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

by Mounica Kota | 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:-

Your biological child, your foster child, your stepchild, or, your grandchild.
Your siblings, half-brother, half-sister, stepbrother, step-sister, or the descendants of your siblings.
Your parents, stepfather, stepmother, grandparents, or other ancestors.
Uncle or Aunt such as brother or sister of your parents
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.

Tax Implications for buying/selling stocks

by Mounica Kota | Oct 8, 2020 | Tax implications, Tax Payers, tax return, taxes

Tax Implications for buying/selling stocks

The pandemic COVID-19 has created an adverse impact on the economy of the entire world. Millions and millions of Americans have taken the advantage of the low stock prices and purchased many stocks. Many have sold their stocks and withholdings due to market fluctuations and economic causes too.

However, if you have sold or even purchased stocks during this pandemic stricken period you must be willing to understand various tax implications on this. Moreover, you might also be inquisitive to understand the differences between long term and short term capital gains.

So, let us talk about some of the major areas and topics associated with the tax implications on the stock market.

Taxes levied on the Capital Gains

On selling of the shares of winning stock, you would have created Capital Gains. If you are selling your shares during a downturn, you must keep in mind that you might obtain again depending on the duration for which you have held the stock.

Suppose, you have sold a stock at a rate of $80 per share, which is d downturn from the $100 price of each share. You might think that this stock has lost its value and is apt for sale; however, if you would have purchased the stock before 10 years at the cost of $20 for each share you will have a $60 gain and not a $20 loss on each share.

So, in case you had 100 shares of that stock your cost price at the $2000. By selling the shares at $8000, you would be able to recognise a long-term capital gain which would be at around $6000.

In case, you are in the tax rate bracket of 15% long term capital gains then you would have to pay federal taxes of around $900 when the stocks are being sold.

Long Term Capital Gain and Short Term Capital Gain

In case you have been holding a security for a period of more than 1 year, then on the sale of that security, you will be eligible to obtain long term capital gains at the tax rates of 0%, 15%, or 20% based on the income.

However, if you obtain the same gain from the sale of stocks which have been held for one year or even less then the short-term capital gains would be taxed at the same rate as that of ordinary income i.e. 10%, 12%, 22%,24%, 32%, 35% or even 37%.
If you are married and you have a combined taxable income of $150, 0000 along with your spouse. When this is your income level, you can have a long term capital gains tax rate at 15% and your Federal Income Tax rate would be 22%.
Then the capital gain of $6000 which you have obtained by selling security which you have held for one year or less would be $1320 and not $900.

Capital losses can be offset with Capital Gains

You should not feel disheartened if you have sold the losing stock and have faced capital losses. You can offset your capital losses with your capital gains. This procedure is known as Tax harvesting where investors realize their capital losses and offset their capital gains.

Suppose, you had a capital gain of $10000 from the sale of a particular stock whereas, you experienced a capital loss of around $8000 on the sale of another stock. So, in this case, you can deduct the capital losses from capital gains. You would obtain $2000 long-term capital gain thus, reducing your capital gains and taxes.

For instance, if your capital losses are greater than your capital gains, then you can deduct up to $3000 in a year in the form of allowable capital losses against the non-investment income. This would help lower your overall taxable income.

However, in the case of 2020 if there has been a loss of $8000 by the sale of stock then there are no gains offset it against. You can deduct $3000out of that loss against the non-investment income. The remaining $5000 can be easily carried forward into the subsequent years. This can be either deducted against the future capital gains or can also be written off against the non-investment income. This can be done at the rate of $3000 in a year until the complete loss has been deducted.

Net Investment Income Tax

This is an additional tax that you might face depending on your income. The IRS had started implementing the Net Investment Income Tax for partial funding of the Affordable Care Act.

By this, an additional tax of 3.8% would be imposed on your investment income if the thresholds are exceeded by your Modified Adjusted Gross Income.

These thresholds can be listed as

Married jointly- $250,000
Married but filing tax returns separately – $125,000
Single or the Head of a household – $200,000
You re a qualifying widow/widower along with a child – $250,000

The Net Investment Income Tax applies not only to the income from capital gains but also the investment income which has been derived from dividends, interest, rental income, royalty income, and also non-qualified annuity income.

Conclusion

So, this information would be helpful for you in understanding the various tax implications imposed on the purchase or sale of stocks.

Types of interest that is eligible for Debt-Tax Deductible

by Mounica Kota | Oct 7, 2020 | income tax, IRS, Tax Planning, Tax Preparation, Tax Refund, taxes

Types of interest that is eligible for Debt-Tax Deductible

There is a number of debts that would accrue interest on them such as student loans or home mortgage, etc. When the interest accrual is for a longer period, the repayment amount goes on increasing and it turns out to be quite expensive to repay them. If you have several debts then, it is quite obvious for a lot of interest to get accumulated quickly. You might be having low-interest rates but then the only way to pay off is by reducing your outgoing expenses.

Is the interest levied on debt tax-deductible? It might be sometimes; however, it might depend on the type of interest and many other criteria.

Let us find out the types of interest which can be eligible for a tax deduction.

The interest which is eligible for a tax deduction

Student Loan Interest

A large number of the students are under the burden of debts due to the Student loan and to reduce the burden caused by these debts, the IRS provides a tax deduction on the interest which is levied on the Student loan. By the Student loan interest deduction, you can deduct a maximum of $2500 from your income which is taxable as long as the Modified Gross Income (MAGI) of your previous year is less than $70,000. The student loan must be taken either by you, your spouse, or a dependent. The loan must have been taken by you for educational purposes during the period in which you, your spouse, or dependent was enrolled for at least part-time into a degree course.

Home Mortgage Interest

If you are borrowing money for purchasing a home, then you might have the eligibility to avail of the mortgage interest deduction. According to the regulations of the IRS, if you have bought your house after 15^th December 2017 you can be eligible to take up to $750,000 in the form of the interest deduction. Moreover, this is also applicable to those mortgages which are up to $1 million and have been purchased before 15^th December 2017.

If you are paying home equity loan debt, you can be eligible to take the advantage of the home mortgage interest deduction. However, this is feasible only if you are utilizing the home equity loan for purchasing, constructing, or improving the home which secures your home equity loan.

If you want to claim your interest deduction on a home mortgage, you will require the IRS Form 1098 or the mortgage interest statement which you would obtain from your lender. You would also need proper records that would document the details of your home and mortgage. Moreover, you would obtain the need to obtain the Schedule A too for claiming your itemised deductions. You must carefully read the IRS Publication 936 to get more detailed insight into the types of documentation that the IRS would need to check for your deduction approval.

Margin Debt Interest

In case you are borrowing money from a particular lender for investing, then you would be able to claim a deduction for the interest on the margin debt that has been incurred by you. The value of the deduction is capped at the net taxable income obtained from the investment which you would be able to claim during a tax year; however if you do not have any net taxable income obtained on the investment to claim you can easily carry forward the remaining interest expense. By this, you will have the ability for interest deduction from the net taxable investment income in the next tax-filing year.

The tax deduction for the margin debt interest can be calculated by the use of the IRS Form 4952.

However, you can even calculate the margin interest which is deductible by the below-mentioned steps.

You consider your gross income and perform subtraction of qualified deductions, net gains, and all other expenses incurred from investment.
The remaining number obtained is your net investment income.

Let us suppose, you have $1000 as your investment income and $500 as your interest expenses you would be able to deduct $500 on your tax returns obtained.

Business Loan Interest

Business loans would help in providing funds for the expenses incurred in the operation and growth of your business. There are several uses of business loans and can include the accommodation of lines of credit to property mortgages. Business loans also accrue interest over time and this interest accrued is tax-deductible.

The major conditions which determine the tax deductibility of the business loan interest would include the type of business loan you have procured, the relationship between lender-debtor, legal liability for the debt and a proper agreement from both lender and debtor for the debt to be repaid.

Some of the common categories of business loans which would be eligible for small business deductions are:-

Term loans
Short-term loans
Business lines of credit
Personal loans
Business Purchase loans

You should use the IRS Form 8990 for calculation of the amount of business interest you can deduct for a particular tax year.

Sole proprietors and single-member LLCs must claim their deductible interest in the Section –Expenses of Schedule C on Line 16.
In the case of partnerships and multiple-member LLCs, the expenses related to these interests on business loans can be claimed by recording in Form 1065 and the “Other Deductions” section.

What are the benefits of deducting paid interest?

Your taxable income can be reduced by using the benefit of the interest deduction.

By taking the advantage of interest deduction, you would be able to move into a lower tax bracket.
Also, you can be taxed at a lower federal rate by utilizing the benefit of the interest deduction.

Conclusion

Hence, the above-mentioned categories of interest are eligible for the deduction of debt tax and would be beneficial for you to have low taxable income.

Tax deductions for your child born in the US.

by Mounica Kota | Oct 1, 2020 | Tax Deduction, tax deductions, tax filing, Tax Payers, taxes, US Government

Tax deductions for your child born in the US.

When the deadline for the tax return filing approaches, you should keep your details ready for review so that you do not miss any necessary detail. If you have a kid, then it is feasible that you can obtain some good tax benefits.

Dependency Requirements.

If you are going to claim your child as a dependent, then there are certain dependency requirements which your child must meet.

Your first step is applying for the Social Security Number of your baby. It will take nearly two weeks for your Social Security Number to arrive.
Another criterion is that your child should have been living with you for a period of more than half of the year. The time which your newborn child has spent in the hospital would not be taken into consideration here.

Changes in your tax filing status.

In case you were single and now after having a baby you are supporting your household, your tax filing status would change to “Head of the Household”.
By this tax filing status, you would be able to obtain a much larger standard deduction and even more favorable tax brackets.
So, you can save more on your taxes after being the Head of Household than you were saving while you were Single.
However, when married and having a child your filing status would not change.

Child Tax Credit.

This is considered to be one of the best tax breaks for the parents. You can claim Child Tax Credit up to $1000 for each qualifying child.

Some criteria must be met for your child to be the qualifying child.

Relationship – If you are going to claim this credit, then your biological children, foster children, adopted kids, step-children are eligible. Moreover, some of your other family members can also qualify.
Age – Your children must be of the age of either 16 years or younger than that to avail of this credit.
Dependent – You will have to claim your child as your dependent on the federal taxes.
Support – Your child should not have been provided half of the support.
Resident – Your child should have stayed with you for nearly half of the year or more.
Citizenship – Your child can qualify if he is a US citizen, US resident alien, or a US National.

Claiming the tax breaks for medical expenses and child care.

Medical expenses related to the birth of your child and child care are deductible.
These expenses are deductible only when they are exceeding 10% of your AGI (Adjusted Gross Income).
To qualify these expenses for deductions, these expenses must be itemized.
If you are a working parent, then you are eligible to claim credit for Qualified Child Care Expenses.
You can also claim the Child and Dependent Care Credit if you have paid some worker or Daycare center for taking care of your child while you were working.
To qualify for this credit, you should be able to identify the individual who has given support or taken care of your child. You and your spouse should have earned income to avail of this credit if you are filing the returns jointly. Moreover, the expenses paid for child care should not be given to your spouse or any other dependent on your tax returns.
This credit is based on your income and can exceed up to 35% of the child care expenses which qualify for a credit. This can be up to maximum expenses of $3000 for one child and $6000 for more children.
However, your Child and Dependent Care might get reduced if your employer is providing you with dependent care benefits that are tax-free.

Some additional tax breaks.

There are some other tax breaks which parents can enjoy such as:-

You can qualify for obtaining the Earned Income Tax Credit.
Any gifts i.e. in the form of money or property would be free of tax for you and your kid if received from grandparents and other relatives.
You can also be eligible to participate in QTP i.e. Qualified Tuition Program which is being offered by your State. Even though there is no immediate break for the taxes, the earnings in the account would be tax exempted. You could also obtain state deduction or credit for the contributions made.

Conclusion.

So, these factors would help you to understand the different facets related to the tax deductions associated with your child born in the US.

Do you owe taxes to the IRS?

by Mounica Kota | Aug 9, 2020 | IRS, owe taxes, penalties and interest, taxes

Do you owe taxes to the IRS?

There can be scenarios when you realize that you owe taxes to the IRS after you have finished your tax returns or you owe more than what you can afford at the moment. However, you should not panic in such circumstances and must try to find out options by which you can pay off your taxes.

In the first place, you must find out how much tax you owe to the IRS.

How much do I owe to the IRS?

You can use the tax refund calculators to find out about the tax you owe to the IRS. By the time you complete your tax refund, you would know exactly how much you owe to the IRS. You must check out all the deductions and credits carefully which you think you are qualified for. Moreover, you can compare your tax returns of the previous year with that of this year and find out about the changes. However, if you are obtaining a mail from IRS about back taxes then you can further investigate it by checking with the IRS.

File an extension

You can file an extension to complete your tax return by submission of Form 4868 to the IRS. You can check out for any deductions you might have missed or any miscalculations which you might have made while filing your tax returns. It is advisable to take assistance from an experienced tax professional to find out any deduction or credit which you might have missed. You should try and submit your Form 4868 by the deadline based on whatever you think you owe. You must try to pay as much as you can otherwise you might accrue penalties and interest.

Options for payment

Your payment to the IRS can be done by the below-mentioned methods.

The Electronic Federal Tax Payment System – This system is being operated by the Treasury Department to process the federal tax payments. You must set up your account by using your bank account information and then make your payments. Payments can be made related to different tax obligations such as estimated tax, extension payments, tax balances for previous years, etc.

IRS Direct Pay – You can pay your tax bills directly from either a savings account or a checking account by using Direct Pay. By Direct Pay, taxpayers would be able to schedule tax payments up to 30 days in advance. Payment can be canceled or changed before two business days of the scheduled date.

Credit cards or Debit cards – You can make your tax payments by using credit or debit cards, phone, or by any mobile devices. These payments would be processed by a processor and convenience fees would be charged by the processor. You can download the official mobile app of the IRS i.e. IRS2Go and make your payments conveniently.

US Postal Services – This is the conventional means of making tax payments. You can send your money to the IRS in an old-fashioned manner by mailing the payment check.

Minimizing penalties and interest

Huge tax bills can be troublesome and if you have penalties/interest on top of the original amount, then it would add to your hardships. So, you can minimize these penalties and interest can be minimized in the below-mentioned ways:-

Exceptions to the underpayment of tax penalties – In case you have underpaid your tax this year but you owed substantially less tax the previous year, then you would not be paying penalty for the underpayment.

Abatement of penalties – You can write a letter to the IRS and explain your situation. This can lead the IRS to reduce your penalties or interest.

Pay quickly – If you owe to pay tax to the IRS, then you should not wait until the deadline to file your tax returns. You can send an estimated tax payment or file your tax returns early and pay as much as you can.

What can I do if I can’t pay my taxes?

In case, you are not able to pay your federal tax immediately, there are certain options provided by the IRS which you can use to make your tax payments systematically.

Installment Agreement – You can file Form 9465 which is known as the “Installment Agreement Request” to set up installment payments with the IRS. The installment agreement form can be completed online by using the Online Payment Agreement Tool.

If you owe $50,000 or less in the form of combined tax, penalties, and interest and have filed all required returns, you can apply for the Monthly installment agreement online.
Businesses can also apply for this online if they owe $25,000 or less in combined tax, penalties, and interest for the current year or the liabilities of the last year and have filed all required returns.

Offer in Compromise – This method should be used as an extreme last resort. IRS would negotiate back taxes by Offer in Compromise and your tax bills can be settled in less than what you owe.

Conclusion

Hence, these are some basic tips and steps which you must follow if you owe taxes to the IRS for easier and faster resolution of your tax-related issues.

References

Top #10 things to know about IRS and its working amidst the pandemic

by Mounica Kota | May 30, 2020 | COVID - 19 pandemic, federal government, IRS, tax return, taxes, US Government

Top #10 things to know about IRS and its working amidst the pandemic

The outbreak of the pandemic COVID-19 has brought a tough time for everyone. With the economic lives of people being hugely affected due to the coronavirus, the US Government has taken various steps for providing relief to the Americans.The Coronavirus Stimulus Package under the CARES Act is one such major step taken by the Federal Government which would be of certain help to the Americans for dealing with financial issues arising due to the pandemic.

The Internal Revenue Service (IRS) has been playing a major role in the implementation of the various tax laws which have been passed recently by the Federal Government. Along with the normal course of operational activities of the IRS associated with filing of tax returns and their processing, it is also working tirelessly towards the determination and distribution of the Stimulus payments to the eligible taxpayers.

Let us have a look at the major 10 things which we should know about the operations and working of the IRS during the outbreak of COVID-19.

a.Information Center for all queries

The official website of the IRS i.e. IRS.gov/coronavirus is the first place where the taxpayers can find answers to all of their queries related to tax returns and stimulus payments.All updates associated with tax returns processing and stimulus package would be posted by the IRS therein this website. The taxpayers should avoid calling up the IRS and check out the IRS.gov/coronavirus website for tax updates amidst the pandemic.

b.Limited live assistance from IRS

The phone lines of the IRS and the Assistance Centers for taxpayers are to be non-functional for an infinite period.The IRS hotlines including service as well as compliance hotlines such as automated under reporter, collection functions, etc. are not operational for long. Moreover, the IRS has suspended all compliance activities related to tax such as audit and collection till 15th July 2020.So, taxpayers and tax professionals should not worry about missing the tax deadlines. The Local Taxpayer Assistance Centers are also not operational currently.

c.All audits to be put on hold

The IRS has announced that all new audits have been suspended and would resume only after 15th July 2020. But, it is quite obvious for the taxpayers to expect that the IRS must utilize the audit power it has to prevent the erroneous tax refunds.The IRS would be filing filters that would help in stopping suspicious refunds such as Earned Income Tax Credit Returns, suspected identity theft returns, etc. till the taxpayers would be able to verify the returns.So, this freezing of the refund audits will continue and would be troublesome for taxpayers as they will not be receiving any prompt response from the IRS.Moreover, taxpayers can take advice from the local Taxpayer Advocate Service Office in case of facing any queries due to the withholding of audits and refunds.

d.Temporary respite if a taxpayer owes tax

The IRS has halted the enforcement of any tax collection till 15th July 2020. Moreover, all the pending collection alternatives by the IRS and any offers related to compromises in tax laws are also on hold till 15th July 2020. According to the provisions of the People First Initiative, liens, levies, and any restrictions on passport have also been put on hold.

e.Difficulty in reaching out to the IRS even after COVID-19 is over

The IRS would even have its phone lines and hotlines non-functional after the pandemic is over.After the normal operations start, the resources of the IRS would be occupied with the backlog of tax filing issues and people trying to contact the IRS for other tax filing assistance. However, the IRS would be providing other means such as email or e-fax by which taxpayers would submit their documents.

f.Tax returns are still being processed by the IRS

The stimulus payments are being processed by using the information related to the tax returns of 2019 or 2018. If an individual has not filed his tax returns for 2019 or 2018, then this is the right time to do it now. The returns can be e-filed easily and can get accepted in a day without any inconvenience.

g.No requirement of monthly installment agreement payment

Under the provisions of the “People First Initiative”, the IRS has announced that taxpayers can skip their monthly installment payment during the period of 1st April 2020 to 15th July 2020. This would not be considered as a tax payment default by the IRS.

h.Account-related queries can be sorted by IRS transcripts

Taxpayers can obtain their transcripts by creating an IRS account online, review these transcripts and get solutions to any queries related to issues like previous AGI, amount of penalty, amount of estimated tax payments, etc.

i.Any hardship-TAS can be reached

Any taxpayer facing financial hardships and having a hold on their tax refunds can contact their local advocate for suggestions. However, the central TAS hotline would remain closed.

j.Stimulus payment will not be used by IRS tax collectors

The IRS has made it clear that it would not use the stimulus payment of any individual for paying off of any tax debt owed by the individual taxpayer.Hence, the IRS is playing a commendable role in helping the common people in improving their economic lives during this difficult time.

References

https://www.accountingtoday.com/list/10-things-to-know-about-irs-operations-during-the-coronavirus-pandemic

https://taxfoundation.org/coronavirus-tax-tracker-covid19/

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