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

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

by | 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.

10 Things you should know about College tax Savings Plan for?

10 Things you should know about College tax Savings Plan for?

by | Feb 26, 2019 | Education, tax deductions, tax filing, Tax Planning, tax return

10 Things you should know about College tax Savings Plan for?

College Tax Savings Plan Let’s face it. College and education, in general, are getting expensive. This means that saving for your children’s future can be a daunting task. It is only natural that one looks for as much help as possible.

Should you look at investing in a 529 college savings plan? American parents who have kids, save on an average $18,135 for college. And about 30% of these savings go into a college savings plan. While the average savings in the plan was $2,280 in 2016, it has nearly doubled to $5,441.

General savings account for another 22% for college-related funds. While 14% are investment related savings. More parents are opting to invest in a college savings plan and here are some important facts that you should be aware of.

  1. Anyone can open a 529 college savings plan and invest in one of the instruments.
  2. Though people usually associate a 529 plan with college tuition, it does much more than that.
  3. Amendments to the tax laws recently, allow individuals to withdraw up to $10,000 from a 529 for the purpose of K-12 tuition expenses.
  4. The plan is not limited only for kids or teenagers. You can open an account and start saving for graduation or higher studies.
  5. A single tax filer can contribute as much as $15,000 for a year as tax-free in a 529 plan. For married couples filing jointly, the amount is $30,000.
  6. You also have the option to contribute $75,000 into a 529 plan up front for 5 years. For married couples filing jointly, the amount is $150,000.
  7. 529 plan is similar to mutual funds in some ways, as you have the option to purchase them on your own or take the help of a financial advisor.
  8. You can buy a 529 plan depending on the age of your kid, however, you should also look at the past returns and volatility. Some plans can be very aggressive for you, while others can be quite conservative.
  9. Before you start saving into a 529 plan, it is essential to go through all the terms and conditions. You should be aware of the plan’s ins and outs along with any limits that the provider imposes.
  10. Another crucial aspect that you should not miss at any cost is the enrolment fees of the plan along with any annual fees.

Since there are different 529 plans that you can choose from, it is important to delve into the details. Try to look for a plan that offers state-level tax breaks. You should also look at the expense ratio of the plan. A higher ratio would eat into your profits.

There are some cases where your kids might not need to use the 529 plan. What happens to the fund in such cases? Well, you can always transfer the fund to someone in the family. If that is also not possible, you can withdraw the fund yourself. But keep in mind, that you will have to pay a 10% penalty for not using it for educational purposes.

A fundamental of any investment is the minor fluctuation with the market. And 529 plans aren’t immune to that. Thus, it is important that you look into the assets that a fund is investing it.

If you have a short term in your hands, take four or five years for an example, and you invest it entirely in stocks, that might be a bad idea. A big swing in the market can nullify your funds. Thus, take the duration and risk appetite into consideration before investing.

Is NRO/ NRE/ FCNR Interest taxable in the US

Is NRO/ NRE/ FCNR Interest taxable in the US

by | Feb 19, 2019 | income tax, NRO, tax deductions, tax filing

Is NRO/ NRE/ FCNR Interest taxable in the US?

NRO/NRE/FCNR ,With more and more people shifting to the US for a better future, the above question becomes even more pertinent. Are the interests earned from NRO/NRE/FCNR accounts taxable in the USA?

The simple answer to the question is Yes. The interests that you earn from such accounts is taxable in the USA. However, it is not as simple as it might sound and it as a complete process that you must follow.

The following steps will help you ensure that you are able to determine the income from other sources such as NRO/NRE/FCNR accounts earning interest. And that the income is taxed appropriately so that it doesn’t come to bite you at a later date.

Determining Status

Any income generated from the above means is taxable in the USA if you are a US person. Thus, the first step involves determining whether or not you are a US person. You must meet any of the following conditions for the same.

  • Are a citizen of the USA.
  • Are a former legal permanent resident but due to some reasons wasn’t properly expatriated.
  • Are a legal permanent resident.
  • Are a national of another country but have cleared the Substantial Presence Test.

In short, if you are a Green Card holder, OCI, PIO or a legal resident of the USA (holding L1B, H1B, H4 EAD or other work visas of the USA)you must pay taxes on the above-mentioned income.

Dollar Amount

Every year the IRS publishes the year-end treasure rates for various currencies. These can hold as a good starting point to consider the conversion rate. You can use this rate to convert your Indian income from NRO/NRE accounts into the US Dollar.

For example, if you have earned about INR 15,000 as interest from your NRO/NRE account, and consider an exchange rate of 75, the dollar equivalent would be $200. INR 150,000/72 = $200.

You can then use this amount for tax purposes.

Taxes in India

Any interests that you earn on NRE accounts is not taxable in India. This means that banks will not deduct any amount from your earnings directly.

Similarly, any interests that you earn on your FCNR account is not taxable in India.

However, things change a little bit when it comes to NRO accounts. Any interests that you earn on NRO accounts are charged at 30% plus applicable taxes.

Depending on how your bank operates, it can either be deducted from your account directly, or you might have to file at the end of the year.

Taxes in the USA

Once you are a US person, you are expected to file your taxes and returns. In other words, you will have to file Form 1040 using any of the tax filing services or directly with the IRS.

Irrespective of which method you use, it is important that you fill the Schedule B in the Form 1040. Schedule B includes the income generated from your Indian assets or accounts.

In case you have paid taxes in India, you would need to mention that in your tax returns. This is applicable for NRO accounts. As far as NRE and FCNR accounts go, you will have to mention the income from the accounts and that will be added to your annual income in the USA for the fiscal year.

For the year 2016, as many as 21,428,230 filings were there for Schedule B out of which 18,781,052 were electronically filed.

Depending on the tax bracket that you are a part of, you will have to pay appropriate taxes. And for the taxes that you have paid in India, the DTAA will ensure that you do not pay taxes twice.

All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

by | Nov 29, 2018 | capital gains taxation, DTAA, indian investments, tax deductions, Tax exemption, Tax Extension, Taxation, US investments

All you need to know about Capital Gains taxation and DTAA for your Indian and US investments

Capital Gains taxation To ensure that residents do not end up paying taxes at two different places, several countries get into a mutual agreement. The Double Taxation Avoidance Agreement is one such example. The United States of America and India have a rather comprehensive DTAA.

The DTAA is applicable to any individual, company, trust or partnership who have taxable income in both India and the USA. As per the agreement, the following taxes are levied by both countries.

  • The United States of America imposes the Federal taxes as per the Internal Revenue Code. It doesn’t include any accumulated earning taxes, social security taxes and personal holding taxes. The taxes are also applicable to insurance premiums paid to insurers in India as well as any private foundations.
  • India levies the Income Tax on the income that you a taxpayer earns in the country. It includes any surcharges but excludes undistributed income declared by some companies.

There are three major ways in which the DTAA can come into the picture.

Tax Credit

In the tax credit mechanism, your country of residence will offer you with tax credits for the taxes paid in the foreign country. This usually is divided as Tax Reserve method, Underlying Tax Credit method or Ordinary tax credit method.

Tax Exemption

In the tax exemption mechanism, the country of your residence exempts any income from the foreign country.

Tax Deduction

In this mechanism, the taxes that you pay in the country where your source of income is then deducted from your total global income and you need to pay taxes only on the residual amount.

Residential Status

Your residential status plays a crucial role in determining which country you should pay your taxes in or how to file your returns. According to Indian laws, if any individual stays for 182 days or more for a financial year, he/she is liable to pay taxes. Similarly, if they have stayed in the country for more than 365 days in the last 4 years and at least 60 days in the current taxable year, they need to pay taxes.

For the USA, the citizenship decides whether or not they should pay taxes. If a person is not a citizen, he/she is a non-resident alien. In such cases, either the substantial presence test or the green card test comes into the picture.

Immovable Property

If you have any immovable property such as real estate, the income generated on selling the same or other incomes from it such as forestry or agriculture will be taxed in the same State. This means, that your property and any earnings from it for a specific financial year will be taxed in India if it were done in India or the USA if it were present in the USA.

Income Through Interest

Any interest that you earn from financial institutions is subject to taxation in the country of residence. However, you might end up paying taxes in the country that you earn the interest owing to certain conditions. For example, if the interest that you earn does not exceed 15% of the gross interest amount that you earn.

Dividend Income

If are a resident of the USA and earn dividends from an Indian country, it will be taxed in the USA. However, it might be subject to taxation in India if it doesn’t exceed certain levels. These include:

  • 15% of the gross dividend amount if the individual own at least 10% of the stocks in a company.
  • 25% of the gross dividend in all other cases.

Being aware of the DTAA will help you avoid paying double taxes in both the countries.