Does every NRI in the US need to file their Income Tax?

by | Jan 10, 2021 | income tax, income tax credit, NRI, tax filing, Tax Payers, taxes

Does every NRI in the US need to file their Income Tax? Everyone in the US is not required to file their Income Tax return every year. In case, your total income for a year does not exceed a particular threshold then you would need to file a federal tax return. The amount of income which you would be able to earn before you are needed to file a tax return would be based on the type of income, the age of the NRI and the filing status of the NRI. Gross Income Thresholds Most taxpayers are eligible to claim the Standard Deduction. As an NRI, the Standard Deduction amount for which you would be eligible for is mainly determined by your age and your filing status. The Government usually decides this amount before the tax filing season arrives and this amount would increase for inflation each year. By the help of Standard Deduction and other deductions, your income can be reduced to determine your taxable income. In general, if your income is less than your Standard Deduction then you do not need to file a federal tax return. You would not need to file a federal income tax return if the below-mentioned criteria are true.
  1. If you are below the age of 65 years
  2. If you are filing your tax returns with the Single status
  3. If you do not have any other special conditions which would require you to file the tax returns such as income obtained from self-employment
  4. If your income is less than $12,400 i.e. the Standard Deduction in the year 2020 for a taxpayer.
What would happen if you are only receiving Social Security Benefits? In general, cases, if your only source of income is the Social Security Benefits then you would not have to file a tax return. However, Social Security Benefits have another aspect i.e. if you are married and are filing your tax return separately from that of your spouse then some of your Social Security Benefits must have to be included in your taxable income to know if it is greater than the Standard Deduction you are claiming. Taxability of Social Security Benefits In order to find out if the Social Security Benefits which are receiving are taxable or not, the below-mentioned steps can be implemented.
  1. You can add one-half of your Social Security Income to all other types of income which you are receiving including the income which is tax-exempt.
  2. After that, the amount obtained can be compared to the base amount for determination of your filing status.
  3. In case, the total will be more than the base amount then some of your Social Security benefits would be taxable.
When a dependent would need to file a federal tax return? NRI taxpayers who are claimed as dependents on the tax returns of another person have different filing requirements with the IRS. The income of a dependent can be “unearned” when it would be derived from certain sources such as dividends or interest. If the unearned income of a dependent is more than $1,100 in 2020 then tax return must be filed by the dependent. Filing a Tax return to claim a tax refund There might be instances when there would be the need to file a tax return for an NRI such as taxes would have been withheld from a paycheck and a tax refund is due. If too much amount has been withheld from your paycheck, then the only method by which you would be able to obtain your tax refund is by filing their tax return.
  1. For instance, if you are an NRI who is a taxpayer with a single filing status and earns $2500 during a particular year and $300 is being withheld from your paycheck then you can obtain a refund of $300 as your income is less than Standard Deduction.
  2. If you have a refund due then the IRS would not automatically issue the refund. You would have to file a tax return so as to obtain your refund which is due.
Conclusion Hence, if you are an NRI in the US then there are various criteria which are applicable for determining your tax liability. You must be well aware of these criteria and file your tax returns accordingly.

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.

IRS assists the elderly for tax counseling in the US.

by | Nov 24, 2020 | IRS, taxes, Taxpayers

IRS assists the elderly for tax counseling in the US.

The IRS (Internal Revenue Service) had very recently awarded more than $36 million for the Elderly and Volunteer Income Tax Assistance Grants for those organizations which help in providing senior citizens of the country with federal tax return preparation. Usually, taxes are difficult for everyone; tax returns, tax credit, property tax, social security tax, etc. make the entire concept of taxes even more confusing. With increasing age, the process of tax preparation and tax return seems to be even more difficult.

 The complex tax rules, changing technology and the lack of proper funds for hiring a professional tax preparer can make the tax preparation and file even much more difficult. So, if you are ageing and finding it difficult to prepare your federal taxes yourself then you can approach the IRS for assistance.

 The IRS offers two great tax preparation programs which the seniors in the country can use:- 

  1. Volunteer Income Tax Assistance (VITA) Program
  2. Tax Counseling for the Elderly (TCE) Program

 Throughout the US, VITA and TCE support centers and programs are located which would be helpful for the seniors. When you visit the IRS website, you would be able to search based on your location that would help you in finding the nearest VITA or TCE program. The IRS would partner with several organizations throughout the US for developing the VITA and TCE programs. These community partners can include faith-based organizations, community centers, non-profit agencies, large employers, etc.  Proper training on tax laws and certifications are provided by the IRS to these community partners for enabling them to prepare correct tax returns.

 Volunteer Income Tax Assistance (VITA) Program.

 The volunteers at VITA are the IRS certified professionals who help old people or disabled people in their tax preparation. The VITA program by the IRS is most suitable for those seniors who have a particular income which can be subject to income tax. Moreover, the VITA Program is also helpful for those seniors who do not have very fluent English skills, earn a higher income, and need professional assistance for tax preparation. The VITA Program was created in the year 1969 and would help the under-deserved communities like low –income and moderate-income individuals in tax preparation.

 The tax professionals at VITA work very hard and help in providing good quality services for the seniors who have low income and would need professional help for the preparation of their tax returns. VITA volunteers would also help in providing counseling on the tax credits that are applicable for reducing the income tax burden. But, there are certain limits on what the VITA volunteers can prepare and cannot prepare. The IRS would suggest that difficult federal tax situations must be handled by paid tax professionals.

 Tax Counseling for the Elderly (TCE) Program.

 Those senior citizens who are not very sure about which tax assistance program they must use can use the TCE Program. The TCE Program was started in 1978 and its volunteers receive proper tax training and technical assistance. According to the laws in 2017, a senior citizen must be 60 years old to qualify for using the TCE Program for tax assistance.  Many seniors in the US have a living which is based on a fixed income and they should use the TCE Program rather than the VITA Program. 

 TCE Program is operated by the IRS certified tax professionals and provides free services to the senior citizens. TCE volunteers make it more convenient for senior citizens by traveling to locations where the seniors can meet them easily such as libraries or community centers, etc.  Several non-profit organizations would administer the TCE Program that functions on the grants given by the IRS.

 Conclusion

So, senior citizens can avail themselves of professional tax aid programs and also be aware of the tax scams that are a common occurrence these days.

Capital Gains tax on selling your property in 2020.

by | Oct 26, 2020 | capital gains, income tax, IRS, tax filing, tax savings, taxes

Capital Gains tax on selling your property in 2020

When you are selling real estate which has been held by you as an investment, the tax implications might be different based on the period for which you have held the property. The tax rules also depend on whether the property is a home or any other category of real estate. If it is a home sale, then it is considered as a particular type of capital gains which has its own set of taxation rules.

 If you are selling property that you have held for less than a year, then it is known as Short-term capital gains. You would have to pay taxes for the Short-term capital gains at the same rate as that of the Income taxes. However, the rates are based upon the income bracket under which you fall.

 When you are selling property which you have held for more than a year, then the profits obtained is known as long-term capital gains. The rates at which the long-term capital gains are taxed are your taxable income, your filing status which can be single, married, and filing taxes separately and married and filing jointly/head of the household.

 Let us have a look at the tax rates for the long-term capital gains of the year 2020.

a.Individual rate or when you are filing as a single

Income

Long-Term Capital Gain Rate

$0 to $40,000

0%

$40,000 to $441,450

15%

$441, 451 or above

20%

 b. Married and filing taxes jointly 

Income

Long-Term Capital Gain Rate

$0 to $78,750

0%

$78,751 to $488,850

15%

$488,851 or above

20%

 c. Married and filing taxes separately 

Income

Long-Term Capital Gain Rate

$0 to $39,375

0%

$39,376 to $244,425

15%

$244,426 or above

20%

 d. Head of the Household 

Income

Long-Term Capital

$0 to $52,750

0%

$52,751 to $461,700

15%

$461,701 or above

20%

Example to illustrate capital gains tax implications on Real estate

In case you are married and filing taxes jointly along with your wife. You and your wife have a taxable income of $200,000 for the year 2020. By this, you would be included in the tax bracket of 15% for the year 2020.

Then you had purchased land in California less than a year ago. However, you had some emergency and needed cash. You had estimated a profit of $10,000 when you had purchased the land. If you sell it now immediately it would be a short-term capital gain and you would have to pay tax $2400 for it. But, if you waited for some more time and sell it then it can be considered as a long-term gain and would be taxed at 15%. So, you would have to pay $900 less or $1500 for the land. Thus, you would have an $8500 gain on the investment.

How much tax can you exclude?

  • If you are selling the house in which you are staying current, then your capital gain would not be taxed up to $250,000 if you are filing your tax returns as a Single.
  • This exemption is based on the IRS Section 121 Exclusion.
  • If you are married and are filing your tax returns jointly, then you can avail of the benefit of a tax exemption of up to $500,000.
  • You would qualify for this exemption only if you are the owner of the home and have used it as your primary residence for a minimum period of 2 years out of the five years before the sale date.
  • There can be some factors which might not let you avail this normal exclusion such as
  1. If you are liable to pay expatriate tax
  2. If the home or the real estate which has been sold by you was not your main residence
  3. If you have not lived there for 2 years out of the 5 years before the sale
  4. If you have not owned the house even for 2 years out of the 5 years before the sale of the house.
  • If you are married and are filing your taxes jointly, then only one out of both of you must satisfy the owning criteria to avail of this tax exclusion.
  • You can still claim the tax exclusions even if any of the criteria are not satisfied if the house was sold or exchanged due to some changes in your employment place, health issues, or any unexpected circumstances.

How to file your Capital Gains Tax?

In 2019, the IRS had said to report your capital gains and losses on Schedule D and report the amount on your Form 1040.  However, now if you are receiving Form 1099-S, Proceeds from Real Estate Transactions, you should report about the sale of the home even though the gain obtained from the sale is excluded under the IRS Section 121 Exclusion.

Conclusion

So, these are the important tax implications on any capital gains you have obtained by selling property. You should also keep in mind that if your investments are being sold they might be subject to an additional 3.8% income tax.

Understanding the tax bracket in 2020.

by | Oct 14, 2020 | tax savings, taxes, Taxpayers

Understanding the tax bracket in 2020.

 

In November 2019, the IRS has announced the annual inflation adjustments for the year 2020. These adjustments would include tax rate schedules and other tax changes. The adjustments of the tax year 2020 would be used while filing the tax returns in 2021. If you are planning for earning more money in 2020 or for changing your circumstances this year, then you should adjust your withholdings or plan for tweaking your payments made for estimated taxes.

 

Tax Brackets and Tax Rates.

The tax items for the year 2020 which would be maximum interest for the taxpayers are:-

  • The rates for Standard deduction for those taxpayers who are married and are filing their taxes jointly are $24,800 for the year 2020. There has been a rise of $400 from the previous year. For those taxpayers who are single and those are married but filing their returns separately, the standard deduction rates have risen to $12,400 this year. For those who are filing their tax returns as ‘Heads of households’, the rate of Standard deduction will be $18,650 which is an increase of up to $300 in 2020. 
  • For the tax year 2020, the personal exemptions allowed are zero which remains the same as that of the year 2019. This elimination was a provision present in the Tax Cuts and Jobs Act. 
  • For the year 2020, for individual taxpayers, the top tax rates are 37% for the individual taxpayers whose income is more than $518,400 ($622,050 for the married couples who are filing returns jointly). The other rates can be listed below as:-
  1. 35% for those incomes which are over $207,350($414,700 for the couples who are filing their returns jointly)
  2. 32% for those incomes which are over $163,300($326,600 for the couples who are filing their tax returns jointly)
  3. 24% for those incomes which are over $85,525($171,050 for those couples who are filing their tax returns jointly)
  4. 22% for those incomes which are over $40,125($80,250 for those couples who are filing their tax returns jointly)
  5. 12% for those incomes which are over $9,875($19,750 for those couples who are filing their tax returns jointly 
  • The limitations on the itemized deductions for the tax year 2020 have been eliminated under the provisions of the Tax Cuts and Jobs Act. 
  • For the tax year 2020, the Alternative Minimum Tax Exemption amount is $72,900 and begins to phase out at $518,400. The exemption amount was $71,700 for the year 2019 which began to phase out at 510,300.   
  • For the tax year 2020, the maximum Earned Income Credit Amount for the taxpayers who have three or more than three qualifying children is $6,660. 
  • The limitation in a month for qualified transportation fringe benefits is $270 for the tax year 2020. 
  • For the tax year 2020, the limitations for the salary reductions of employees to make contributions to health spending arrangements is $2750 which is an increase of $50 from the limit of the last year. 
  • For those participants who have self-only coverage in a Medical Savings Account, for the tax year 2020 there must be an annual deductible that is more than $2,350 which remains the same for the tax year 2019 but must be less than $3,550, which is a rise of $50 from the previous year. In the tax year 2020, for the self-only coverage, the maximum out-of-pocket expense amount is $4,750. For the tax year 2020, the taxpayers who have family coverage, the annual deductible is $4,750 which has increased from $4,650 in 2019; but, this deductible must be less than$7,100, which is an increase of $100 from the limit that has been fixed for the tax year 2019. For family coverage, the limit for the out-of-pocket expenses is $8,650 which has increased by $100 from the tax year 2019. 
  • The Adjusted Gross Income (AGI) amount which is being used by the joint filers for determination in the reduction of the Lifetime Learning credit is $118,000for the year 2020. 
  • For the tax year 2020, the annual exclusion for gifts as determined by the IRS is $15,000. 
  • The Foreign Earned Income Exclusion is $107,600 for the tax year 2020. 
  • The estates of those decedents who die during the tax year 2020 will have an exclusion amount of $11,580,000 which is greater than the exclusion amount of $11,400,000 for the estates of decedents who died in the tax year 2019. 
  • For the tax year 2020, the maximum credit which is permissible for adoptions is the number of qualified adoption expenses up to $14,300.

 

Conclusion.

So, these are the major tax rules which have been changed in the tax year 2020 which must be understood by the taxpayers.

 

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.