Tax implication for home-buyers in the US

Tax implication for home-buyers in the US

Tax implication for home-buyers in the US

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

Tax benefits of homeownership in the US

 

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

Imputed Rent

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

Deduction of mortgage interest

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

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

Deduction of property tax

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

Profit from home sales

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

Effect of deductions and exclusions

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

Conclusion

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

Top #5 things to know about Tax Liability amongst spouses

Top #5 things to know about Tax Liability amongst spouses

Top #5 things to know about Tax Liability amongst spouses

Marriage is the time when you vow to stand by the side of your spouse through thick and thin throughout the rest of your life. You might be having the idea that you know everything about your partner; however, there might be a secret that you might not be aware of i.e. the tax debt. You would want to know if the IRS can come after you or charge you for your spouse’s taxes. Yes, you can be liable for the tax debts of your spouse but only in certain circumstances.tax liability amongst spouses.

1.Can I be held liable for my spouse’s tax debts?

The main reason as to why the IRS would come after you for your spouse’s tax debts depends on factors such as when you filed your tax returns and your tax return filing status. In case, your spouse had claimed false deductions or failed to pay off the debts to IRS you might be held responsible for this.

Filing status and liability determines whether you would be liable for your spouse’s tax debts or not.There are two options available for married couples i.e. filing jointly or filing tax returns separately. These options will be available to you if you are filing your tax returns being married to a foreign citizen or a resident.

a.Married filing jointly

Your tax filing status is important as it will determine your taxable income. When filing your tax returns jointly, you can claim tax allowances but both of your tax obligations become the same. By this, you would be responsible for your spouse’s tax debts and vice versa. Your tax refunds can be used by the IRS to offset the tax dues of your spouse. However, if you do not want your refunds to be used for paying your partner’s tax debts you can apply for Innocent spouse relief or injured spouse relief.

b.Married filing separately

According to the latest IRS data, out of the 153 million tax returns which were filed during the year 2017 only 3.2 million couples were married and filing their returns separately. The main cause for filing tax returns separately is to avoid being liable for their partner’s tax bill or any other tax penalties.

2.When your spouse’s tax debts were incurred?

In case your spouse owes money to the IRS, the timing of the debt incurred is important.

1.Before Marriage

If the debt of your spouse had been incurred before you got married, then you do not have any tax liability and only your spouse would be liable. In case, your refund had been intercepted by the IRS to pay off your spouse’s debts then you must apply for Injured Spouse Status.

b.During Marriage

If the tax debts of your spouse were incurred during the time of your marriage and you have filed jointly then you might be potentially liable. However, tax debts have been incurred by your spouse without your knowledge then you are not responsible.

c.After Marriage

If the tax debts have been incurred by your spouse after marriage then you might be held liable if you have been legally separated from your spouse but not divorced. In such a case, you can apply for Separation of liability relief for partial liability.

3.Can your house or assets be seized by the IRS?

Yes, the IRS has the power to seize your house or assets even though the money owed to the IRS is by your spouse. This is feasible for that year during which you have filed your tax returns jointly. However, it is very unlikely for the IRS to seize your physical property and it would rather issue a tax lien or levy.

4.Can you dispute the liability of your spouse’s back taxes?

 

The IRS would offer two options to provide relief to those spouses who have been taxed on behalf of their spouses.

a.Innocent Spouse Relief

Innocent spouse relief can be offered to you if your spouse failed to report his income or claimed improper credits/deductions. You are considered to be an innocent spouse if you are married to someone who had lied to the Federal Government, hidden income, or claimed too many deductions to lower his tax debts. You can fill Form 8857 and request a separate tax liability which would help you in providing relief from tax penalties or liabilities of your spouse.

b.Injured Spouse Relief

If your share of the tax refund on the joint tax return was used by the IRS to offset the debts of your spouse, you can consider yourself as an Injured Spouse. The IRS would intimate you if any part of your tax refund is being used to offset your spouse’s back taxes. You can fill Form 8379, mention “Injured Spouse” on the top of Form 1040, and obtain your refund from the IRS.

5.Open communication on finances

So, your tax return filing status and the status of your marriage will help in determining if you would be held liable for your spouse’s back taxes or not. It is necessary to maintain clear communication with your partner and understand the financial positions of each other well. Taxes are a part of your lives and you must discuss them openly.

Conclusion

Hence, this information on the tax liability of spouses would be helpful in case you are wondering about the difficulties you might face due to the tax secrets of your spouse.

Top #5 things to do if you have missed the tax deadline

Top #5 things to do if you have missed the tax deadline

Top #5 things to do if you have missed the tax deadline

With response to the outbreak of the pandemic COVID-19, the US Treasury Department and the IRS had provided special tax filing and payment relief to the Americans. The deadline for tax returns had been extended by the IRS from 15th April 2020 to 15thJuly 2020. The IRS had continuously urged the Americans to file their tax returns before the completion of the tax deadline or request for an extension in case of ineligibility to file or pay by the declared deadline.

However, the federal tax deadline has come and gone now. If you have missed your federal tax deadline and have not also filed for an extension then, you should have an idea about the course of action you can follow now.

Go ahead and file as soon as you can

  1. If you owe money to be paid to the IRS, then you must file your tax returns soon to avoid paying any penalties to the IRS.
  2. Even though the IRS would charge penalties on you for the late filing of your returns but that would be somewhat less than the penalties charged for not filing the tax returns at all.
  3. The IRS would have received Form 1099-Misc and Form W-2 which would reflect your income earned for the year. You must file your returns immediately so that the IRS does not show that you need to pay more taxes.
  4. Moreover, you might be having a tax refund and it may not come if you have a tax penalty to pay. In case you have a tax refund and do not file your taxes then you would have to wait for three years of the tax return due date.

Make arrangements for the payment

If you are not filing your tax returns on time because you are not sure about how you will arrange for your payment amount then, you can follow the below-mentioned steps.

  1. You must file your tax returns soon, pay whatever amount you can arrange, and then request a payment plan from the IRS.
  2. There are several options available with the IRS such as a request for a short term payment plan, offer in compromise, long term installment plan, or temporarily delay collections in some cases.
  3. By the short term payment plan, you can pay the amount you owe to the IRS within 120 days. Similarly, by long term installment agreements, you can pay your amount over 6 years.
  4. In case your total taxes, penalties, and interest are up to $50,000, you can request for an installment agreement online.

Information about the penalties

If you have not filed your tax returns or not paid your taxes on time, you should be aware of the penalties which you would have to pay.

  • Failure-to-file penalty – This penalty would be 5% of the unpaid taxes for each month your tax return filing is late until 5 months. However, if you are filing your tax returns late by more than 60 days you; you would have to pay whichever is less i.e. 100% of the federal taxes you owe or a specific dollar amount which can be adjusted annually for inflation. This “specific dollar amount “is $435 for those returns which are due after 1st January 2020.
  • Failure-to-pay penaltyThe IRS would charge you 0.5% of your unpaid taxes for each month of unpaid due up to 25%. Interest would be accrued on the unpaid taxes and would be equal to the Federal Short term rate plus 3%.

In most cases, the failure-to-file penalty is much more than the failure-to-pay penalty. So, it is advisable that if you are not able to pay the taxes on time you should at least file your tax returns on time.

Use e-filing

If you have not filed your tax returns yet, you can still do it online by using the e-filing method. If you are using the conventional methods of tax filing, it will take a longer time to be received by the IRS and to be processed by the IRS.  If the filing has been done by electronic means, the IRS would process the return requests within 21 days from the date of receipt of the return.

Do not ignore

You should be completely aware of your specific tax situation. The sooner your tax issues are addressed the better. If you continually keep on ignoring your taxes, you would have to face some serious penalties like

  1. IRS can file a notice of a federal tax lien.
  2. Your property might be seized.
  3. IRS could forfeit your refund.
  4. In serious cases, your passport might be revoked or charges could be filed against you for tax evasion.

Conclusion

It is advisable not to avoid your tax-related problem, do good research, seek help from professionals, and work toward finding a solution to your problem.

References

Survival business strategies for an NRI in the US during the pandemic

Survival business strategies for an NRI in the US during the pandemic

Survival business strategies for an NRI in the US during the pandemic

The pandemic COVID-19 has caused a major impact on businesses across the country. The Government has been urging the Americans to stay indoors to control the further spread of the pandemic; however, the productivity and the economy have been affected.

Businesses are finding it difficult to maintain their workflow and financial stability during these challenging times. The NRI businessmen and entrepreneurs in the US are facing a lot of challenges due to lower revenues and profits. Be it an established business, a start-up or a small business reconsideration of business strategies is the only way for business survival in the country during current times.

So, let us talk about some of the strategies that NRI businessmen in the US can implement for their business survival.

a.Secure liquidity

One of the major challenges which are being faced by businesses currently is access to cash. In these challenging times, overhead costs like payroll, rent, and utilities leave very meager cash with the owners. In addition to these, lack of revenue from services that are slowing down is making the entrepreneurs distressed.

NRI business owners must take up efforts to provide immediate liquidity and keep the business solvent. Government organizations like the “Small Business Workforce Stabilization Fund” would help in providing financial assistance to those who are facing a financial crisis due to the pandemic. This program can also provide immediate cash flow to the vulnerable businesses by keeping their employees on payroll and allowing the business to grow after the customers return.

b.Planning in advance

It is difficult to estimate by when this pandemic would pass; so to be prepared with a plan would be beneficial for business. NRI businessmen can make a plan for 3-18 months depending on the nature of the business and the estimated time needed for the things to be normal. The businesses can immediately stop certain flexible expenses such as hiring, travel, and marketing expenses.  Strategies should be made to focus only on essentials such as sales, renegotiation of fixed expenses such as rent, salaries, etc. Businesses must consider a revision of their revenue goals and timelines of manufacturing along with the creation of a new operating plan.

c.Employee management

For those businesses which have to think about making decisions such as employee layoffs, the most suitable option could be to reduce salaries of the highly paid employees and to retain those employees who cannot afford to lose their job. The Federal Government has also formulated a relief plan which would help small scale businesses in affording their payroll and cover expenses easily such as paid sick leave, loan repayment, and paid FMLA. It is advisable to carry out employee management according to the Government directives and businesses must also try to offer extra compensation to their employees whenever necessary.

Moreover, the employee s must be engaged during these times and the productivity should be maintained. The entrepreneurs must guide the employees and should try to help those employees who are facing any kind of mental issues. The morale within the employees must be kept high and this is feasible by being connected with them digitally through various applications like Zoom, Skype, etc.

d.Turn digitization into an advantage

The major challenge of this pandemic for businesses is not only to sustain their productivity by the digitized operations but also to focus on the plethora of new opportunities that have come up for the workforce through digitalization. Digitalization can be considered as a catalyst that would help in changing the business model creatively. Transferrable manpower and increased productivity of remote working would be beneficial for businesses.

e.Maintaining transparency and keeping stakeholders informed

Customers are the ones who keep the business running and without customers, a business would not be able to flourish. Since, the pandemic COVID-19 has created a crucial issue which we all are facing together and so, staying transparent with the customers and keeping them updated about the situation is necessary. If the business is communicating clearly with the customers it would help the customers to be more empathetic and understanding.

Moreover, stakeholders also play an important role in the success of a business. The NRI businessmen must seek business advice from their investors or from other external experts to make plans and strategies. It is necessary to discuss the impact of the current situation on the business with the stakeholders.

Conclusion

Hence, during these distressful times, it is necessary to stand by each other and provide assurance to each other. These tips mentioned above would be helpful in keeping business functional and intact during these times of pandemic.

Step-by-step guideline on what to do if you cannot afford to pay your taxes

Step-by-step guideline on what to do if you cannot afford to pay your taxes

Step-by-step guideline on what to do if you cannot afford to pay your taxes

 

 The IRS had extended the tax return filing and payment deadline until 15th July 2020 for the Americans to alleviate the financial crisis faced by millions of Americans due to the pandemic COVID-19. However, the pandemic has led to the unemployment of millions and millions of Americans. So, even with the extension in the return filing and tax payment deadlines, it is quite difficult for some Americans to pay their taxes on time.

The IRS has a simple reminder for the taxpayers who cannot pay their entire amount of federal taxes which they owe. They should file their tax returns on time and pay as much as possible. By this, the interest and penalties of taxpayers would reduce and there would not be much accumulation of interest to pay back.

If a taxpayer plans to pay his taxes as much as he can afford, then the IRS has some convenient methods to do this i.e. by IRS Direct Pay Method, Electronic Federal Tax Payment System (EFTPS), Electronic Funds Withdrawal, Debit or Credit card, or by Check/Money Order, etc.

However, for those taxpayers who feel payment of taxes are unaffordable at the moment; they can follow a detailed plan.

Step1 – File by the new 15th July deadline even if it feels difficult to afford the payment on time

As said earlier, due to the pandemic COVID-19 the deadline to pay the Federal taxes has been pushed to 15th July 2020. However, with this extra time, taxpayers should not wait much more to file their taxes. Taxpayers must consult tax professionals for filling the forms. By this, the credits and deductions to lower the bill can be found out easily.

Many taxpayers might consider the option of the deadline extension. However, the extension would provide more time for filing the tax returns but not for 

paying the taxes. Even if there is an extension, the tax payment must be done on time. So, an extension should only be filed by the taxpayers if due to some reason the taxpayer is not able to file the tax returns on time.

 Step2 – Pay as much as possible by the tax deadline

This is also recommended by the IRS that the taxpayers should wait till the deadline, try to arrange for the tax amount, and pay off as much as possible. Some taxpayers even prefer discarding some of their unwanted materials in exchange for cash which can be utilized in payment of their taxes which are due.

Taxpayers can contact the IRS on the toll-free number to discuss alternate payment options. IRS might help the defaulter taxpayers with other payment options like a short-term extension to pay the taxes, an

agreement for installment, an offer in compromise, or by temporary delay in the collection by reporting that the taxpayer’s account is currently not collectible until the taxpayers can afford to make the payment.

Step3 – Keep paying the taxes you owe even after filing

Even after Tax Day, taxpayers would have a period of around 1 month or 2 months before the IRS would contact them about the rest of the tax payment. During this available time of 1month or 2 months, taxpayers should try to pay out as much as possible to reduce the balance left out.

In case the taxpayers are not able to make their complete payment by this time, the IRS would suggest options for making the rest of the payments in monthly installments.

 

Step4 – Rectify the problem

You should approach a tax professional and try to work with him or his team to ensure that you are not stuck with the problem of unaffordability related to tax payments. This can be feasible either by setting aside profits from a side business or by the adjustment of withholdings from your paychecks.

Your issues can be best identified and rectified by the tax professionals so that these issues are avoided in the future.

Conclusion

Hence, you can follow these steps and try to pay off as much tax as you can. Avoiding the aggregation of penalties is important to avoid any further financial and economic hardships.