Can pandemic COVID-19 affect your house mortgage rate and your deduction?

by Mounica Kota | Apr 7, 2020 | federal government, Standard Deduction

Can pandemic COVID-19 affect your house mortgage rate and your deduction?

Currently, the world is fighting against the huge economic disruptions caused due to the spread of the dreadful coronavirus. The US has been highly impacted by this pandemic causing loss of many lives and the livelihoods of people. COVID 19 The Federal Government has been taking up several measures to reduce the financial stress on the common people. Amongst these, one of the announcements made by the Federal Reserve is related to the cutting of the interest rates and also making unlimited quantitative easing.

According to the Federal Reserve, unlimited quantitative easing would help to calm down the markets. The Federal Reserve has declared that there would be continuity in its asset-purchasing program in amounts which would help in supporting the smooth functioning of the share market and broadening of the financial conditions.

Some of the major reasons why the Federal Reserve uses Quantitative Easing can be mentioned below.

According to the Federal Reserve, the money printed by Quantitative Easing can be used to create more employment opportunities in the country.
Quantitative Easing can encourage both lending and borrowing as the interest rates would be low.
As per Federal Reserve, this would also encourage spending as there would be more money which enters the economy so more money to be spent. It would increase company profits and stimulate the stock market.

If you are a homeowner, then the Unlimited Quantitative Easing and cutting of interest rate would have an impact on you. When there is a drop in the rates of the Federal Reserve, then it would put pressure on the mortgage lending rates.

Mortgage lending rates would be affected directly as the adjustable-rate mortgages are often parallel to the rates of the Federal Reserve.
There would be an indirect impact on the Mortgage lending rate as the borrowers would be allowed to refinance at a low rate of interest.

Moreover, the interest rates on the Home Equity Lines of Credit (HELOCS) have also fallen down due to the drop in the rates of the Federal Reserve.

Higher Equity and Lower payments

Due to the lower rate of interest the borrowers would be able to avail several benefits such as lower payments to be done in a month or the capability of building up of equity quite faster.
But, as you know mortgage interest is tax-deductible and lower mortgage interest rate would result in reducing your deductions. This would ultimately result in an increase in your taxes to be paid.

Major points to be considered

You would have to refinance for locking in the lower rate of interest if you have a fixed mortgage or your Adjustable Rate Mortgage i.e. ARM is in its fixed-rate period.
It has been noticed that usually in the beginning many ARMs have a fixed-rate period which is then followed by an adjustable period.
Refinancing for locking in the lower rate of interest means paying of some loan-originating points.
These loan-originating points are deductible but you would have to spread that deduction over the life period of the loan which would be difficult and impractical.
So, it is quite simple if you stick to your current mortgage even though it would be an expensive option.

Additional thoughts

Usually, the taxpayers in the US would prefer to opt for Standard Deduction. However, there are some taxpayers who prefer itemizing and they must think about refinancing. If you are planning for refinancing at a lower rate, then you must consider the advantages and disadvantages of doing the same.

You must consider in detail how much the reduced monthly payment would help you in saving for each month, for a year and the entire life of the loan.
You should compare the savings you make with the new additions that would come up at the time of tax payment.
You must analyze and calculate any other changes that might come. These changes can be associated with your income or the deductions that you make while filing taxes.
You must ensure that you take into consideration other aspects such as the birth of a baby, change in your household income, increase or decrease in charity for the year or if your adult child has moved out, etc.

Hence, you must be educated about the changes that are being made in tax laws and be aware of the implementation of these changes.

References

What is Standard Deduction all about?

by Mounica Kota | Feb 26, 2020 | Form 1040, IRS, Standard Deduction

What is Standard Deduction all about?

Standard Deduction is meant to ensure that there is at least some income of an individual which is not subject to any income tax. In simple terms, the standard deduction can be said to be a specific amount which reduces your amount of income on which tax is being imposed. It is the flat amount which the tax system lets you deduct from your taxable income with no question asked about it. Usually, your standard deduction would depend upon the tax filing status for which you qualify. Standard deductions are subject to increase every year due to inflation.

Your standard deduction would consist of the sum of your basic standard deduction available and any extra standard deduction for which you qualify due to your age or any physical disabilities. You’re filing status such as your income, whether you are 65 years old or more than that, you are blind or not can affect the standard deduction which you can avail. According to the norms of the IRS, you have an option of either using the standard deduction or itemize your deduction. You cannot avail both at the same time, it is possible to either claim your standard deduction or itemize your deduction at a particular instant of time.

Itemized deductions are certain expenses that are allowed by the IRS for deduction from your taxable income. This can include the amount which you had paid for state tax, local tax, sales tax, real estate tax, personal property taxes, mortgage interest, etc. Also, you can include gifts given for charity and a particular part of the amount you paid for your medical or dental expenses. By itemizing deductions on Schedule A of the Form-1040, you would be able to reduce your taxes. However, it is less complicated to claim your standard deductions as compared to claim the itemized deduction.

How can you claim Standard Deduction?

Claiming Standard Deduction is less complicated and can be done easily by using the Form-1040. In line 8 of your Form-1040, you can put down your Standard deduction or a combined amount of your itemized deductions.

Additional standard deduction

You are allowed for claiming additional standard deductions under the below mentioned scenario.

You can be allowed for an additional standard deduction if your age is 65 years or older than that at the end of the tax year.
If you are blind on the last day of the tax year, then you are eligible for claiming the additional standard deductions.
In case you or your spouse are 65 years of age or more than that and are blind then you must claim your additional standard deduction.

When are you not eligible for claiming Standard Deduction?

Generally, the standard deductions are available for all but there are certain instances in which a taxpayer will not be eligible for claiming Standard Deduction.

If you are married and are filing your tax return as married but filing it separately and your spouse claims the itemized deduction, then you are not eligible to claim Standard Deduction.
If you have been a non-residential alien or a dual-status alien during a particular tax year, then you do not qualify for a Standard Deduction claim. However, this has an exception to it i.e. if you are a non-resident alien and get married to a US citizen or a resident alien then you can claim the standard deduction if you are filing a joint tax return and will choose to treat the nonresident alien as a citizen of the US.
In case you are filing a tax return for a period that is less than 12 months due to a change in your annual accounting period, you cannot claim a Standard Deduction.
An estate, trust, common trust fund or partnership entity is not eligible to claim Standard Deduction.

Conclusion

Hence, even though claiming standard deductions are simple to process but they can cost you additional charges. So, the IRS suggests you think carefully about the numbers and which one gives you more deductions before making the claim.

Reference

All You Need to Know About Tax-Deductions on Charity

by Mounica Kota | Nov 30, 2019 | Charitable Deduction, income tax, Standard Deduction, tax filing, Tax Liabilities, taxes

All You Need to Know About Tax-Deductions on Charity

A lot of taxpayers plan to do charity by the end of the year or during the festival season. If you have any such plans, it is only natural to wonder how the new tax laws will have an impact on your donations or Tax Deductions on charity.

While donating to charities, it is essential to be cognizant of the organization that you are donating to. Since there are a lot of scammers who do not miss an opportunity to collect charity in the wake of a natural disaster.

Making donations towards a qualified non-profit organization is the right way to go. Thequalified non-profit organization includes groups that are educational, charitable, religious, literary or scientific. Or any organization that works towards reducing cruelty towards children and animals. The IRS provides enough information on their website regarding all the organizations that are qualified. So that your contributions are directed to the right resources.

Though there have been new tax laws, it doesn’t bring a lot of changes for charity. They are still tax-deductible. The new laws have made some changes to itemized deductions but with minor changes, charity remains tax-deductible. You can still contribute money towards charity or items as long as you itemize them.

Updates for Charitable Deductions

The following are the two major changes for charitable deductions.

The earlier law allowed taxpayers to claim up to 80% of donations towards a seasonal ticket for college as tax deductions. However, under the new law, you cannot make any such claims. This is applicable from the year 2018 onwards, or the filing year 2019.
The limits when it comes to cash contributions to public charities have been hiked from the current level of 50% to 60%.

Itemized Deductions and Standard Deductions

The new tax laws have increased the standard deduction limits and it might impact the way you claim or do not claim your donations towards charity. Though there is no direct correlation between them, the IRS believes taxpayers are more likely to take the standard deduction.

For 2019, the IRS has hiked the standard deduction to $12,200 for single taxpayers and $24, 400 for jointly filing taxpayers. Taxpayers who are the head of the family can claim up to $18,350 as a standard deduction. The thing which hasn’t changed is your decision to take the standard deductions or itemize your deductions. Of course, you still must assess which option gives you a better tax option.

As mentioned, predictions show that a lot more taxpayers will now have their standard deductions a bit higher than itemized deductions. Thereby, leaving them with the option to go with the standard deduction and not itemized deductions. Consider this, you are liable to $8,000 as state and local taxes, $5,000 as mortgage interest and have made charitable contributions of $2,000. If you are filing as a single taxpayer, these itemized deductions sum up to $15,000 which is higher than the standard deduction of $12,200.

However, taxpayers filing jointly have a higher buffer of $24,400 and are more like to take the standard deduction instead of itemizing their deductions.Taxpayers who are close to the upgraded standard deduction limits can choose to contribute towards a charity of their choice during the festival season and claim it under Itemized deductions.

There are a couple of benefits of doing the same. For starters, you will be bringing a positive impact in someone’s life during the festive season and boost your tax refunds at the same time.

While both the options are still available, a taxpayer must do a quick assessment as to which method saves the most amount of taxes for them.

What is the difference between a Standard Deduction and an Itemized Deduction

by Mounica Kota | Mar 7, 2019 | Standard Deduction, tax deductions, tax filing, Tax Planning, Tax Preparation

What is the difference between a Standard Deduction and an Itemized Deduction?

While filing your federal taxes, there are several aspects that you need to be cognizant about. Of those many, two terms that will crop up the most are a standard deduction and itemized deduction. Quite a few taxpayers get confused when it comes to these two deductions. So, here are the differences.

Standard Deduction

As the name suggests, it is a fixed dollar value. This reduces the net amount that your tax calculations are based on. The following are the standard deductions for the current year.

For taxpayers who are single or are married and filing separately, the deduction stands at $12,000.
For taxpayers who are married filing jointly or are qualifying widow(er), the deduction stands at $24,000.
For taxpayers who are the head of the household, the deduction stands at $18,000.

The standard deduction limit increases by a considerable margin if you are either visually impaired or above the age of 65 years old. For taxpayers who are either single or the head of the household, the amount increases by $1,550 and it increases by $1,250 if the taxpayer is a qualifying widow(er) or is married.

The numbers suggest that two out of every three tax filings, claim the standard deduction. Here are some other benefits of standard deductions.

Standard deductions do not require any sort of records or receipts for various expenses, in the event that you are audited by the IRS.
A standard deduction ensures that you can opt for a deduction even if you have no expenses that can qualify for itemized deductions.
Standard deduction eliminates the need to itemize expenses such as charity or medical expenses.

Itemized Deduction

As one would come to expect, Itemized deduction also helps you knock off some dollars from your taxable income. For example, if you were in the 22% tax bracket, every $1000 that you list in the itemized deduction would reduce your tax liability by $220.

Itemized deductions on the Schedule A of your Form 1040 would let you benefit from the following.

If you had expenses out of your pocket when it comes to dental or medical expenses.
If your itemized deductions sum up to be more than what your standard deductions account for.
If you made donations to charities that are in the qualified list.
If as an employee, you had a large expense that has not been reimbursed.
If you had large miscellaneous expenses that have not been reimbursed.
If you had a large casualty that is not covered as insurance such as fire, wind, theft etc.
If you paid any mortgage interest or real estate taxes, you can claim them as well.

There is a certain limitation when it comes to itemized deductions. If your AGI or adjusted gross income is more than any of the following, the limitations kick in.

For a single taxpayer, the limit is $261,500.
For taxpayers who are the head of the household, the limit is $287,650.
For taxpayers who are married but filing separately, the limit is $156,900.
For taxpayers who are married filing jointly or qualifying widow(er), the limit is $313,800.

There are several instances, where opting for itemized deduction is more beneficial. With itemized deductions, you can claim for a larger tax benefit than what you would have done otherwise with standard deductions. As many as 103,301,532 taxpayers opted for Standard Deductions in the previous tax filing year versus 45,610,227 taxpayers who filed for Itemized Deductions. Thus, you can choose either depending on your expenses.

Understanding the New 2019 Federal Income Tax Brackets And Rates

by Mounica Kota | Mar 4, 2019 | federal income tax, Standard Deduction, Tax benefits, Tax Planning, Tax Preparation

Understanding the New 2019 Federal Income Tax Brackets And Rates

Understanding the new 2019 federal income tax brackets and rates.The income tax filing season for 2018 is just around the corner. However, the IRS has gone one step ahead and published the modifications for the year 2019. The modifications include changes to the Federal Income Tax brackets and enhancement of limits for certain tax credits. The intent of these modifications is to make them inflation proof.

There are some chances that you might get confused, but don’t be. During the tax filing season, you would be primarily focusing on income tax related activities for the year 2018. The current modifications implemented by the IRS will be applicable from the 1^st of January. Which means, that you do not immediately have to worry about them. Your first focus should be to complete the tax returns for 2018 in a smooth manner.

Once you are done with filing your taxes for 2018, you can shift your focus to 2019. Since there are some modifications, you might have to make some changes with respect to tax estimations if you are self-employed or to your withholding taxes.

What is the need for changes?

There is a term called indexing in the tax code, which calls for regular modifications to the tax brackets. Every year the IRS adjusts the tax brackets so as to account for inflation. A good example of the same would be, if the inflation for the previous year was 2%, the enhanced tax brackets would be approximately 2%.

If you were to consider numbers, the following example would be a better representation. Take for an example that the taxable income for a bracket starts at $50,000. If the country were to witness inflation of 2% in the previous year, the IRS would adjust the same tax bracket to $51,000. The IRS usually rounds off the numbers. The IRS would usually round off the numbers in increments of $25, $50 or $100 depending on the needs.

The whole intent of these modifications is to get rid of a concept called bracket creep. According to bracket creep, you will end up getting into a higher tax bracket with raises in your pay. Even though the pay would be just enough to beat the inflation, you will end up paying higher taxes. Indexing ensures that you stay in the same tax bracket after accounting for inflation.

Till the year 2017, indexing would use the data from CPI or customer price index to adjust the inflations. However, the recently passed Tax Cuts and Jobs Act of 2017ensures that the C-CPI is considered for the indexing. C-CPI stands for Chained Consumer Price Index.

The indexing is not only applicable to tax brackets but also to other tax numbers such as alternative minimum tax and standard deduction etc.

Updated Tax Bracket

Following is the detailed tax bracket for the year 2019. With the help of indexing, the brackets have approximately gone up by 2%.

10% tax bracket
- For someone who is single and earns up to $9,700.
- For someone who is married filing jointly or any qualifying widow earning up to $19,400.
- For someone who is married filing separately earning up to $9,700.
- For someone who is the head of the household and earns up to $13,850.
12% tax bracket
- For someone who is single and earns between $9,701 and $39,475.
- For someone who is married filing jointly or any qualifying widow earning between $19,401 and $78,950.
- For someone who is married filing separately earning between $9,701 and $39,475.
- For someone who is the head of the household and earns between $13,851 and $52,850.
22% tax bracket
- For someone who is single and earns between $39,476 and $84,200.
- For someone who is married filing jointly or any qualifying widow earning between $78,951 and $168,400.
- For someone who is married filing separately earning between $39,476 and $84,200.
- For someone who is the head of the household and earns between $52,851 and $84,200.
24% tax bracket
- For someone who is single and earns between $84,201 and $160,725.
- For someone who is married filing jointly or any qualifying widow earning between $168,401 and $321,450.
- For someone who is married filing separately earning between $84,201 and $160,725.
- For someone who is the head of the household and earns between $84,201 and $160,700.
32% tax bracket
- For someone who is single and earns between $160,726 and $204,100.
- For someone who is married filing jointly or any qualifying widow earning between $321,451 and $408,200.
- For someone who is married filing separately earning between $160,726 and $204,100.
- For someone who is the head of the household and earns between $160,701 and $204,100.
35% tax bracket
- For someone who is single and earns between $204,101 and $510,300.
- For someone who is married filing jointly or any qualifying widow earning between $408,201 and $612,350.
- For someone who is married filing separately earning between $204,101 and $306,175.
- For someone who is the head of the household and earns between $204,101 and $510,300.
37% tax bracket
- For someone who is single and earns above $510,301.
- For someone who is married filing jointly or any qualifying widow earning above$612,351.
- For someone who is married filing separately earning above $306,176.
- For someone who is the head of the household and earns above $510,301.

Capital Gains

The taxation for capital gains works differently than income taxes. While there are about 7 tax brackets for income, there are merely 3 tax brackets when it comes to capital gains. And they range between 0 to 20%. People with considerable income from capital gains enjoy these benefits.

Since the capital gains tax is lower income tax, it is favorable for investors. The following is the updated tax brackets for capital gains.

0% tax rate
- For someone who is single, and the earning is less than $39,375.
- For someone who is married filing jointly, and the earning is less than $78,750.
- For someone who is the head of a household and the earning is less than $52,750.
15% tax rate
- For someone who is single, and the earning is between $39,376 and $434,550.
- For someone who is married filing jointly, and the earning is between $78,751 and $488,850.
- For someone who is the head of a household and the earning is less than $52,751 and $461,700.
20% tax rate
- For someone who is single, and the earning is above $434,551.
- For someone who is married filing jointly, and the earning is above $488,851.
- For someone who is the head of a household and the earning is above $461,701.

Standard Deductions

As per the new tax laws, personal exemptions have been completely eliminated. Until 2017, you could claim up to $4,050 for yourself, spouse or dependent children, it no longer is valid.

The standard deductions have replaced it and they are roughly twice the amount. The following is updated standard deduction.

Status of Filing	Fiscal Year 2018	Fiscal Year 2019
Single	$12,000	$12,200
Married filing jointly	$24,000	$24,400
Head of the household	$18,000	$18,350

Other Changes

Alternative Minimum Tax

The alternative minimum tax or AMT came into existence in the 1960s to levy taxes on individuals who took a lot of tax breaks. In the event that these individuals were to exceed a certain limit, the second set of taxes would be applicable if their income were to be calculated normally.

As per the tax code, there is an income exemption for AMT. Any amount below this would not be applicable. As is the case with all other figures, the AMT is also indexed for inflation. Following are the updated numbers.

For single taxpayers, the exemption amount stands at $71,700 and the phaseout begins at $510,300.
For taxpayers who are married and filing jointly, the exemption amount stands at $111,700 and the phaseout begins at $1,020,600.

Contributions Towards Retirement

For the year 2019, the base contribution levels are being increased by $500. Yet, the catchup contributions for individuals above 50 remains the same. This is how the retirement contributions will look like.

IRA contributions stand at $6,000 versus $5,500 for the previous year. There is also a provision of $1,000 as catch-up if you are older than 50 years.
For employer-sponsored plans, such as 401(k), 403(b), 457 etc. the amount is $19,000 which is an increase over the current $18,500. And you can opt for a $6,000 catchup if you are older than 50 years.

There are certain other modifications as well. Such as the lifetime gift and estate tax exemption will see an increase to $11.4 million from the current $11.18 million. The annual gift exclusion of $15,000 remains as it is.

Even though they might seem small, these modifications ensure that you are not impacted by the inflation. If you are currently occupied with the 2018 tax filing, it is better to return at a later date and revisit the clauses.