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.

Can a property be seized if you owe back tax to the IRS?

by | Oct 12, 2020 | IRS, owe taxes, property tax, tax filing, Tax Payers, Taxtips

Can a property be seized if you owe back tax to the IRS?

“Can the IRS seize my property if I owe taxes?” This is properly the first question every person who owes tax to the IRS enquires. The mere thought of losing their most valuable asset can create a sense of terror and fear in the minds of taxpayers who might have taxes due to the IRS. However, this might depend on why you owe taxes to the IRS, how much tax you owe, and your financial circumstances.

 The IRS has the authority to seize the property of a taxpayer if the taxpayer has been neglecting or avoiding payment of taxes to the IRS.  This process is otherwise known as Tax Levy. By Tax Levy, the IRS has the legal authority to seize a taxpayer’s property which might include a real estate for the settlement of taxes for which there have been several notices sent to the taxpayer.

 When will the IRS seize your property?

  • Seizure of your property is the last method which the IRS might follow for the settlement of the back taxes.
  • Before the seizure of your assets, the IRS would take the below-mentioned steps for the tax settlement: –
  1. The IRS would assess your outstanding tax and would issue a notice to you which would be demanding for the payment of the taxes.
  2. If you have neglected the notice sent to you by the IRS, then
  3. You will be sent a final notice of intent to levy and also a notice of your right to have a hearing before 30 days of the implementation of the tax levy.

 If the IRS decides to take your property 

  • The IRS would calculate and provide you with the minimum bid price of your property.
  • If necessary, you can challenge the price laid off by the IRS and state the fair market price of your property.
  • The IRS would issue a notice and make the announcement for sale of the property.
  • After the announcement, the IRS waits for 10 days before your property is sold off.
  • The entire amount obtained from the sale of the property would be used to recover the expenses incurred in the property seizure, selling of the property, and payoff of your tax debts.
  • You will obtain a refund if any amount is left out after the sale is over and if any excess money is left out.

 Will the IRS visit your home?

 The IRS representative can visit you for tax-related discussion only in circumstances such as

  • You owe taxes to the IRS and there is a need for a discussion.
  • There is an audit process
  • If there is a criminal investigation needed

 However, there has been an increase in the fake IRS visits and tax scams lately which urges the taxpayers to be aware of their rights. You have the right to verify whether the IRS representative is authorized or not by asking for their credentials. 

What are the other properties which the IRS can seize?

 By a tax levy, the IRS can be able to seize the below-mentioned properties. 

  1. Real estate
  2. Your vehicle
  3. Wages by Wage Garnishment
  4. A levy can be put up on your bank account
  5. Investments and collectibles

 Can you get back your seized property?

 In case, you want to get back your seized property you would have to take some immediate action for resolving the tax debt. You must get in touch with the IRS to request a release of your seized property. Moreover, help from a tax professional would help you in the expedition of the process. In case the IRS would not approve your request for the release of the seizure, you can have an opportunity to appeal against it.

 There are certain circumstances in which the IRS would have to undo the seizure of your property. 

  1. Your seizure can be released if you have fulfilled your tax liabilities.
  2. If the tax collection period got completed before the seizure of your property was done.
  3. If you have enrolled in an installment agreement program and the agreement does not allow the seizure of property.
  4. If by the release of your property, you would be able to cover your tax balance.
  5. If by the seizure of your property, you would be facing some economic hardships and would not be able to avail of the necessities of life.
  6. If the value of the property seized by the IRS would exceed the tax owed and the release of the property would not prevent the IRS from the tax collection.

 Protection of your assets from the IRS

 If you want to avoid any kind of trouble with the IRS, then you must be careful about the rules. Either paying of your taxes or responding to the IRS notice, everything must be done on time and carefully.

 Some of the basic steps by which you can take to prevent a tax levy are:-

  1. Find out methods by which you can utilize your finances to cover up your tax debts.
  2. In case you are not able to pay off your entire tax debt in full, then you can enter into an installment agreement.
  3. You can check with the IRS if it is feasible to classify your taxes as uncollectible.
  4. You can also try to request the IRS for an offer in compromise.

 Conclusion

 As a US taxpayer, you must fulfill your civil responsibilities on time. Ignoring or neglecting the notices or communication obtained from the IRS can lead to serious consequences. So, you must abide by the laws, regulations and must take matters related to the IRS quite seriously.

SBA Debt Relief for small business owners

by | 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.

  1. In case the loan payment of a borrower was to be collected after 27th 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.
  2. 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.
  3. 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.
  4. In the case of those loans which have been made after 27th March 2020 and have been fully disbursed before 27th 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 1st March 2020, automatic deferments would be provided by the SBA through 31st 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.

 

Types of interest that is eligible for Debt-Tax Deductible

by | Oct 7, 2020 | income tax, IRS, Tax Planning, Tax Preparation, Tax Refund, taxes

Types of interest that is eligible for Debt-Tax Deductible

There is a number of debts that would accrue interest on them such as student loans or home mortgage, etc. When the interest accrual is for a longer period, the repayment amount goes on increasing and it turns out to be quite expensive to repay them. If you have several debts then, it is quite obvious for a lot of interest to get accumulated quickly. You might be having low-interest rates but then the only way to pay off is by reducing your outgoing expenses.

 Is the interest levied on debt tax-deductible?  It might be sometimes; however, it might depend on the type of interest and many other criteria.

 Let us find out the types of interest which can be eligible for a tax deduction.

 

The interest which is eligible for a tax deduction

 

Student Loan Interest

 A large number of the students are under the burden of debts due to the Student loan and to reduce the burden caused by these debts, the IRS provides a tax deduction on the interest which is levied on the Student loan. By the Student loan interest deduction, you can deduct a maximum of $2500 from your income which is taxable as long as the Modified Gross Income (MAGI) of your previous year is less than $70,000. The student loan must be taken either by you, your spouse, or a dependent. The loan must have been taken by you for educational purposes during the period in which you, your spouse, or dependent was enrolled for at least part-time into a degree course.

 

Home Mortgage Interest

If you are borrowing money for purchasing a home, then you might have the eligibility to avail of the mortgage interest deduction. According to the regulations of the IRS, if you have bought your house after 15th December 2017 you can be eligible to take up to $750,000 in the form of the interest deduction. Moreover, this is also applicable to those mortgages which are up to $1 million and have been purchased before 15th December 2017.

 If you are paying home equity loan debt, you can be eligible to take the advantage of the home mortgage interest deduction. However, this is feasible only if you are utilizing the home equity loan for purchasing, constructing, or improving the home which secures your home equity loan.

 If you want to claim your interest deduction on a home mortgage, you will require the IRS Form 1098 or the mortgage interest statement which you would obtain from your lender. You would also need proper records that would document the details of your home and mortgage. Moreover, you would obtain the need to obtain the Schedule A too for claiming your itemised deductions. You must carefully read the IRS Publication 936 to get more detailed insight into the types of documentation that the IRS would need to check for your deduction approval. 

 

Margin Debt Interest

 In case you are borrowing money from a particular lender for investing, then you would be able to claim a deduction for the interest on the margin debt that has been incurred by you. The value of the deduction is capped at the net taxable income obtained from the investment which you would be able to claim during a tax year; however if you do not have any net taxable income obtained on the investment to claim you can easily carry forward the remaining interest expense.  By this, you will have the ability for interest deduction from the net taxable investment income in the next tax-filing year.

 The tax deduction for the margin debt interest can be calculated by the use of the IRS Form 4952.

However, you can even calculate the margin interest which is deductible by the below-mentioned steps.

  1. You consider your gross income and perform subtraction of qualified deductions, net gains, and all other expenses incurred from investment.
  2. The remaining number obtained is your net investment income.

Let us suppose, you have $1000 as your investment income and $500 as your interest expenses you would be able to deduct $500 on your tax returns obtained.

 

Business Loan Interest

 Business loans would help in providing funds for the expenses incurred in the operation and growth of your business. There are several uses of business loans and can include the accommodation of lines of credit to property mortgages. Business loans also accrue interest over time and this interest accrued is tax-deductible.

 The major conditions which determine the tax deductibility of the business loan interest would include the type of business loan you have procured, the relationship between lender-debtor, legal liability for the debt and a proper agreement from both lender and debtor for the debt to be repaid.

 Some of the common categories of business loans which would be eligible for small business deductions are:-

  1. Term loans
  2. Short-term loans
  3. Business lines of credit
  4. Personal loans
  5. Business Purchase loans

You should use the IRS Form 8990 for calculation of the amount of business interest you can deduct for a particular tax year.

  • Sole proprietors and single-member LLCs must claim their deductible interest in the Section –Expenses of Schedule C on Line 16.
  • In the case of partnerships and multiple-member LLCs, the expenses related to these interests on business loans can be claimed by recording in Form 1065 and the “Other Deductions” section.

 

What are the benefits of deducting paid interest?

Your taxable income can be reduced by using the benefit of the interest deduction.

  • By taking the advantage of interest deduction, you would be able to move into a lower tax bracket.
  • Also, you can be taxed at a lower federal rate by utilizing the benefit of the interest deduction.

 

Conclusion

 Hence, the above-mentioned categories of interest are eligible for the deduction of debt tax and would be beneficial for you to have low taxable income.

The top 10 myths busted for taxpayers in the US-2020.

by | Oct 7, 2020 | IRS, Tax Payers, tax return

The top 10 myths busted for taxpayers

in the US-2020.

It is quite obvious that there are some common misconceptions among the taxpayers related to various facts related to taxes. Some taxpayers feel paying taxes is not necessary and can be avoided whereas certain tax deductions have been labeled as loopholes. Some taxpayers even follow the bad tax advice from others blindly and land up in troubles. 

So, let us understand some of the major myths associated with the taxes in the US and debunk those myths to be better taxpayers.

 

Myth 1:- Filing of taxes is a voluntary activity.

Even if this can be considered as falsehood, there are a large number of people who believe in this. These people think that due to the Form 1040 instruction book, the tax system is voluntary and people are not legally liable to pay taxes.

Here the term voluntary means that every individual would find out how much tax they owe, but has no relations if the filling of taxes is done on time or not. Unless there is a legal dispute, it is a bad idea to think about such theories to contest with the IRS.

 

Myth 2:- Illegal activity is not taxable.

Even if performing illegal activities is wrong, it cannot be considered non-taxable. The income obtained from illegal activities is taxable. If the entire scenario is being considered from a tax perspective, then the IRS does not care whether income obtained is by robbing banks or by defrauding investors. When an individual is making money, the Government is entitled to receive its share. The person can be very good at covering the tracks but, if illegal income is made and on top of that tax cheating is done it is sure to be exposed.

 

Myth 3:- Pets can be claimed as dependents.

A person might love his pets up to any extent, but he cannot claim them as dependents. Pets indeed obtain half of their financial support from the masters; but, they are not humans. If a dependent is being claimed falsely, then it would be counted as a fraud and must be avoided.

 

Myth 4:- Students do not need to pay taxes.

It can be said that this myth is partially true. If a student is being claimed as a dependent of someone else who has an income less than $12,200, then he would not have to pay taxes. But, the students should file their taxes. If the student would have an employer who would be withholding money due to some purposes then the student can receive a refund.

 

Myth 5:- Online income is free of taxes.

This type of rumor might have started as those who are doing business online do not fill the Form W-9 and report their income to the IRS. But, the IRS does not consider income earned from online different from that of the income earned offline. Irrespective of the medium, if you are earning more than $400 you will have to declare the income on your tax returns.

 

Myth 6:- The IRS would file a tax return for you.

IRS can verify your tax returns but waiting for your returns to be filed by the IRS would be quite disappointing. Your tax returns have to be filed by you only and you cannot depend on the IRS for that.

 

Myth 7:- Home office deductions are equal to instant audit.

There was a time when this myth was almost considered to be the truth. But, with home offices becoming quite prevalent this fact has become a myth now. Claiming a home office would increase the scrutiny but they are quite common and reduce the fear of claiming a legitimate deduction.

 

Myth 8:- Lack of time to do taxes.

Since we have already covered the fact that taxes are not voluntary lack of time for not filing your taxes does not form a considerable factor anymore. There are several options available for making tax filing easier and lack of time cannot be considered anymore.

 

Myth 9:- Your tax mistakes are your accountant’s liabilities.

Even if you are hiring an accountant, the mistakes made in tax filing are your responsibilities ultimately. You should not assume that your accountant must have taken care of all details; rather you must double-check the details before the returns are filed.

 

Myth 10:- I don’t have enough money for being audited.

You might think that if your income is less you will not be audited by the IRS. However, your income has less connection with you being audited. Many other factors play an important role in your audits rather than your income. Even though the probability of being audited is more for those individuals who fall under the income bracket of $100k, still those falling below this bracket can also get audited. You must maintain a detailed record of any income which can be considered as questionable.

 

Conclusion.

So, these myths are the mysteries which many taxpayers in the US believe. However, these myths are far away from reality and taxpayers should avoid getting confused with these myths.

Top #5 things to know about Tax Liability amongst spouses

Top #5 things to know about Tax Liability amongst spouses

by | Aug 24, 2020 | Back taxes, IRS, Spouse Relief, Tax Liability, tax secrets

Top #5 things to know about Tax Liability amongst spouses

Marriage is the time when you vow to stand by the side of your spouse through thick and thin throughout the rest of your life. You might be having the idea that you know everything about your partner; however, there might be a secret that you might not be aware of i.e. the tax debt. You would want to know if the IRS can come after you or charge you for your spouse’s taxes. Yes, you can be liable for the tax debts of your spouse but only in certain circumstances.tax liability amongst spouses.

1.Can I be held liable for my spouse’s tax debts?

The main reason as to why the IRS would come after you for your spouse’s tax debts depends on factors such as when you filed your tax returns and your tax return filing status. In case, your spouse had claimed false deductions or failed to pay off the debts to IRS you might be held responsible for this.

Filing status and liability determines whether you would be liable for your spouse’s tax debts or not.There are two options available for married couples i.e. filing jointly or filing tax returns separately. These options will be available to you if you are filing your tax returns being married to a foreign citizen or a resident.

a.Married filing jointly

Your tax filing status is important as it will determine your taxable income. When filing your tax returns jointly, you can claim tax allowances but both of your tax obligations become the same. By this, you would be responsible for your spouse’s tax debts and vice versa. Your tax refunds can be used by the IRS to offset the tax dues of your spouse. However, if you do not want your refunds to be used for paying your partner’s tax debts you can apply for Innocent spouse relief or injured spouse relief.

b.Married filing separately

According to the latest IRS data, out of the 153 million tax returns which were filed during the year 2017 only 3.2 million couples were married and filing their returns separately. The main cause for filing tax returns separately is to avoid being liable for their partner’s tax bill or any other tax penalties.

2.When your spouse’s tax debts were incurred?

In case your spouse owes money to the IRS, the timing of the debt incurred is important.

1.Before Marriage

If the debt of your spouse had been incurred before you got married, then you do not have any tax liability and only your spouse would be liable. In case, your refund had been intercepted by the IRS to pay off your spouse’s debts then you must apply for Injured Spouse Status.

b.During Marriage

If the tax debts of your spouse were incurred during the time of your marriage and you have filed jointly then you might be potentially liable. However, tax debts have been incurred by your spouse without your knowledge then you are not responsible.

c.After Marriage

If the tax debts have been incurred by your spouse after marriage then you might be held liable if you have been legally separated from your spouse but not divorced. In such a case, you can apply for Separation of liability relief for partial liability.

3.Can your house or assets be seized by the IRS?

Yes, the IRS has the power to seize your house or assets even though the money owed to the IRS is by your spouse. This is feasible for that year during which you have filed your tax returns jointly. However, it is very unlikely for the IRS to seize your physical property and it would rather issue a tax lien or levy.

4.Can you dispute the liability of your spouse’s back taxes?

 

The IRS would offer two options to provide relief to those spouses who have been taxed on behalf of their spouses.

a.Innocent Spouse Relief

Innocent spouse relief can be offered to you if your spouse failed to report his income or claimed improper credits/deductions. You are considered to be an innocent spouse if you are married to someone who had lied to the Federal Government, hidden income, or claimed too many deductions to lower his tax debts. You can fill Form 8857 and request a separate tax liability which would help you in providing relief from tax penalties or liabilities of your spouse.

b.Injured Spouse Relief

If your share of the tax refund on the joint tax return was used by the IRS to offset the debts of your spouse, you can consider yourself as an Injured Spouse. The IRS would intimate you if any part of your tax refund is being used to offset your spouse’s back taxes. You can fill Form 8379, mention “Injured Spouse” on the top of Form 1040, and obtain your refund from the IRS.

5.Open communication on finances

So, your tax return filing status and the status of your marriage will help in determining if you would be held liable for your spouse’s back taxes or not. It is necessary to maintain clear communication with your partner and understand the financial positions of each other well. Taxes are a part of your lives and you must discuss them openly.

Conclusion

Hence, this information on the tax liability of spouses would be helpful in case you are wondering about the difficulties you might face due to the tax secrets of your spouse.

Reference

https://www.communitytax.com/spouse-tax-debt-liability/