Estimated Tax Tips for the self-employed NRI’s in the US

by Mounica Kota | Oct 12, 2020 | NRI, self employed, tax filing, tax savings tips

Estimated Tax Tips for the self-employed NRI’s

in the US

If you are self-employed NRIs in the US, you will have to make payment for quarterly estimated taxes. Due to the COVID-19 conditions, the deadline for the first and second quarterly estimated tax payment was extended to 15^th July 2020. The deadline for the third quarter estimated tax payment was on 15^th September 2020 and the fourth payment deadline is yet to come.

So, you must know about the basic tax tips which are needed by self-employed NRIs in the US for the estimated tax payments.

Who should make payment for the Estimated Tax?

In the United States, there is a “pay as you go” tax system. This implies that the Government expects that it would receive most of the taxes throughout the year. As a result, employees usually have a certain amount of taxes directly deducted from their paycheck.
However, if you are self-employed i.e. you are a freelancer, or a home-based entrepreneur then taxes are not being withheld from your paycheck. You would be subject to making the payment for the estimated tax.
Generally, self-employed NRIs would be expected for making a payment of estimated taxes only if you are expecting to owe $1000 or more for your tax payment in a year.
In case, you are earning your self-employment income quite unevenly in the year then you would be able to use the Annualised Installment Method at the time of taxation. By this, you can also avoid a penalty for not making the payment of Estimated Taxes every quarter due to uneven income.

When do you need to pay the estimated taxes?

There have been some changes in the deadline for payment of estimated taxes this year due to the onset of COVID-19.

1^st Quarter payment – 15^th July 2020 (Original deadline was 15^th April 2020)
2^nd Quarter payment – 15^th July 2020 (Original deadline was 15^th June 2020)
3^rd Quarter payment – 15^th September 2020
4^th Quarter payment – 15^th January 2021

In case, if the 15^th falls on a weekend then you will have to pay the estimated taxes on the next weekday.

How would you figure out your estimated taxes?

You should use online programs such as QuickBooks Self-Employed which are available for keeping a track of your income, your expenses, and mileage and calculate your estimated taxes for the year. By the online programs, your calculations are done easily thus, finding out your estimated taxes and helping you make the payment on time. Then while annual filing, by the online programs you can very easily export your information of Schedule C into tax filing tools thus, making the procedure easier.

Pro-tip:- For the self-employed NRIs, there is a new sick and family leave tax credit available. This credit is available under the Family First Coronavirus Response Act. In case you are a self-employed NRI and are also impacted by the pandemic, then you are eligible to fund your sick leave and family leave equivalents. This can be done by considering the 2020 tax credits which would be claimed in 2021 and reducing the 2020 quarterly estimated tax payments if you are eligible for those credits. You can estimate your tax credits by online tax credit calculators and thus, reduce your estimated tax payments by the number of credits you must be eligible for.

How to pay your estimated taxes?

Once, you have calculated your estimated tax you must pay them on time. There are several options by which the self-employed NRIs can make their estimated tax payments.

You can use the Electronic Federal Tax Payment System (EFTPS) for the payment of your estimated taxes. It would help in making instant payment and the EFTPS is also considered to be free.
QuickBooks Self-Employed online program would also help you in filing your estimated taxes with the IRS. This method is also fast and error-free as you will not have to re-enter the necessary information into your checkbook or the computer system of the IRS.
Your estimated tax payment can be mailed using the mailing address provided by the IRS in your respective State. Also, you should be careful that your payments are postmarked by the due date for avoiding penalties.

Pro-tip: – You must keep a record of all the estimated tax payments you have done as you will have to enter the information while filing your taxes.

Conclusion

Hence, this information about estimated tax calculation and payment would definitely help you to understand the process better.

How to start a business as an NRI in the US if you owe taxes?

by Mounica Kota | Aug 6, 2020 | business incorporation, NRI, owe taxes, tax considerations

How to start a business as an NRI in the US if you owe taxes?

As an NRI, if you are planning to launch your own business but you owe taxes and are not sure about how to proceed then you might find yourself in a confusing situation. In this scenario, it depends if your situation would be affecting your ability to start or launch a business. Your tax debt may not prevent you from starting a business; however, it can affect your goodwill and even your ability in obtaining loans for your business.

Possibilities of business incorporation

Even if you owe taxes to the IRS, you would still be able to incorporate your own business. Generally, corporations and the LLC business structures would allow you to separate and also protect your assets. If you are planning to launch your own business, you must have a very clear distinction between the business and yourself as an individual. By the process of incorporating or forming an LLC, it is implied that you are eligible to run your business without any fear of your personal assets being seized due to your business debts.

If you consider the scenario from a tax standpoint, it is much easier to pay off or rather manage taxes if your expenses for business re kept separated from your personal expenses. Corporations and LLCs can deduct eligible expenses like salaries and supplies; however, it would become more complicated if your personal expenses and business expenses are mixed up. You must work very closely with a tax advisor or tax professional to help you in the proper set up of your company.

Financing of your business when you owe taxes

When you apply for the financing of your business, your business loan application could be affected by your personal credit. Usually, financers would evaluate in detail your personal credit and financial history before granting you a business loan.
If you have a high amount of tax debt or you have not paid your taxes then your credit score might decrease steeply.
If there is a tax lien against you then it would remain on your credit report for a long time even when you have paid the tax.

4. If you think your tax debt can create an issue for the financing options available for your business, you can consider the below-mentioned financing options.

Short term loans – You can obtain a short term loan if your business has a sustainable cash flow. This kind of loan places greater emphasis on the revenue of the company rather than on your credit score.

Term loans – For term loans, you would need good personal credit. Moreover, these loans would give you a lump sum money which you would have to repay with a fixed interest rate.

Accounts Receivable Financing – If you are waiting on your unpaid invoices to pay your business expenses, this type of loan is the best option for you.

SBA Loans – SBA loans are highly sought as their lower interest rates are added up with longer repayment terms.

Resolve your unpaid taxes

If you owe back taxes to the IRS, then the IRS has the authority to collect the taxes by seizing your property through a tax levy. By a tax levy, the IRS is allowed to seize your bank account balances, your wages, real estate, automobiles, retirement accounts, and any other assets. However, you can still work and earn.

You will have to discuss your unpaid taxes with the IRS. If you have negotiated with the IRS and decided that you would be paying your debts using an installment agreement, then you would be able to start your own business. However, you must keep in mind that if you try to hide your assets from the IRS’s levy by using your business as a front then it is illegal.

Some other tax considerations

From the perspective of business structures, there are four types of business structures and each one would be having a different influence on business taxes.

a.Sole proprietorship – If you are setting up your business as a sole proprietorship, your business would not be separate from you as an individual from a legal perspective. By this, your business would not have to pay business income tax as you would have to report your self-employment income only.

b.LLC – LLC means Limited Liability Company and by this, your company would get its own identity and status different from your personal identity. You can receive more protection and financial benefits. Your LLC would not have to pay business income tax and you would only pay personal income tax.

c.S-Corp – It is also a business structure that is not liable for business income taxes and all the business earnings would pass through the owner.

d.C-Corporation – C-Corporations might be a publicly-traded company or a small company, this business structure requires you to pay business income taxes.

Conclusion

Hence, even if you owe taxes to the IRS it does not mean that you will not be able to set up a business of your own. You should not ignore your tax obligations, connect with experienced tax professionals for tax resolution services, and get ready to pursue your dreams of starting your own business.

References

As an NRI in the US, can you claim a Tax Deduction for your Health Insurance?

by Mounica Kota | May 2, 2020 | health insurance, health insurance plan, NRI, self employed, tax deductions

As an NRI in the US, can you claim a Tax Deduction for your Health Insurance?

In today’s times, health insurance has become a basic necessity of life. With the spread of dreadful diseases across the world and the cost of medical facilities soaring high, health insurance is a must for every individual. By a health insurance policy, the insurance provider would meet the medical expenses that are incurred during any type of treatment undergone by the health insurance policyholder. For availing this, the policyholder will have to pay the health insurance premium regularly. As an NRI in the US, can you claim a Tax Deduction for your Health Insurance.

NRIs who are living in the US and are working sought to purchase health insurance to avoid any financial emergencies at the times of medical emergencies.

NRIs enrolled in an employer-sponsored health insurance plan

When an NRI in the US has taken a health insurance plan which is sponsored by his employer then the premiums which are paid for the health insurance plan are already tax-free. However, if the premiums for the health insurance plan are made by a payroll deduction plan and the premium payment is done by pre-tax dollars then a tax deduction cannot be availed.
Payroll deduction plans are those in which the employers of the NRIs withhold money from their paychecks for the benefits. These plans can include those for Medical insurance, life insurance premium, and retirement savings, other taxes, etc.

Tax deductions for unreimbursed expenses of NRIs

In the case of NRIs purchasing their health insurance on their own by using after-tax dollars, some tax deductions can be done on the health insurance premiums.
In the year 2019, NRIs would be allowed to deduct any qualified unreimbursed health care expenses that they have paid for themselves, their spouses, or dependents if the expenses exceeded 10% of their AGI (Adjusted Gross Income).
However, in the year 2017 and 2018 if the healthcare expenses were more than 7.5% of the AGI of the NRI then it would qualify for a tax deduction.
Apart from the health insurance premium, other expenses which can be included in this category by the NRIs are any expenses which are out-of-the-pocket such as expenses involved in surgeries, doctor’s visit, mental health care, vision care, etc.
If an NRI is interested in making deductions for the medical expenses it is advisable to itemize the deductions. The NRI must ensure that his total itemized deductions would exceed the standard deduction amount.

Tax deductions for self-employed NRIs

For self-employed NRIs living in the US, the entire health insurance premium can be claimed as a tax deduction. This deduction claimed by self-employed NRIs can be said to be a write-off to their personal income tax and will not be deducted when the NRIs are filing on the behalf of any of their businesses. For instance, a sole proprietor must enter the deduction amount in Form 1040 and not in the Schedule C Form.
But, if an NRI is self-employed and also has another job at the same time then he can preclude from this tax deduction.
If a self-employed NRI receives health insurance coverage through his spouse’s health insurance plan which is employer-sponsored, then he can also preclude himself from the tax deduction that can be availed by self-employed NRIs.
Self-employed NRIs are not eligible to claim more deduction than the amount of income they are making through their work.
Self-employed NRIs can choose any one of their businesses as the sponsor for their health insurance plan. It is not permissible for self-employed NRIs to add up their income generated by different companies to claim the maximum deduction. So, it would be wiser if a self-employed NRI would choose his most profit earning business as the sponsor for his health insurance plan.

Reducing of tax bills by NRIs

If an NRI does not qualify to make tax deductions for his health insurance either because of the cost threshold or due to the choice of taking the standard deduction, then he can choose another alternative method for reducing his tax bills.

By electing an HDHP i.e. high-deductible health plan, NRIs can avail the benefits of paying less premium for health insurance plans than normal plans. Through this, NRIs would be able to open a Health Savings Account (HSA). The money which is put into the HSA can be utilized for paying off the health care expenses which are out-of-pocket. The contributions made by an NRI towards the HSA are tax-deductible and when these are used for eligible expenses the withdrawals also become free. In some cases, the health insurance premium can be paid off by using the funds in the HSA.

However, HDHP can offer tax benefits to the NRIs but they are only advisable for the younger masses that do not need health care cover except some health emergency. It is not advisable for those masses that already have pre-existing health issues or are expecting health expenses shortly.

Hence, tax deduction by NRIs for health insurance can be made by thinking wisely and by taking into account the major criterion such as the type of employment and type of health care expenses incurred by the NRIs.

References

How to create your investment portfolio with your tax refunds in the US?

by Mounica Kota | Jan 6, 2020 | income tax, Investment & Income, IRA, NRI, Tax Refund

How to create your investment portfolio with your tax refunds in the US?

Investing has become quite an easy task today and with so many options available it is easy for common people to utilize their savings for achieving the dreams and accomplishing long term goals. How to become an investor if there are no savings? This is a thought which can creep into your mind when you think about investing. Without a considerable amount of savings, the investment portfolio seems to be a distant dream. But, in the US you have a simple way out. You can use your tax refund as an option to initiate investing in the stock market.

Stock market scenario

During the year 2012, according to the reports generated by IRS the average tax refund in the US was 2,803 and this amount is enough to start investing with the help of a brokerage account. Investment can be done by a very little less amount itself. Today the market condition is quite good and it is being addressed as a “bull market” which means a market in which the prices of the stocks of companies are rising and people are interested in buying shares. Investments into shares can be a good decision right now as the performance of the stock market is quite good now. In the last 4 years, there has been an average annual return of 17% in the stock market which makes investing a good decision for common people.

This performance of the stock market is much better as compared to that of other investment options such as money market funds, bonds, real estate, certificates of deposit, etc. But, along with the high returns, there is a huge risk associated with the stock market even. The major risk which is associated with the stock market is the fluctuation in the returns. The returns obtained keep on changing rapidly from one day to another or even from one month to another. However, in the long run, if you are interested in achieving long term goals the best investment option is the stock market. With proper risk assessment and risk analysis, the stock market can turn out to be a great investment option.

Use of tax refund for making investment

When you receive your tax refund for a year, you can open an Individual Retirement Account (IRA) with the help of your investment brokerage firm or your bank itself. With the help of the IRA, you can invest and obtain tax benefits. When you are putting money into your IRA, your taxable income reduces and you pay less tax.
When you have opened your own IRA, you can pick mutual funds for making investments. A mutual fund is known as a collection or assortment of bonds, stocks, and cash alternatives. Mutual Fund helps in managing money from different investors and even the small investors can manage their funds with the help of professionals.
There are numerous funds with different objectives that are available and you can easily pick a fund of your choice according to your long term goals. You can select funds for stocks or funds for bonds or even funds for a mixture of both stocks and bonds.
The fund which you wish to select for investment depends on the amount of risk you are willing to take when it comes to your money. We can illustrate this with the help of an example such as stocks involve a higher amount of risk but bonds are less risky than that of stocks. But, stocks provide higher returns as compared to bonds and you will need higher returns for accomplishing your long term financial goals. So, it is your choice to take up the risk with stocks for higher returns or to play safe with bonds.
The amount of risk you can take depends on how much time you have for the accomplishment of your financial goal. If you have a long time left for retirement then you can go ahead and take certain risks.
Using your tax refund as an investment is the beginning; after opening up your IRA account you can opt for investments to be made automatically for making contributions to the IRA account every month.

Hence, with these investment avenues, your finances will change and you would become an investor with long term financial goals. So, you should file your taxes on time and utilize your tax returns as an investment option.

How to start investing in the US being an NRI?

by Mounica Kota | Jan 3, 2020 | 401(k), federal income tax, global income tax, Investment & Income, NRI, tax return

How to start investing in the US being an NRI?

For the NRIs in the US, an investment can be the best method to build long term wealth. If you are an NRI and are planning to invest in the US, you don’t need to be wealthy or super-rich; a common man can start investing with a minimum amount of funds but in a wise manner.

Some of the best investment options in the US which can be ideal for NRIs can be listed below.

Index Funds
Target-Date Retirement Funds
Retirement Account

Index Funds

An Index fund is a category of mutual fund which has a portfolio that has been constructed in a way such that it can match the components of a financial market index i.e. the Standard and Poor’s 500 Index (S&P 500). Index funds help the investor in providing wider market exposure, fewer expenses involved in operating and low turnover associated with the portfolio.

By investing in an index fund, an NRI would be involved in a form of passive investing. Here the portfolio manager would not be actively involved in picking up the stocks and making up strategies on how to buy and sell them. Rather, the portfolio manager would build up a portfolio in which the holdings would mirror the securities which are of a specific index. In simple terms, an index fund is a portfolio of stocks or bonds which are designed in such a way that it can be similar to the composition of a financial market index.

Index Funds are a very good choice for diversification. They provide strong long term returns and are an ideal option for buy-and-hold investors. There is a “three-fund portfolio” which can be used to make an investment in every sector in the market.

Total U.S. Stock Market Index Fund consists of large-cap, mid-cap, and small-cap U.S stocks.
Total International Stock Index Fund which comprises of developed and developing international markets.
Total Bond Market Index Fund that includes corporate bonds and Government bonds.

Target-Date retirement fund

The target-date retirement fund is another ideal investment option for NRIs in the US. An investor can choose a fund that is nearer to his planned retirement date. The fund manager should plan and put the money into better and conservative assets as the investor’s retirement date approaches.

Target-date retirement funds can be more expensive when compared to Index funds. But, still, they are cheaper and involve less amount of risk as compared to that of the option of selection of individual stocks for investment.

Retirement Accounts

In the US, federal tax and state income tax is charged on any income which is obtained from an investment. To reduce bills that are related to tax, NRIs must start contributing towards a 401(k) plan or towards an individual account which is meant for retirement. If an NRI has an individual retirement account, he will pay tax on the cash in the account for only once.

With the help of a 401(k) plan or contributions made towards IRA the taxable income of NRI decreases. The contributions made by the NRI become tax-deferred as taxes are paid on the amount being withdrawn. Roth 401(k) and IRA need to make tax payments in the current year, but the amount of contribution made and the earnings made in life-time grow free. If the employer of an NRI is offering equal contribution, then he can consider making contributions to the 401(k) plan first. Otherwise, it is wiser to contribute to the Retirement Account at lower fees.

The right time to begin investing

The right time to begin investing is from now as more opportunities will be available to earn income from dividends and also to capture the growth in the share price. Moreover, when you are reinvesting your income; your passive income starts compounding.

In the US, investing is the best option to start saving for your retirement. The sooner you start investing the less you are delaying your retirement planning. The rate of interest in banks is almost low and does not generate much compound interest. Also, inflation rates affect the rate of interest in the savings account. So, by investing early you are paving the way for obtaining consistent returns with fewer efforts.

Hence, there are numerous investment avenues available for NRIs in the US. To start investments in the US as an NRI, you do not need too many funds. You can start your investment from today with minimum funds and minimum effort but with strategies and far-sightedness.

How Much To Save Up For Your Retirement In The US?

by Mounica Kota | Dec 27, 2019 | income tax, NRI, tax deductions, Tax Extension, tax filing, Tax Planning, Tax Preparation, Tax Refund, tax savings, Taxation

How Much To Save Up For Your Retirement In The US?

A lot of us look up to retirement so that we can hang our boots and finally relax or take a break from all the running around. However, how well your retirement goes depends on a few important factors. The quintessential one being how much you save for your retirement.

Should you plan your retirement well in advance and align your savings and investments accordingly, the chances are high you will have a stress-free retirement phase. To aid you in the entire process of making your retirement a much happier place, here are some tips.

The amount that you need to put away for your retirement depends on the following factors.

Your age when you start investing for your retirement.
Your paycheck when you decide to save for your retirement.
The age at which you wish to retire.
The returns that you are expecting on your investments.

There is a simple correlation when it comes to saving for your retirement. When you start saving for your retirement early, you will end up setting aside a smaller chunk of the salary. And the reserve also holds good. The later you start, you must invest a larger chunk of your paycheck towards your retirement.

How Much Is Enough For Retirement?

Your lifestyle plays a crucial role in deciding the amount of money you would need for your retirement. If you wish to retire at 60 years and expect to live for another 30 years, you will need enough money to support you through that entire duration. You should consider the needs along with wants as well. A simple monthly budget will help you understand the amount. But unexpected medical expenses are something that you must also consider.

Estimating Your Requirements

There are several online calculators that you can use to estimate the amount you must set aside for retirement. As a general rule of thumb, when you are 35 years old, you would need to save about 1 to 4 times your annual income for your retirement. Similarly, when you are 50, the savings must be at 5 to 10 times your annual income. You can reach out to a trusted financial advisor if you need details on specifics.

Optimize Your Income Taxes

There are different ways to fund your retirement. Once you start optimizing your income taxes, you will find additional room for savings for retirement. Here are a couple of ways to do the same.

Withholdings

A lot of taxpayers withhold a lower amount from their taxes while declaring their W-4 Form. Eventually, the IRS refunds the amount at the end of the tax season. Should you opt to withhold exactly as much taxes as you owe, you will end up with some savings. You can then invest this additional amount into a tax-deferred retirement plan. Thus, do not forget to update your W-4 if there is any change in your filing status, income, employment, etc.

Refunds

And should you decide not to alter your withholdings, you can expect a refund from the IRS at the end of the tax season. You can use this refunded amount to fund your retirement. Depending on the amount that you receive, you can either put the entire amount into a tax-deferred investment account or a portion of it. If the refund is a considerable amount, you can opt to use only a portion of it.

Start saving for your retirement at the earliest and you will have to put away a smaller amount every month. This will give you a head start and the possibility of saving a higher amount as well.

Reference:

https://www.taxslayer.com/blog/how-much-do-i-need-to-save-to-retire/