be able in the removal of some portion of your income from your tax return.
A capital loss can be used by you to offset your ordinary income but up to a limit of $3000 in a year in case of a lack of capital gains by which you would have been able to offset your capital losses.
If you are willing to deduct your stock market losses, then you would have to fill Form 8949 and Schedule D while filing tax returns.
Your short term capital losses would be calculated against your short term capital gains by using Part I of Form 8949 to arrive at the net short term capital gain or loss. In case of a lack of capital gains for that year, the net would be a negative number equal to the total of your short-term capital losses.
Part II of Form 8949 will be used for the calculation of your net long term capital gain or loss. It would be equal to any long term capital losses minus long-term capital gains.
The next step is the calculation of the total net capital gain or loss by a combination of your short-term capital gain/loss and the long-term capital gain/loss. The resulting figure would be entered into Schedule D Form.
If your net figure obtained is a negative number (the difference between short term and long term gains/losses) which indicates an overall capital loss then this loss is deductible from any other taxable income with a limit on the amount set by the IRS.
For taxpayers, filing tax returns as Married and filing jointly the maximum amount deductible from total income is $3000. However, for taxpayers filing tax returns as Single or Married and filing separately the maximum deduction permissible is $1500. Moreover, if the amount of your net capital loss is more than the permissible limit you can carry it forward for the next taxable year.

Hence, you must attempt to take your tax-deductible capital losses in a very tax-efficient manner to have maximum benefit. Choosing a short-term capital loss for tax deduction would be more advantageous than that of a long-term capital loss. In general, you should opt for taking any capital loss in the year in which you are tax-liable for short-term gains or in which you have obtained zero capital gains as this would help in saving on your ordinary income tax rate.

References

https://www.investopedia.com/articles/investing/062713/capital-losses-and-tax.asp

https://www.investopedia.com/articles/personal-finance/100515/heres-how-deduct-your-stock-losses-your-tax-bill.asp#:~:text=Deducting%20Capital%20Losses&text=If%20you%20don’t%20have%20capital%20gains%20to%20offset%20the,forward%20to%20future%20tax%20years.)