All about Unemployment Income Reports

by | Mar 5, 2021 | 2020 Tax Returns, Blog, income tax, Tax Planning, Tax Preparation

All about Unemployment Income Reports

All about Unemployment Income Reports

The US economy has suffered from a great setback due to the pandemic COVID-19. Millions of Americans have either lost their jobs or have been furloughed. However, the US Government has started the initiative of providing several unemployment benefits for the affected Americans. These unemployment benefits are either a part of the CARES Act or are also sponsored by the State Government.

If you have been facing the problem of unemployment due to the pandemic and have received the unemployment benefits, then your taxes must have been affected. So, it is very important for you to understand how to report your unemployment income on your tax returns.

Taxability of the Unemployment Income

Unemployment income would be considered as an income and hence is taxable as per the laws. According to the norms of the IRS, the unemployment income or compensation obtained should be reported on the tax return of the year 2020.

The IRS and the Government want their cuts of the funds which you are receiving in the form of Unemployment income. Income is income and the source of income is not to be considered when it comes to filing your tax returns.

Unemployment Income to be reported

 Before you start filing your tax return for the year 2020, you should be aware of the below-mentioned facts.

You must check out if you have been a participant involuntary withholding. If you have been a participant in the Voluntary Withholding, then you should have done it by filing the Form W-4V which denotes the Voluntary Withholding Requests. In case, you had filled out the Form W-4V then withholding of a flat 10% of your unemployment benefits would have occurred. This would mean that you have already paid 10% of your federal income taxes on your income earned due to unemployment.

In case, you are not making payment for the taxes of any of your unemployment income then a lump sum of your taxes would be paid while filing your tax returns. In such cases, the IRS would however offer payment plans by which you would be able to make the payment of your taxes.

Reporting your unemployment income

 In your federal tax returns, you can mention the unemployment income which you have received under the Income Section. Before starting the process, one mandatory step is to receive Form 1099-G. This Form would help in highlighting the certain Government payments which have been issued by the State’s unemployment office and shows how much amount you have received as Unemployment Income.

You must keep that Form and match it to your own records which you have. Under the Income Section of your Tax return, the amount mentioned in Form 1099-G must be mentioned. Unemployment Income is usually reported in your federal tax return in Schedule 1 in the “Additional Income Section”. Then the full amount would be carried forward to the main Form 1040.

Exceptions for COVID-19

At this point, the IRS has clearly stated that there are no exceptions related to the taxes with respect to COVID-19. It has been stated by the IRS that you will have to pay the taxes related to unemployment on both the income received for unemployment from the State and also any extra funds if received from the Federal Government due to unemployment.

If you cannot pay the bills

In case you are not able to pay your tax bills on time you should not panic. You should not refrain from filing your tax returns due to this. It would be best for you to file your tax returns for the year 2020 even if you are not able to pay your bills on time. You would have to pay penalties in case of missing the tax return filing deadline.

You can contact the IRS and discuss the delay in tax payments. The IRS would help you by providing an extension in the tax payment, creating instalments in making the tax payment, or temporary late collection of taxes, etc.

Conclusion

Hence, reporting Unemployment income is a must for Americans and the given information would help understand the tax implications associated with Unemployment income.

If your Income Tax Refund is delayed because of the PATH Act

by | Feb 23, 2021 | income tax, Income Tax Refund

If your Income Tax Refund is delayed because of the PATH Act

If your Income Tax Refund is delayed because of the PATH Act

 

The PATH Act was passed in the year 2015 and it would include some changes brought to the tax laws in the US. The PATH Act would include bringing up changes into the two major tax credits i.e. The Additional Child Tax Credit (ACTC) and the Earned Income Tax Credit (EITC). 

The refundable part of the ACTC is known as the Child Tax Credit (CTC). EITC is a mean-based tax credit that is refundable and it’s worth would be more than $6,000. 

The PATH (Protecting Americans from Tax Hikes) Act was signed into a bill in the year 2015. According to the PATH Act, the IRS will not issue refunds which would include the EITC and ACTC before the mid of February.

The PATH Act applies to all tax preparation methods and its main objective is to help in detecting and prevention any tax frauds. Moreover, by the extension in the release of refund, the IRS gets time to ascertain that the taxpayers are properly claiming their tax credits.

PATH Act and the Extended Tax Credits  

Those taxpayers who are willing to claim the ACTC (Additional Child Tax Credit) can avail a significant break on their federal income tax. This break can be up to 15% of the income the taxpayer family has earned above the initial threshold of $3000.

Let us illustrate this with the help of an example.

  1. Suppose, a family has an income of $40,000 then the refund of 15% would be applied on the $37,000 which is the amount that is left after the threshold of $3000 has been applied.
  2. The expiring tax laws can raise this tax threshold to around $10,000 which can lower your tax refund amount but the PATH Act would help in keeping the threshold fixed at $3000 permanently.

Similarly, the PATH Act would help in permanently increasing the phase-out threshold for the EITC (Earned Income Tax Credit) by an amount of $5000 for those who are married and filing their tax returns jointly. This implies that those couples who have earned more than $5000 would have been originally allowed might now receive the complete EITC for their income. 

Some additional changes to the EITC

There have been some additional changes to the EITC by the PATH Act which can have an impact on your tax returns. 

  1. The Social Security Number (SSN) is always necessary to claim the EITC. However, according to the older tax laws the credit could have been claimed even for those years for which the taxpayer did not have an SSN.
  2. By the PATH Act, EITC cannot be claimed for those years in which the taxpayer did not have a valid SSN. 
  3. Taxpayers who are claiming the EITC by erroneous means can be penalized by the IRS under the provisions of the PATH Act. This can also restrict the taxpayer from claiming the EITC credit for the upcoming 10 years.

Delay in the tax refunds

Most of the taxpayers who are claiming the EITC and ACTC would be experiencing a delay in the receipt of their tax refunds. According to the PATH Act’s provisions, the IRS should withhold the tax refund for those taxpayers who are claiming these credits till 15th February 2021.

In case, a taxpayer is filing his tax returns before 15th February then he owes a tax refund and in case he is claiming the EITC or ACTC then the refunds would be withheld until the 15th February deadline.  By this delay, the IRS would get a considerable amount of time to match up the information present on a taxpayer’s tax returns and the respective W-2 forms.  This would help detect and prevent identity thefts and tax frauds. 

According to the IRS, if a taxpayer has claimed the EITC and ACTC then he can expect to obtain his tax refund by the first week of March. This would be feasible if the below-mentioned conditions are satisfied:-

  1. The tax returns are filed online by the taxpayer
  2. The taxpayer would get his refund by Direct Deposit
  3. There have been no issues found with the filing of the tax returns

Conclusion

Hence, if the credits EITC and the ACTC are being claimed then the taxpayer must be prepared to experience a delay in receiving their tax refund. The refund status can always be checked by using the “Where’s My Refund” tool or by using the IRS2Goapp.

 

Financial Goals change with change in Income and Taxes as Well

by | Jan 13, 2021 | Financial and Mental Health, income tax, Tax Planning, Tax Preparation, Tax Refund, Taxpayers

Financial Goals change with change in Income and Taxes as Well If there are any minor changes into your Income such as a pay rise or a decrease in the duration of work hours, then it is quite easy to change your financial goals. However, if there are bigger changes in your income then it becomes quite difficult to change your financial goals.  It may be a case of a promotion, a pay hike or a pay cut during adverse times like pandemic. In both of these scenarios, it is quite difficult to manage your financial goals and objectives. Let us have a look at how to manage or rather change your financial goals as your income changes. A huge decrease in your income In case, there is a huge decrease in your income then the most important thing to consider is the impact of the decrease in your life on a daily basis. Suppose, you have lost your job and you are filing for unemployment then, in that case, your expenses would be more than your income. In such cases, the best idea is to look out for those areas where you can cut your expenses to get closer to positive cash flow. If such adverse situations occur, then it is best to put your long-term financial goals on hold for a temporary period.  There might be a need for goal adjustment and it can be started by reducing your contributions to align with the decrease in income. In these adverse times when the deadly coronavirus has taken a toll on the lives and the livelihoods of people, if there is a 50% reduction in your income then your contributions towards investments and other financial avenues must be reduced by half. With the economic situation worsening every single day due to the pandemic, it is wiser to remain careful about such situations and strategies to handle such scenarios.  A huge increase in your income If you are getting a pay raise or switching jobs, you must plan towards increasing your contributions for your financial goals. You should avoid spending more and stick to a particular budget for your expenses. The bottom line is that you must try to resist the temptation to spend in a limitless manner. It is quite obvious that you are accustomed to a particular lifestyle and when your income increases you can be able to save some more by maintaining the same lifestyle. There can be a temptation in your mind to accelerate your financial goals and you can use several financial tools which can help you in accelerating your goals and increasing your savings. In case you are saving more, you would be able to achieve your financial goals easily and on time so it would be quite sensible to adjust your timelines. If financial goals are not dependent on the stock market or any other factors you can adjust them as they fit into your financial plans.  One of the best examples explaining this is your retirement. The retirement accounts which you have would definitely be invested into the stock market and if there is a rise in your income it indicates that you can retire earlier with your financial plan reflecting this. It is imperative for you to adjust your allocation of assets with an updated time frame of retirement along with your projections.  In general, a big change in your income indicates a very big change in your goals associated with savings. You should not forget to adjust your savings goals with any unexpected increase or decrease in your income. Conclusion Hence, an increase or decrease in your income can have a great impact on your financial goals. You must determine your financial goals clearly whenever there are any changes in your income and work accordingly to achieve those goals.

Does every NRI in the US need to file their Income Tax?

by | Jan 10, 2021 | income tax, income tax credit, NRI, tax filing, Tax Payers, taxes

Does every NRI in the US need to file their Income Tax? Everyone in the US is not required to file their Income Tax return every year. In case, your total income for a year does not exceed a particular threshold then you would need to file a federal tax return. The amount of income which you would be able to earn before you are needed to file a tax return would be based on the type of income, the age of the NRI and the filing status of the NRI. Gross Income Thresholds Most taxpayers are eligible to claim the Standard Deduction. As an NRI, the Standard Deduction amount for which you would be eligible for is mainly determined by your age and your filing status. The Government usually decides this amount before the tax filing season arrives and this amount would increase for inflation each year. By the help of Standard Deduction and other deductions, your income can be reduced to determine your taxable income. In general, if your income is less than your Standard Deduction then you do not need to file a federal tax return. You would not need to file a federal income tax return if the below-mentioned criteria are true.
  1. If you are below the age of 65 years
  2. If you are filing your tax returns with the Single status
  3. If you do not have any other special conditions which would require you to file the tax returns such as income obtained from self-employment
  4. If your income is less than $12,400 i.e. the Standard Deduction in the year 2020 for a taxpayer.
What would happen if you are only receiving Social Security Benefits? In general, cases, if your only source of income is the Social Security Benefits then you would not have to file a tax return. However, Social Security Benefits have another aspect i.e. if you are married and are filing your tax return separately from that of your spouse then some of your Social Security Benefits must have to be included in your taxable income to know if it is greater than the Standard Deduction you are claiming. Taxability of Social Security Benefits In order to find out if the Social Security Benefits which are receiving are taxable or not, the below-mentioned steps can be implemented.
  1. You can add one-half of your Social Security Income to all other types of income which you are receiving including the income which is tax-exempt.
  2. After that, the amount obtained can be compared to the base amount for determination of your filing status.
  3. In case, the total will be more than the base amount then some of your Social Security benefits would be taxable.
When a dependent would need to file a federal tax return? NRI taxpayers who are claimed as dependents on the tax returns of another person have different filing requirements with the IRS. The income of a dependent can be “unearned” when it would be derived from certain sources such as dividends or interest. If the unearned income of a dependent is more than $1,100 in 2020 then tax return must be filed by the dependent. Filing a Tax return to claim a tax refund There might be instances when there would be the need to file a tax return for an NRI such as taxes would have been withheld from a paycheck and a tax refund is due. If too much amount has been withheld from your paycheck, then the only method by which you would be able to obtain your tax refund is by filing their tax return.
  1. For instance, if you are an NRI who is a taxpayer with a single filing status and earns $2500 during a particular year and $300 is being withheld from your paycheck then you can obtain a refund of $300 as your income is less than Standard Deduction.
  2. If you have a refund due then the IRS would not automatically issue the refund. You would have to file a tax return so as to obtain your refund which is due.
Conclusion Hence, if you are an NRI in the US then there are various criteria which are applicable for determining your tax liability. You must be well aware of these criteria and file your tax returns accordingly.

Capital Gains tax on selling your property in 2020.

by | Oct 26, 2020 | capital gains, income tax, IRS, tax filing, tax savings, taxes

Capital Gains tax on selling your property in 2020

When you are selling real estate which has been held by you as an investment, the tax implications might be different based on the period for which you have held the property. The tax rules also depend on whether the property is a home or any other category of real estate. If it is a home sale, then it is considered as a particular type of capital gains which has its own set of taxation rules.

 If you are selling property that you have held for less than a year, then it is known as Short-term capital gains. You would have to pay taxes for the Short-term capital gains at the same rate as that of the Income taxes. However, the rates are based upon the income bracket under which you fall.

 When you are selling property which you have held for more than a year, then the profits obtained is known as long-term capital gains. The rates at which the long-term capital gains are taxed are your taxable income, your filing status which can be single, married, and filing taxes separately and married and filing jointly/head of the household.

 Let us have a look at the tax rates for the long-term capital gains of the year 2020.

a.Individual rate or when you are filing as a single

Income

Long-Term Capital Gain Rate

$0 to $40,000

0%

$40,000 to $441,450

15%

$441, 451 or above

20%

 b. Married and filing taxes jointly 

Income

Long-Term Capital Gain Rate

$0 to $78,750

0%

$78,751 to $488,850

15%

$488,851 or above

20%

 c. Married and filing taxes separately 

Income

Long-Term Capital Gain Rate

$0 to $39,375

0%

$39,376 to $244,425

15%

$244,426 or above

20%

 d. Head of the Household 

Income

Long-Term Capital

$0 to $52,750

0%

$52,751 to $461,700

15%

$461,701 or above

20%

Example to illustrate capital gains tax implications on Real estate

In case you are married and filing taxes jointly along with your wife. You and your wife have a taxable income of $200,000 for the year 2020. By this, you would be included in the tax bracket of 15% for the year 2020.

Then you had purchased land in California less than a year ago. However, you had some emergency and needed cash. You had estimated a profit of $10,000 when you had purchased the land. If you sell it now immediately it would be a short-term capital gain and you would have to pay tax $2400 for it. But, if you waited for some more time and sell it then it can be considered as a long-term gain and would be taxed at 15%. So, you would have to pay $900 less or $1500 for the land. Thus, you would have an $8500 gain on the investment.

How much tax can you exclude?

  • If you are selling the house in which you are staying current, then your capital gain would not be taxed up to $250,000 if you are filing your tax returns as a Single.
  • This exemption is based on the IRS Section 121 Exclusion.
  • If you are married and are filing your tax returns jointly, then you can avail of the benefit of a tax exemption of up to $500,000.
  • You would qualify for this exemption only if you are the owner of the home and have used it as your primary residence for a minimum period of 2 years out of the five years before the sale date.
  • There can be some factors which might not let you avail this normal exclusion such as
  1. If you are liable to pay expatriate tax
  2. If the home or the real estate which has been sold by you was not your main residence
  3. If you have not lived there for 2 years out of the 5 years before the sale
  4. If you have not owned the house even for 2 years out of the 5 years before the sale of the house.
  • If you are married and are filing your taxes jointly, then only one out of both of you must satisfy the owning criteria to avail of this tax exclusion.
  • You can still claim the tax exclusions even if any of the criteria are not satisfied if the house was sold or exchanged due to some changes in your employment place, health issues, or any unexpected circumstances.

How to file your Capital Gains Tax?

In 2019, the IRS had said to report your capital gains and losses on Schedule D and report the amount on your Form 1040.  However, now if you are receiving Form 1099-S, Proceeds from Real Estate Transactions, you should report about the sale of the home even though the gain obtained from the sale is excluded under the IRS Section 121 Exclusion.

Conclusion

So, these are the important tax implications on any capital gains you have obtained by selling property. You should also keep in mind that if your investments are being sold they might be subject to an additional 3.8% income tax.

Is your income tax refund guaranteed?

by | 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.