Tax implication for home-buyers in the US

by Mounica Kota | Aug 27, 2020 | property tax, Tax benefits, Tax Deduction, Tax implications

Tax implication for home-buyers in the US

More and more Americans are now looking for purchase of vacation homes, rental income properties, and comfortable places to settle down after retirement. US Tax laws governing the ownership of property are quite complex and have different tax implication for both residents and non-residents.

Tax benefits of homeownership in the US

The main tax benefit of owning a house in the US is that the homeowners do not need to pay taxes on the imputed rental income from their own homes.
Homeowners will not have to count the rental value of their homes as taxable income even though that value is just a return on investment such as that of stock dividends or interest on a savings account. So, the rental value of homes is a form of income that is non-taxable.
Homeowners are allowed to deduct mortgage interest, property tax payments, and other expenses from their federal income tax if they are itemizing their deductions.
According to the tax rules, in a well –functioning Income tax system there must be deductions made for mortgage interest and property taxes. But, the current Federal Income tax system does not tax the imputed rental income.
Furthermore, homeowners can also exclude up to a certain limit the capital gain which they realize from the sale of their home.
Both residents and non-residents in the country must pay taxes on any property which has been generated by renting a property that is located in the US and also by any gain realized from the sale of the property.

Imputed Rent

In the US, a landlord can count the rent received as income whereas the renters may not deduct the rent which they are paying. A homeowner can be considered as both the landlord and the renter. However, the tax code of the country would treat the homeowners in the same way as the renters by ignoring their simultaneous role as their landlords.

Deduction of mortgage interest

Those homeowners who are itemizing their deductions may reduce their taxable income by deduction of the interest that has been paid on the mortgage of their home. Those taxpayers who do not have their own homes will not have the ability to make any deductions for the interest paid on the debt incurred in the purchase of goods and services.

However, there have been certain changes introduced by the TCJA (Tax Cuts and Jobs Act). Before the changes introduced by the TCJA, the deduction was limited to the interest paid up to $1 million of debt which has been incurred either to purchase or substantially rehabilitate a house. Homeowners can also make a deduction on the interest that is paid up to $100,000 of home equity debt regardless of how the borrowed funds have been used. The TCJA has also limited the deduction to interest on up to$750,000 of the mortgage debt which has been incurred after 14^th December 2017 to either buy or improve a first or second home.

Deduction of property tax

Homeowners who can itemize their deductions may also have to reduce their taxable income by deduction of property taxes which they pay on their homes. This deduction can be said to be a transfer of federal funds to the jurisdiction which imposes a property tax and allowing them to raise the property tax revenue a lower cost to its constituents.

Profit from home sales

Usually, taxpayers who sell assets must pay capital gains tax on any profit which is made out of the sale. But, homeowners might exclude from the taxable income up to $2, 50,000 of capital gains on the sale of their homes. This is feasible when certain criteria i.e. the homeowners must have maintained their home as a principal residence for two years out of the five preceding years and may not have claimed the capital gain exclusion for the sale of the other home during the previous two years.

Effect of deductions and exclusions

These benefits are more useful for those taxpayers who are in the higher-income tax brackets rather than to those who are in the lower-income tax bracket. The difference in the tax impact results due to three main factors: compared with lower-income homeowners, those with higher incomes face higher marginal tax rates, typically pay more mortgage interest and property tax, and are more likely to itemize deductions on their tax returns.

Conclusion

So, if you are a house owner or are planning to buy a house in the US these tax implications would be of great help to you in understanding the details related to the tax system.

References

Key Take-away from the IRS’ announcement on “cross-border tax guidance related to travel disruptions arising from the COVID-19 emergency”

by Mounica Kota | May 21, 2020 | COVID - 19, COVID - 19 pandemic, IRS, Tax benefits, Tax guidance, Tax Payers, taxes, US Government

Key Take-away from the IRS’ announcement on “cross-border tax guidance related to travel disruptions arising from the COVID-19 emergency”

Due to huge adverse impacts being created by the outbreak of the pandemic COVID-19, social distancing and restrictions on the travel of people residing in the US have been imposed by the US Government. These restrictions imposed on the travel of the people residing in the US are sure to raise queries on the taxation policies and guidelines.

The IRS and the Treasury Department of the US have together issued tax guidelines which would help provide some relief to those people/businesses which have been impacted by these travel restrictions imposed due to COVID-19.

The major highlights of this tax guidance can be listed below.

Revenue Procedure 2020-20
Revenue Procedure 2020-27
An FAQ

The Highlights Of This Tax Guidance

1.Revenue Procedure 2020-20

The Revenue Procedure 2020-20 provides the guidance that under specific circumstances up to a period of 60 consecutive calendar days of presence in the US due to travel disruptions caused because of COVID-19 would not be counted for determination of the US Tax Residency and for other purposes such as qualification for tax treaty benefits for income obtained from the personal services that have been performed in the US.

a.The pandemic COVID-19 has affected the travel plans of many foreign travelers who had planned to leave the US. Even though foreign travelers who test negative for COVID-19 are not being able to leave the US due to cancelation of flights, border closures, and other disruptions.

b.An alien individual would be considered as a US resident for a year under the substantial presence test in the calendar year if

The individual has been present in the US on at least 31 days during the tested calendar year.
The sum of the number of days of presence in the tested calendar year plus one-third of the number of days of presence in the previous calendar year plus one-sixth of the number of days of presence in the second preceding calendar year equal to 103 days or more.

c.Medical condition exception means an alien individual would not be considered as present in the US on those days when he intended to leave the US but was not able to do so due to serious medical condition which arose when the person was in the US.

d.Those individuals who are claiming the Medical Condition Exception need to file the Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition for filing Form 1040-NR. However, under certain circumstances, the need for timely file Form 8843 might be not taken into consideration.

e.The COVID-19 emergency would be considered as a Medical Condition Exception while determining his eligibility for treaty benefits and revenue procedures. For revenue procedure, an individual would be considered to have intended to leave the country unless he has applied for becoming a resident of the US. Also, for obtaining treaty benefits an individual would be presumed to be unable to leave the country during the period of COVID-19.

2.Revenue Procedure 2020-27

The IRS and the Department of Treasury have provided a waiver of the time requirements for revenue procedure and eligibility for treaty benefits. This Revenue procedure provides the qualification for being excluded from gross income under the IRC Section 911 and would not be impacted because of the days spent away from a foreign nation due to COVID-19.

a.A qualified individual can elect to exclude from the gross income of the individual’s foreign earned income and the housing cost amount.

b.The IRS and the Treasury Department have determined that the COVID-19 is an emergency. For IRC Section 911, an individual who had left China on/ after 1st December 2019, or any other foreign nation on/after 1st February 2020, but on/ before 15th July 2020, would be considered as a qualified individual concerning the period during which he was present in, or was a bona fide resident of, that foreign nation if the individual can establish an expectation that he would have met the requirements of the IRC Section 911 for COVID-19 emergency.

c.To qualify for relief for the revenue procedure, an individual must have been physically present, in the foreign nation on/ before the applicable date specified for this revenue procedure. An individual who was physically present or in China after 1st December 2019 or another foreign nation after 1st February 2020 would not be eligible to use this revenue procedure.

d.Individuals trying to qualify for the section 911 foreign earned income exclusion as they have been expected to be present in a foreign country for 330 days for the outbreak of COVID-19 and have met the other 4 requirements for qualification may use any 12 months to meet the qualified individual requirement.

3.FAQ

FAQ specifies that specific business activities which are conducted by foreign corporations or by a non-resident alien will not be considered in the 60 consecutive calendar days for determination if the individual or the business is engaged in some US business or has a permanent establishment in the US only if those business activities would not have been conducted in the US due to the travel disruptions caused due to COVID-19.

Hence, these tax guidelines framed by the IRS are also being continuously monitored by the IRS and the Treasury Department. Taxpayers can visit the IRS website and obtain further information related to this.

References

5 Tax Benefits that you should claim when you are HOMEOWNER?

by Mounica Kota | Mar 12, 2019 | Tax benefits, Tax Payers, Tax Planning, Tax Preparation

5 Tax Benefits that you should claim when you are HOMEOWNER?

Paying taxes is usually a cumbersome process for taxpayers. The simple reason being, the numerous clauses and conditions that one has to keep in mind. However, we have 5 tax benefits these variations at times come to your rescue as well.

If you are a taxpayer who is also a homeowner, there are more than a few ways by which you can save taxes. The following is a list of some tax benefits that you can avail. The combination of deductions and credits will help you save considerably.

Home Improvement Loan

Should you decide to take a loan to improve or enhance your home, there are tax benefits associated with it. Here are a few things that you should be aware of.

Interest on home loan improvement loan is completely deductible up to $100,000.
Any interest paid on HELOC or home equity line of credit is also eligible for tax credit.
People who own a second home, the mortgage is deductible if you have spent at least 14 days or about 10% of rental days in the home.

Property Tax

According to a Congressional Research Service, homeowners in America claimed more than $173 Billion in the year 2001. The amount was close to $30 Billion in 2015 and expectations are the number will go up. Here are some important pointers regarding property tax.

The taxes that you pay for your properties are almost always deductible.
About 54% of Americans who own a house use this deduction.
Clergy and military service members can write off home mortgage interest and estate taxes despite receiving housing allowances.
You cannot take off any of the following expenses or charges.
- Appraisal fees
- Attorney fees
- Transfer taxes
- Cost for a credit report

Renewable Energy Credit

With a wider range of equipment and devices available, you have more options to install renewable energy-based equipment. Here is how you can benefit from it.

Installing any renewable energy-based equipment makes you eligible for Renewable Energy Efficiency Property Credit.
You can claim as much as a staggering 30% of the total equipment cost and even installation charges through the credit.
According to the Solar Energy Industries Association, more than 700,000 homemakers have installed equipment since 2010.

Ground Rent

In certain rare cases in the USA, you can own a house but the land might still belong to the original owner. In such cases, you would rent the ground from the owner so as to use your property on the ground. The IRS understands this and offers the following.

You can deduce the “ground rent” from your tax filing.
You should be paying rent to the ground owner either monthly or annually.
And the lease should be at least for 15 years for you to avail this deduction.
But, if you wish to capitalize on the ground rent and make payments so as to buy the lessor’s interests, this clause is not applicable.

Reverse Mortgage

If you are aware of the concept of a reverse mortgage, the IRS has something interesting that might catch your attention. Here is all that you need to know.

The IRS does not consider reverse mortgages as income, rather loan advance.
The amount that you receive as the reverse mortgage is non-taxable.
The interest that is accrued on a reverse mortgage is taxable unless the loan amount is completely paid.
Unlike a traditional mortgage, where you can claim interest paid for each year, the same is not applicable in a reverse mortgage.

In the year 2016, as many as 150,272,157 taxpayers filed returns out of which 131,618,295 are estimated to have done them electronically. If you are one of them, the above should help you lower the taxes.

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.

5 Tax Benefits that you can claim when you take care of YOUR PARENTS & RELATIVES

by Mounica Kota | Feb 28, 2019 | income tax, Tax benefits, Tax credits, Tax Planning, Tax Preparation

5 Tax Benefits that you can claim when you take care of YOUR PARENTS & RELATIVES?

Tax Benefits ,A considerable amount of your money can get into medical related expenses when it comes to taking care of parents or relatives. Here are the five Tax Benefits

According to Caring.com, a company that specialized in Bankrate, about 40% of caregivers spend about $5,000 a year on caregiving. Similarly, about 25% of people spend more than $10,000 per year on caregiving.

Though it is not the primary concern paying for caregiving expenses can help you avail some tax benefits. One of the key points that you need to be aware of is that your elderly parents are declared as dependents.

Here are some of the benefits that you can claim if you take care of your dependent parents or relatives.

Medical Expenses

Having elderly parents can result in quite a considerable sum of money being spent on medical expenses. You have the option of claiming them as Itemized Deductions in Schedule A of your income tax.

Itemized Deduction comes in handy if you have exceeded the standard deduction limit.
The total medical related expenses must be more than 7.5% of your total adjusted gross income for a fiscal year.
The expenses include hospital care, visit(s) to doctors, cost of prescription drugs and so on.
January 2019 onwards, you will be able to claim only unreimbursed medical expenses if they exceed 10% of your adjusted gross income.

Income Simulation

The IRS has set a few criteria that your parents must meet before you can declare them as dependents on your tax returns. Here are some of them.

Your parents should not have an income that exceeds the exemption amount for the year in question.
The IRS decides the exemption amount and the value might change year on year.
In the event, your parent(s) have income from dividends or interests, a portion of their social security might also be taxable.
The IRS publication 501 consists of the exemptions for the current year.

Providing Support

If you provide support to your parents for at least half of the fiscal year, there are a few tax benefits that you can avail. The following are some factors that you need to consider before determining the support amount.

You would need to find out a fair market value for the room. If someone were to rent the room out, how much would they pay for it?
The next step would be to include expenses related to food. One needs to be careful and not include utility bills, medical bills or other general expenses that you incur.
The amount that you want to claim as support should exceed the income of your parent(s) by a minimum of $1.
A comparison between the income that they receive, social security or other income and the support that you lend will paint a clearer picture of support requirements.

Care Credit

Dependent care is a non-refundable tax credit that you can benefit from. In the event that your parent is a qualifying individual, you can claim for it. Here is all that you need to be aware of.

Parents who are physically or mentally unable to take care of themselves are qualified individuals.
You should have an income and certain work-related expenses to show, so as to qualify for the tax credit.
You should be able to identify your care provider properly.

Supporting Siblings

In the event that you support your parents along with siblings, you can claim the amount as well. The only condition being that each sibling must contribute to at least 10% of the total support expenses.

The above tax benefits will aid you in taking care of dependent parents or relatives.