What is Recovery Rebate Tax Credit for 2020 all about?

by | Jan 28, 2021 | Tax credits, tax filing, Tax Payers, tax returns, taxes

What is Recovery Rebate Tax Credit for 2020 all about? The pandemic COVID-19 had created a huge adverse impact on the financial lives of the Americans. Initially, the US Government had issued a huge round of Stimulus Checks or Economic Impact Payments up to $ 1200 for each qualified adult in a household plus $500 for each qualifying dependent. Later on, another round of Stimulus Payments has been issued for the Americans according to which each qualified individual in a household would receive Stimulus Payment of up to $600. The eligibility of Americans to receive these Economic Impact Payments is based mainly on their AGI. The IRS would mainly have a look at the tax returns of the Americans for the year 2018 or 2019 for determining their eligibility to receive the Stimulus Payments. Under the CARES (Coronavirus Aid, Relief and Economic Security) Act, a different type of credit known as “Recovery Rebate Tax Credit” has been authorized. This implies that if an American is eligible to receive the Stimulus Payment or the Economic Impact Payment, but has not received the payment or has received an amount which is less than the total amount in the form of an advance payment for the tax year 2020 then it would be feasible to claim Recovery Rebate Tax Credit on the tax returns of 2020. Who would qualify for a Recovery Rebate Credit? In general, an individual would be eligible to obtain Recovery Rebate Credit if
  1. The individual was a US citizen or a resident alien of the US in the year 2020.
  2. The individual was not claimed as a dependent in the year 2020
  3. The individual has a valid Social Security Number issued for employment before the due date associated with the 2020 tax returns.
The amount of Rebate Recovery Credit to be obtained can be calculated by the IRS in the same method which was used to calculate the Stimulus payment.
  • Any eligible taxpayer who has not received either one or both of his Stimulus payments would be able to claim the Recovery Rebate Credit while filing their tax returns for 2020 in 2021. 
  • There might be some individuals who would have experienced a life-changing event after the first round of Economic Impact Payment was made such as unemployment or birth of a child etc.
  • If an individual is single and has an adjusted gross income of less than $75000 and his Stimulus obtained is less than $1200.
  • If an individual is married and is filing his tax returns jointly with a gross income, not more than $15, 00, 00 and his Stimulus payment is less than $2400 then he can claim Recovery Rebate Credit.
  • If an American has not received $500 for every qualifying energy then he can claim the Recovery Rebate Credit.
Information required claiming Recovery Rebate Credit In case, you have not received the full Economic Impact Payment and wish to claim more by the Recovery Rebate Credit on the taxes of 2020 then you would have to inform about the amount of Stimulus payment that was issued in the tax year 2020. A Notice 1444 is being issued by the IRS which reflects the amount that an individual was issued before any offences had happened in 2020. While filing your tax returns, an individual can have this form in front of him and do his taxes. Can a college-going student claim the Recovery Rebate Credit? If an individual is able to meet the basic eligibility criteria and has not been claimed as a dependent on his parents or anyone else’s tax returns of 2020, then he can claim the Recovery Rebate credit if he has not received the Stimulus Payment. If a college student has worked in 2020 and has federal taxes withheld from his pay, then he can get some of his withholding back either as a tax refund, claim the education tax benefits also increase their refund by the help of Recovery rebate credit. Recovery Rebate Credit – Way to claim the additional stimulus If you have not been able to claim the extra $500 for each qualifying child in your first Stimulus Check or have not been able to claim the additional $600 for each qualifying child in the second Stimulus Check then the additional amount can be claimed by the Recovery Rebate Credit. Conclusion Hence, in these challenging times of Coronavirus, the Recovery Rebate Credit would be a helpful means in increasing the amount of tax refund to be obtained by an individual or in decreasing the tax owed by an individual. Recovery Rebate Credit can be claimed on Form 1040 or Form 1040-SR in the year 2020.

All you need to know about Form 1099-R

by | Jan 6, 2021 | tax filing, tax form, Tax Planning, Tax Preparation, Tax Refund, tax returns, tax savings, taxes

All you need to know about Form 1099-R

Form 1099-R is being used by you for reporting the distribution of benefits associated with retirements like annuities or pension plans. Precisely, the Form 1099-R can be used for reporting the distributions which you might have received from your IRA, annuity, pension, or your retirement account. Form 1099-R can be considered as a record to denote any money paid or given to an American other than his employer.  The payer who pays will fill out the Form 1099-R and will send a copy to the payee and to the IRS as well.

Who can receive a Form 1099-R?

As said earlier, the main purpose of Form 1099-R is to record income. You can receive a Form 1099-R due to some of the below-mentioned reasons.

  1. Freelancers and contractors working independently usually get a Form 1099-MISC from their clients. If you are a freelancer or an independent contractor, this form would reflect the money which the client has paid you. Form 1099-R is for employees but it is not the same as the Form W-2.
  2. Form 1099 has a Social Security Number or Taxpayer Identification Number present on it. This indicates that the IRS will know that you have received money and it will also know if that income has not been reported on your income tax return.
  3. If you are receiving only the Form 1099-R, then it does not specifically mean that you would be owing money on that money reported in Form 1099-R. There might be some deductions which can be helpful in the offset of the income

Variations of Form 1099-R

The variations of Form 1099-R includes the following forms:-

  1. Form CSF 1099R
  2. Form CSA 1099R and
  3. Form RRB-1099-R

Mostly, public and private pension plans which are not a part of the Civil Service System use the Form 1099-R. You must receive a copy of the Form 1099-R or some other variation in case of receipt of a distribution of $10 or more amount from your plans related to retirement.

Pension plans and payment of annuity

Retirement benefits are said to be an extension of the compensation which has been arranged by an employer and employee. On most of the contributions made into the retirement plans, income tax is deferred. In simple words, this means you are not liable to pay any income tax on the funds contributed to the Retirement plans until they are withdrawn by you.

Usually, the pension and annuity distributions are being made to the retired employees, employees who are physically disabled and also for the beneficiaries of any deceased employee.

Loans

Many employers would have the provision of granting loans against pension plans. Usually, these loans are not taken as distributions and are repaid with interest. The issue of Form 1099-R occurs when you have taken a loan and are not able to make the necessary loan repayment on time.

  1. If this situation arises then the amount which is not being re-paid is treated as a distribution and would be mentioned in the Form 1099-R along with the code L i.e. Distribution Code.
  2. These distributions are treated as deemed taxable income and might be subject to penalties related to early distribution.

Rollovers

By a Rollover, retirement funds can be moved or transferred from one individual to another otherwise known as a custodian without any taxes paid on the money that has been transferred.

  1. By the use of Form 1099-R, direct rollovers can be easily identifiable. This is done by the use of codes G or H in box 7 of the Form 1099-R.
  2. Rollovers can be indirect if you are the owner of the account and you take up the responsibility of the amount in the Retirement Account and would transfer the deposited money into another Retirement Account.
  3. When there is a point when there is an amalgamation of rollover and IRS principles, the distribution made is not taxed. But, you should not forget to report the amount on your tax returns. 

Early distributions

Those benefits which are paid to you before you reach the age of 59 and half years are said to be Early Distributions. For avoiding the misuse of the retirement funds, an extra 10% federal tax is imposed on the Early Distributions.  Many states also levy penalties on these early distributions. This additional tax is applicable on the full amount of distribution which is taxable unless exceptions like disability, death, IRS levy, etc.

Conclusion

Hence, the above-mentioned information about Form 1099 would be helpful in understanding the details about this and be easier for use.

Penalties highlight for tax returns filed after 14-Sep

by | Oct 12, 2020 | Tax Refund, tax return, tax returns, taxes, Taxtips

Penalties highlight for tax returns filed after 14-Sep

  

The IRS has very recently urged the US citizens to act immediately if they have taxes due and have not filed their tax returns for 2019. After 14th September 2020, the IRS would be imposing huge penalties on those who owe taxes and are not updated concerning their tax returns.

 The deadline for tax filing was 15th July 2020 due to the adverse consequences caused by the pandemic COVID-19. Several taxpayers have submitted their request for an extension to file their tax returns would not be paying any penalties until 15th October 2020. However, it is an essential point to keep in mind that this extended period is for the filing of tax returns only and not for the payment of tax. Any tax which is due after the 15th July 2020 deadline would be considered as a failure to pay penalty and interest would be charged on it.

 There are still many taxpayers who did not make an extension request but owe taxes; will be facing the failure to file the tax returns and also the failure to pay the penalties. It is advisable for these taxpayers to immediately file their tax returns and pay as much as they can before huge penalties are levied from 14th September 2020 onwards. 

  • The penalty charged for non-filing of the tax returns by the specified date or by the extended date even is 5% of the tax which is unpaid for each month.
  • It can also be charged for that part of the month for which there has been a delay in the tax return filing at the rate of 25% of the tax unpaid.
  • If there has been a delay of 60 days in the filing of tax returns, a minimum penalty is charged.
  • In case, there has been no filing of tax returns even after 60 days; the minimum penalty charged is either $435 or 100% of the unpaid tax whichever is lower.
  • This year, this period of 60 days starts after 14th September 2020. After 14th September 2020 heavy interest or penalties would be charged on the tax defaulters.
  • Apart from the penalties, interest would also be charged for any tax which has not been paid by the tax payment due date of 15th July 2020.
  • However, if there is a refund due for a taxpayer no penalty would be charged for the filing of tax returns late by the taxpayer.

 Probabilities of Penalty Relief may be available 

  • If there has been no assessment for any penalties for taxpayers for the past three years would be eligible for an abatement of penalties.
  • If a taxpayer is not eligible for the relief of his first-time penalty relief, still he can qualify for penalty relief if the cause for non-filing of tax returns or non-payment of tax was due to some reasonable reason.
  • The different types of penalty relief which are offered by the IRS are 

Reasonable cause 

The reasonable causes for failing to file tax returns are:-

  • Natural disasters, fire, or any other disturbances
  • Inability in obtaining the necessary records
  • Death, any serious illness, unavoidable absence of the taxpayer or his immediate family member
  • Other causes which state that despite using all care to meet the tax obligations, the taxpayer has not been able to do so.

  Administrative Waiver and Abatement of a first-time penalty

 A taxpayer would be eligible to qualify for the administrative waiver from the penalties due to filing of tax returns late or for non-payment of taxes on time under the below circumstances:-

  • The taxpayer did not have to file tax returns previously or he has no penalty for the previous three tax years which are before the one in which penalties have been received.
  • If the taxpayer has paid or rather has made the arrangement for making the payment all due taxes.
  • If the taxpayer has filed the current tax returns or has filed an extension in the time to file a tax return.
  • A taxpayer can also be eligible for an Administrative waiver if he has received incorrect oral advice related to tax returns and payment from the IRS.

  Statutory Exception

 A taxpayer would qualify for a Statutory Exception if he has received incorrect written advice from the IRS. The taxpayer would have to submit various evidence to prove this such as

  • The written request made for advice
  • The erroneous written advice which was sent by the IRS
  • Report on any tax adjustments which have been made due to the erroneous advice obtained from the IRS.

 The taxpayer can file Form 843, Claim for Refund and Request for Abatement to request for penalty relief in case of incorrect advice obtained by the IRS.

 Get extra time for the tax payment

If a taxpayer owes tax but is not able to make the full payment, then he can opt for payment of taxes by a payment plan which includes an Installment Agreement.  A qualified taxpayer or an authorized representative is eligible to apply for a payment plan to make payments of the taxes over time. A taxpayer who is unable to pay the full amount must contact the IRS to know about the options available.

The IRS might provide options like short-term extension, and installment agreement or offer in compromise can be offered, etc.

Conclusion

Hence, taxpayers must be alert and file their tax returns before the deadline if they have not done so to avoid huge penalties.

Who qualifies to be your dependent when you file your Income Tax Return?

by | Oct 10, 2020 | income tax, IRS Tax Refunds, tax filing, tax returns, taxes

Who qualifies to be your dependent when you file

your Income Tax Return?

 By claiming your dependents, you would be able to save a huge amount of taxes. So, if you have a family you must know how the dependents are defined by the IRS for income tax purposes. However, you may not completely aware of who in your family can qualify as your dependent or not.

 

Who would qualify as a dependent?

 Mainly, there are two types of dependents i.e. 

  • Your qualifying child
  • A qualifying relative

 In both the conditions, the below-mentioned criteria must be fulfilled for qualifying to become dependent. 

  • The person must be a US citizen, a US resident, a US national, or a Canadian/Mexican resident. Some people think of claiming a foreign exchange student who is staying with them temporarily. This is feasible only if the foreign exchange student fulfills this above-mentioned condition.
  • You would not be able to claim a person as your dependent if he claims a personal exemption for himself or is claiming another dependent on his tax forms.
  • You would not be able to support the claim of a person who is married and files taxes jointly with his spouse.

Qualifying child. 

  • To be a qualifying child, the child doesn’t need to be your biological child. The child must be related to you and can be your brother, sister, adopted child, stepchild, niece, or nephew as well.
  • The qualifying child must be below the age of 19 years unless he is suffering from some disability (permanent and total). However, there is an exception to this rule and you can claim a child in case of him being below the age of 24 years and being a full-time student for a minimum period of 5 months in a year.
  • The child should be a citizen of the US, US national, or a United States/Canadian/Mexican resident.
  • A child would be qualifying if he is dependent but not self-supporting. He must be living with you for more than a year unless there are exceptions like living with the other parent in cases of divorce or being temporarily absent, etc.
  • If you and your spouse have been divorced then, you can use the tie-breaker rules found in the IRS Publication 501. These tie-breaker rules are the basis for the establishment of income, the parentage, and even the residency requirements for claiming the child.  

Qualifying relative.

In case, you are supporting your parents or any other relative then certain conditions should be fulfilled to claim the dependency exemption. 

  • The person whom you are supporting should be your relative and this category of relatives would include:-
  1. Your biological child, your foster child, your stepchild, or, your grandchild.
  2. Your siblings, half-brother, half-sister, stepbrother, step-sister, or the descendants of your siblings.
  3. Your parents, stepfather, stepmother, grandparents, or other ancestors.
  4. Uncle or Aunt such as brother or sister of your parents
  5. Your in-laws can include your father-in-law, mother-in-law, daughter-in-law, son-in-law, brother-in-law, or sister-in-law. However, this can only be feasible when the marriage is active and not if there has been a divorce or separation.
  • The person whom you are supporting must have a taxable income not more than $4200 in the year 2019. However, this limit goes up every year with the changing rules.
  • The relative who would be qualifying for obtaining a tax exemption must have been living at your residence throughout the year or would be on the list of those people who do not live with you.
  • You should have paid for the support of the person in more than half of the person is being supported by multiple people who agree in multiple support agreements that the exemption can be claimed by you.

Conclusion.

So, the process of including qualified dependents for claiming tax exemptions is one of the best benefits which you can avail. By claiming these dependents, you can very easily avail several tax credits and deductions which would help in reducing your tax bills. Hence, you must understand carefully the qualifying criteria for claiming dependents failing which you would miss the opportunity of availing the benefit of low tax bills.

 

Now is the time to switch to Online Tax Filing, if you have not done it already

Now is the time to switch to Online Tax Filing, if you have not done it already

by | Apr 25, 2020 | e filing tax, tax filing, tax returns

Now is the time to switch to Online Tax Filing, if you have not done it already

Gone are those days when tax filing used to be a tedious job with meeting a tax preparer, filing out tax returns manually, sending your returns to the IRS, etc. online tax filing Today, everyone wishes to perform their tasks quickly without investing much time and conveniently as well. Now, this is also applicable to the procedure used for tax filing.

If you wish to complete your tax filing easily without facing any inconveniences, the best method to opt for is online tax filing or e-filing. By online tax filing, you would be able to file your tax returns easily by the electronic medium without the need of commuting to anywhere or mailing anything. 

Benefits of e-filing taxes

 Some of the major benefits of the online tax filing method can be noted below.

  1. Online tax filing or e-filing is the most secure means to deliver your tax returns to the IRS.
  2. Confirmation from the IRS is sent once your e-filing is done. This gives you a sense of mental peace that your tax returns have been received successfully.

3. By e-filing your tax return, you will be obtaining your returns very soon i.e. within around 21 days of filing. So, e-filing is the fastest and easiest method to obtain your tax refunds.

4. Moreover, e-filing is less expensive as compared to other methods of tax filing.

 

The Rise of e-filing

In 1986, e-filing began as a pilot project in Cincinnati, Phoenix, and N.C. In that particular year, the number of tax returns filed by e-filing was 25,000. Gradually, the number of Americans using the e-filing method started increasing.

During 2010, 141.5 million income tax returns were filed by the taxpayers out of whom 70% was done electronically.

Due to the different benefits offered by the e-filing method, more and more taxpayers are willing to use this method for filing their tax returns. In the last decade, the number of taxpayers opting for e-filing has increased by around 145%. Since 1990, the IRS has processed approximately 1 billion income tax returns securely filed by e-filing.

In 2011, the IRS had also taken certain initiatives to encourage people for e-filing. The IRS had sent postcards to those taxpayers who had filed their tax returns by paper. The announcement was that the IRS would no longer be mailing paper tax packages to the taxpayers.

How does e-filing work?

For the low and middle-income taxpayers, the IRS has a tool known as IRS Free File. This tool can be accessed on the official website of IRS i.e. www.irs.gov. By this tool, it is easier for the taxpayers to make tax preparation online and also do e-filing at absolutely no cost.

This program or tool of the IRS is created by a partnership between public and private organizations i.e. the Federal Government and the private companies  

which are engaged in tax preparation. Those companies which participate in this partnership must exhibit adherence towards strict privacy guidelines.

Americans having an adjusted gross income (AGI) of $57,000 or below that are eligible to select the best amongst the available online tax preparation services. Moreover, a taxpayer can also make use of the Free File Fillable Forms which are available on the official web page of the IRS. This is a free form which can be said to be the Form 1040 electronic equivalent. It takes the numbers as the input and performs the calculations. 

After the e-filing of tax returns

  1. Once the returns have been submitted by e-filing, the IRS will be reviewing your returns. This review procedure can take almost 48 hours. 
  2. If your returns submitted match all the personal information, and then your return is accepted.   
  3. After your return has been accepted and there is a refund due, you would obtain a refund within 21 days.

4. In case, your return submitted does not match with your personal information, your return would be rejected by the IRS. You can make the error corrections and re-submit your return again.

While e-filing your tax returns, you would be able to select the delivery method of your tax refund. Usually, it is advisable to select the Direct Deposit method as refunds are sent quite faster by this method.

Hence, e-filing is the norm nowadays. It is an easy, convenient and secure method to get back your money. So, if you have not tried it yet you can give it a try this time!!

References

https://www.taxslayer.com/blog/making-the-switch-to-online-tax-filing/

https://blog.turbotax.intuit.com/turbotax-news/irs-free-file-program-offers-free-tax-preparation-and-e-filing-13584/

https://blog.turbotax.intuit.com/turbotax-news/what-can-e-filing-your-tax-return-do-for-you-8998/

https://blog.turbotax.intuit.com/tax-tips/the-rise-of-e-filing-4887/

 

All about filing your taxes in the US: The When, the Where and the How

All about filing your taxes in the US: The When, the Where and the How

by | Feb 1, 2020 | tax filing, tax form, tax returns

All about filing your taxes in the US: The When, the Where and the How

In the US, filing your taxes on time is considered quite important. If you are not filing your taxes on time, then you might have to pay heavy penalties. For avoiding paying heavy penalties, you must know in detail some essential aspects related to taxes.

The major aspects which are related to taxes in the US are

  1. When to file the tax returns?
  2. Where to file the tax returns?
  3. How to file the tax returns?

Let us know about each aspect in details.

a. When to file the tax returns?

In case you are a tax filer as per the calendar year, then the end of a particular tax year for you is on 31st December. In this case, you have to finish your process of tax filing by 15th December of each year. Suppose, you are using a fiscal year i.e. tax year which is ending on the last day of any month but not December then you will have to file your tax returns by the 15th day of the fourth month after your fiscal year has been closed.  In case of the tax return for the year 2019, the tax payment due date is 15th April 2020. 

If you are filing your tax returns by the help of mail, then you will have to ensure that the mailing address to which you are sending the document is correct and the documents are deposited on time. In case of filing a tax return by electronic means, you should ensure that the date and time in your time zone must be accurate as it determines whether your tax filing has been done on time or not.

In case, you are not able to file your tax returns by the due date then you will have to request an extension in the time needed to file the taxes. You can use Form 4868 to obtain an extension of 6 months automatically. For this, you will have to pay interest and also there might be a penalty charged on you for non-payment of tax by the due date.

b.Where to file the returns?

If you are filing your tax return electronically, then you should not be worried about the area where it will be sent. In case, you are filing your tax return by physical means or by paper then you will have to send it to the correct address which is mentioned in the form that you are filling. 

If you have a balance to be paid at the time of filing your tax return, then you can make the payment by IRS Direct Pay. In case you are filing your return by paper, then you will fill Form 1040-V and send your cheque or money order along with the form.

  • The cheque or money order which you are going to send must be prepared as payable to “United States Treasury”.
  • You should not staple your tax return, Form 1040-V and payment together. They should be left loose and placed in an envelope.
  • On the front side of your payment, you should include your name, address, TIN, tax year and the category of form which you are including.
  • It is advisable not to send cash along with your return.

c.How to file the tax returns?

You can file your tax returns either by electronic means or you can mail your tax returns in paper form. Mostly, it is advisable to file your tax returns by electronic means as it is convenient and even a faster process.  When you are mailing your tax return, it will take around six weeks to eight weeks for processing. In case, you are preparing your tax returns by using professional software then there might be the need to pay additional fees to file the return.

If filing tax returns by paper form, you should use the Form 1040 or Form 1040-SR. Along with these forms, you also need to attach some other documents like a copy of Form W-2, Form W-2c which is a corrected form Form-W2, Form-W2G and Form 1099-R if a federal income tax was withheld, etc. 

For electronic filing, you will have to use the e-file method. For this, you can use self-select PIN which will act as your digital signature when you are using tax preparation software. The self-select PIN will allow you to make your electronic signature while filing your Income Tax Return by selecting a five-digit PIN. 

Conclusion

So, you must know in detail about these important aspects associated with filing your tax returns in the US. This basic information makes it easier for you to file your tax returns accurately on time thus avoiding heavy penalties. 

Reference

  1. https://www.irs.gov/taxtopics/tc301
  2. https://www.irs.gov/faqs/irs-procedures/signing-the-return/signing-the-return-0