How to calculate Income Tax Benefits for your dependents?

How to calculate Income Tax Benefits for your dependents

How to calculate Income Tax Benefits for your dependents?

Supporting dependents i.e. kids or even other dependents both can have an impact on your finances. However, having dependents can help you in availing certain tax advantages which can help increase your tax refunds.

We can list down some of the major things which you must know about tax benefits if you have dependents.

  • Related and unrelated dependents

You would be spending thousands of money on food, house, and education of your kids, taking care of other dependents, etc. The IRS helps you with provisions for tax breaks for your both related and unrelated dependents. These tax credits and deductions can help you in saving a considerable amount of money from a tax perspective.

  • Several tax credits and deductions for your kids

There is no doubt about the fact that raising your kids would be expensive but you must know about the tax credits and deductions which you can avail yourself if you have kids. You would qualify for availing credits such as Child Tax Credit, Child, and Dependent Care Credit, Earned Income Tax Credit, and other Education Credits as well.

  • Social Security Numbers

If you have become a new parent, then you must ensure that you have applied for the Social Security Number of your newborn baby. When you have this Social Security Number you would be able to claim the tax credits and deductions easily. Moreover, if you have any other dependent family member or relative then they must have their Social Security Number for being able to avail the tax credits.

  • Tax Credits and deductions for relatives and non-relatives

Tax credits and deductions can be extended for relatives such as your parents, your grandparents, your grandchildren, or any other blood relatives who do not need to stay with you. However, if you are availing any tax credit or deductions for your non-relatives such as boyfriend/girlfriend then they must have stayed with you for the whole year.

Now, let us have a look at some of the major tax credits which are related to your kids and other dependents.

  • Child Tax Credit

The Child Tax Credit would help reduce your tax liability dollar-for-dollar. Earlier in the year 2017, the Child Tax Credit available, if you had a dependent child below the age of 17 years, was $1000. However, with Tax reform, this Child Tax Credit has now increased to $2000 for a dependent child who is below the age of 17 years. If you are filing your tax return as a Single, then the income threshold at which you would be able to avail of the Child Tax Credit is $200,000 whereas it is $400,000 if you are married and filing jointly.

  • Child and Dependent Care Credit

You would be eligible to claim Child and Dependent Care Credit if your dependent child is below the age of 13 years and you are working or looking for work. There is no age limit for the dependent child if he is disabled. This credit would usually range from 20% to 35% of the childcare expenses that have been incurred based on your level of income. Expenses incurred in Nursery and Kindergarten schools, daycare, after-school programs would qualify for this credit.

  • Other Dependent Credit

In case you are supporting a relative or your dependent kid is above the age of 17 years, you can still be able to claim tax credits. This credit is the Other Dependent Credit which is up to $500for each qualifying individual. However, this credit would phase out if you are filing taxes as a Single with an AGI greater than $200,000 or if you are married and filing taxes jointly with an AGI more than $400,000.

  • Earned Income Tax Credit (EITC)

The Earned Income Tax Credit is mainly useful for those Americans who are self-employed and have income below a certain level. The amount you can receive as a credit in Earned Income Tax Credit would mainly be based on your filing status, your level of income, the number of qualifying kids you have, etc. The EITC is refundable and in case your credit is more than your tax liability you can easily obtain a refund. For the year 2020, you can receive EITC ranging from a maximum value of $6660 if you have three or more than that qualifying children to $538 in case if you have no children.

Conclusion

Hence, your children and other dependents can help you in obtaining these tax credits and thus pay lower federal income taxes.

 

All you need to know about the W-2 form (Wage and Tax Statement)

All you need to know about the W-2 form (Wage and Tax Statement)

All you need to know about the W-2 form (Wage and Tax Statement)

The Form W-2 is officially known as the Wage and Tax Statement. The Form W-2 can be defined as the form which an employer should send to its employees and the IRS at the end of every financial year. It mainly denotes the annual wages of the employees and the amount of taxes that have been withheld from the paycheck of the employees. Form W-2 of an individual would also denote the State taxes and other taxes which have been withheld from his paycheck.

The information present on Form W-2 of an individual is extremely necessary while preparing his tax returns. Employers must send the Form W-2 of their employees by 31st January of the tax year to ensure proper tax return preparation. In case of an individual being a contractual employee or self-employed, the income would be reported by other tax forms i.e. Form 1099-NEC or Form 1099-K.

Tax Withholding and its importance

When an employer is withholding amounts from paychecks for the purpose of Federal Income tax, those amounts are being constantly transferred to the IRS throughout the year. Usually, the IRS instructs the taxpayers to make certain periodic payments throughout the year and this is mostly taken care of by the employers.

While the preparation of federal tax returns, the withholding amount reported on Form W-2 would be deducted from the tax bill of an employee. After this has been performed, it would be easy to understand if a tax refund is expected to be received or tax payment would be done. In the case of State Income tax too, when a taxpayer is filing the State Income Tax return a similar calculation has to be done for the amount that has been withheld from a paycheck for the payment of the State Income tax.

How to review the Form W-2?

Let us have a look at some of the major tips that can be used for a review of the Form W-2.

  1. The taxpayer must check the Social Security Number in Block A of Form W-2. If the Social Security Number is wrong, then the employer must be requested for issuing a corrected version of the Form W-2. The taxpayers should not try to change the details themselves as the employer must send the correct copy to the Government for the correct implementation of the changes.
  2. Taxpayers should never assume that the information in their Form W-2 is correct. The figures in the boxes i.e. Box 1 i.e. the federal tax, Box 2 i.e. the federal income tax which has been withheld, Box 16 which highlights the State wages, and Box 17 which highlights the withheld State Income tax must be compared with the figures that are mentioned on the final paycheck stub for 2020.
  3. In the year 2020, if the employer of the taxpayer has sponsored any of the moving expenses then those must be included in the Form W-2. Box 1 of the Form should be reviewed carefully to check the inclusion of that expenditure.
  4. In case an individual has not received his Form W-2 by the end of the first week of February then the employer must be intimated about it. There is a toll-free number that can be helpful for the taxpayers who have not received their Form W-2. As an alternate option, Form 4852 can be substituted for Form W-2 while filing the federal tax returns.

If an individual has complete knowledge about reading Form W-2 then it can be very helpful in understanding his salary structure and even starting the preparations for the tax returns. Once, the tax return preparations are over the taxpayers must attach a copy of their filled Form W-2 and send it to the IRS.

Conclusion

Hence, this information related to the Form W-2 would be of great help for the taxpayers to understand their salary, taxes, and even tax preparations.

 

All you need to know about Stock Investments in your Income Tax report

All you need to know about Stock Investments in your Income Tax report

All you need to know about Stock Investments in your Income Tax report

If you are investing in the Stock Market, then it is one of the best methods by which you would be able to increase your net growth. The money you have or in other words your money is being put to do work for you if you are investing in stocks.  The money which you would be investing in can help you earn dividends and interest as well. So, by the stock investment, you are able to earn a lot of dollars in return.

However, stock investments can lead to certain complications in your tax situations as well. The investments into stocks must be reported on your federal tax returns. So, if you are earning any interest or dividends from your stock investments then you would have to pay taxes on those earnings. Mainly, there are two situations when your investments into stocks can affect your tax returns i.e. first are when you earn from your investments, and the second is if you are selling your investments for either a profit or loss.

So, let us check out the various scenarios that are associated with the tax rules associated with either the purchase or sale of stock investments.

Purchase or Sale of investment

In case, you have sold some of your investments in the tax year 2020 you would pay taxes on the capital gains you have obtained. Capital gains can be said to be the profits that are earned from investments.

The amount of taxes that would be owed to pay in case of the sale of investments would be depending on some factors.  There would be two categories into which the capital gains would be divided i.e. short-term holdings and long-term holdings.

Short-term holding would be the one you had for a period which is less than a year and it can be taxed up to 37%. On the contrary, long-term holdings are those which you can hold for more than a year. Long-term investments are those which have been held for more than a year. These investments are taxed depending on your income earned and the tax rates can vary from 0%, 15%, or even 20%.

Interests and dividends

Even if you have not sold any of your investments in the year 2020, you would have to pay federal income tax on the dividends and interest.

In case, you are the owner of stocks or index funds you would be paid the dividends periodically. In a similar manner, if you are earning some interest on any bonds you have purchased it is necessary to report the interest earned in your tax returns. You would have to pay the respective taxes on the interest earned as well.

Reporting stock investments on your tax returns

Your investment in stocks would start complicating your tax returns. You will have to navigate several additional forms which you would need for reporting the investments made into stocks on your federal tax returns for the year 2020.

You can begin the procedure by gathering all the forms and documents which you have obtained. These additional forms would include 1099-DIV forms which would highlight how much had been paid to you by each company in the form of dividends. You might receive Form 1099-B which would be helpful in demonstrating any capital gains which you have obtained throughout the tax year. The Form 1099-B would help in the calculation of the capital gains or loss and post it on your Form 1040.

Moreover, if you are working with a tax professional or taking help from tax software you must ensure that you are completely organized and have all the tax forms in hand which you have received.

Conclusion

Hence, with this information, it would become quite easier for you to understand the tax implications if you have an investment portfolio.

All about Unemployment Income Reports

All about Unemployment Income Reports

All about Unemployment Income Reports

The US economy has suffered from a great setback due to the pandemic COVID-19. Millions of Americans have either lost their jobs or have been furloughed. However, the US Government has started the initiative of providing several unemployment benefits for the affected Americans. These unemployment benefits are either a part of the CARES Act or are also sponsored by the State Government.

If you have been facing the problem of unemployment due to the pandemic and have received the unemployment benefits, then your taxes must have been affected. So, it is very important for you to understand how to report your unemployment income on your tax returns.

Taxability of the Unemployment Income

Unemployment income would be considered as an income and hence is taxable as per the laws. According to the norms of the IRS, the unemployment income or compensation obtained should be reported on the tax return of the year 2020.

The IRS and the Government want their cuts of the funds which you are receiving in the form of Unemployment income. Income is income and the source of income is not to be considered when it comes to filing your tax returns.

Unemployment Income to be reported

 Before you start filing your tax return for the year 2020, you should be aware of the below-mentioned facts.

You must check out if you have been a participant involuntary withholding. If you have been a participant in the Voluntary Withholding, then you should have done it by filing the Form W-4V which denotes the Voluntary Withholding Requests. In case, you had filled out the Form W-4V then withholding of a flat 10% of your unemployment benefits would have occurred. This would mean that you have already paid 10% of your federal income taxes on your income earned due to unemployment.

In case, you are not making payment for the taxes of any of your unemployment income then a lump sum of your taxes would be paid while filing your tax returns. In such cases, the IRS would however offer payment plans by which you would be able to make the payment of your taxes.

Reporting your unemployment income

 In your federal tax returns, you can mention the unemployment income which you have received under the Income Section. Before starting the process, one mandatory step is to receive Form 1099-G. This Form would help in highlighting the certain Government payments which have been issued by the State’s unemployment office and shows how much amount you have received as Unemployment Income.

You must keep that Form and match it to your own records which you have. Under the Income Section of your Tax return, the amount mentioned in Form 1099-G must be mentioned. Unemployment Income is usually reported in your federal tax return in Schedule 1 in the “Additional Income Section”. Then the full amount would be carried forward to the main Form 1040.

Exceptions for COVID-19

At this point, the IRS has clearly stated that there are no exceptions related to the taxes with respect to COVID-19. It has been stated by the IRS that you will have to pay the taxes related to unemployment on both the income received for unemployment from the State and also any extra funds if received from the Federal Government due to unemployment.

If you cannot pay the bills

In case you are not able to pay your tax bills on time you should not panic. You should not refrain from filing your tax returns due to this. It would be best for you to file your tax returns for the year 2020 even if you are not able to pay your bills on time. You would have to pay penalties in case of missing the tax return filing deadline.

You can contact the IRS and discuss the delay in tax payments. The IRS would help you by providing an extension in the tax payment, creating instalments in making the tax payment, or temporary late collection of taxes, etc.

Conclusion

Hence, reporting Unemployment income is a must for Americans and the given information would help understand the tax implications associated with Unemployment income.

Correlation between Exempt and Refund

Correlation between Exempt and Refund

According to the IRS guidelines, a tax refund would be obtained by a taxpayer only when extra money has been paid by the taxpayer to the Government. It is quite usual that additional money has been withheld from a taxpayer’s paycheck and this can result in a tax refund. Moreover, there can be additional tax deductions and credits which can help reduce a taxpayer’s tax liability thus, resulting in a tax refund.

However, there can be a scenario when money has not been withheld from the paycheck of a taxpayer. In such a case, will the taxpayer be eligible to obtain a tax refund even though he is tax-exempt?

What does it mean to be tax-exempt?        

When a taxpayer is filling the Form W-4 from his employer, he would be adding up his withholding allowances. If the income of the taxpayer is less than his Standard deduction then he would be exempted from paying any Federal Income Tax.

But, in case a taxpayer has some tax liabilities in the previous year or owes to have some tax liabilities in the present year then he cannot be tax exempted. If a taxpayer had $1 of tax in the previous year or even expects earning more than the sum of his Standard Deduction i.e. $12,400 for Single taxpayers, $18,650 for the Head of the Household or $24,800 for those who are married and filing tax return jointly then it is not possible to be tax exempted in the current year.  When a taxpayer is exempt, he has no amount being withheld from his paycheck thus, leading to no refunds as well.

However, there can be certain conditions in which a taxpayer can be eligible to receive a tax refund even if he is exempted from paying any taxes.

Refundable Tax Credits

Taxpayers can receive tax refunds even if they are tax exempted if they can qualify for obtaining a refundable tax credit. Refundable tax credits are those which can help in creating negative tax liability thus, resulting in a tax refund even if taxes have not been paid by you.

Let us have a look at the most common Refundable Tax Credits which can help in obtaining a tax refund even if tax-exempt.

The most common Refundable Tax Credit is the Earned Income Tax Credit. The Earned Income Tax Credit can mainly be available to those taxpayers who are earning in the low to moderate-income bracket. In case a taxpayer is exempt and he has earned any income, he can be able to claim this credit. This can help obtain a tax refund even if there have been no taxes withheld from the taxpayer’s paycheck.

Another common refundable tax credit is the American Opportunity Credit. This refundable tax credit would be helpful to offset the certain costs that are associated with higher education and would be refundable up to 40%.

Exemption claim from withholding

If a taxpayer is not able to claim exemption from his withholding, he would still be able to reduce the amount withheld from his paycheck. This can be done easily by updating the Form W-4 and changing the withholding. The IRS has redesigned the Form W-4 and now the form available in the W-4 Employee’s Withholding Certificate. The earlier version was known as the W-4 Withholding Allowance Certificate and it has been updated for reflecting the changes. The major change in the tax system was that there has been an elimination of the personal allowances as allowances are connected with the dependents of taxpayers and with personal exemptions which have been removed. The Form W-4 which has been redesigned would consider if a taxpayer would be able to claim the Child Tax Credit and if he would be able to claim tax deductions that are different from the Standard Deduction.

Conclusion

Hence, before considering that any tax refund would not be received from the Federal Government taxpayers must understand their eligibility for the Refundable Tax Credits. Taxpayers might get some tax refunds even after being tax-exempt, but this is only feasible if the tax returns are filed.

 

2nd Generation Indians in the US: Did you know that you can avail Family Tax Deductions and Credits?

2nd Generation Indians in the US: Did you know that you can avail Family Tax Deductions and Credits

2nd Generation Indians in the US: Did you know that you can avail Family Tax Deductions and Credits?

In the US, due to various practical and cultural causes, many families reside in their multi-generational homes. Over more than 60 million Americans tend to live with their families due to the various benefits this can offer. Sometimes, living together with families can be the reason for certain chaos; however, the advantages would always be more than chaos.

If you are an Indian staying with your family in the US, then while filing your tax returns there are certain benefits related to family which you must be aware of. You must ensure that you are taking the advantage of these tax deductions and credits while you file your tax returns.

Tax deductions on home

If you are the owner of a house, then you would be eligible to claim certain tax deductions. Let us check out some of these deductions.

  1. Points

In case, you have origination fees or points being paid for your new house to obtain a particular rate from your lender then that fee is deductible from your taxes. Moreover, if you had paid points when your house was purchased then you would be able to deduct those points in the year you had paid them.  In the case of refinancing your home, you would have to do a points deduction over the loan life.

  1. Interest

In case of a home purchase with the help of a home loan then you must have paid the mortgage interest. You are eligible to make a deduction for the mortgage interest that has been paid during the current tax year and has been reported on Form 1098.

  1. Taxes on property

Taxes paid on property are very expensive and can be deductible from your taxes if you have paid them. For the tax year 2020, your taxes on property or State Income tax withholding should not be more than $10,000 in total.

Tax Benefits on Family

As a parent, you would be able to avail various tax benefits while filing your tax returns.

  1. If your child is below the age of 13 years and was using daycare facilities in the last year then you would be eligible to claim the Child and Dependent Credit. For one dependent child, you can claim up to 35% of the $3000 that has been incurred in the daycare. For two or more than two dependent children, you would be able to claim up to 35% of the $6000 incurred in the child-care expenses.
  2. If you are working, then another tax benefit that would be advantageous for you is the Earned Income Tax Credit. If your family has three kids, then you can claim a tax deduction of up to $6,660. Last year around 25 million taxpayers were able to receive the Earned Income Tax Credit and the average Earned Income Tax Credit for each taxpayer would be around $2,476.
  3. Under the tax reforms, the dependent exemption was eliminated. But by the Child Tax Credit, you would be able to claim up to $2000 for each child who is below the age of 17 years and is a dependent. In case of your children being above the age of 17 years, you can claim the credit for non-child dependents which would be $500.
  4. You can also be eligible to avail of the American Opportunity Tax Credit (AOTC) if your kids are dependents and are studying in college. The American Opportunity Tax Credit is a refundable tax credit that would be up to $2500 for each student for the first four years of their college.
  5. In case, you are not qualifying for the American Opportunity Tax Credit, you can avail the option of Lifetime Learning Credit. The limit for this credit is up to $2000 for each tax return and you can claim it even if your dependent has attended one class in the college.

Financial support for elderly family members

If you have been providing monetary support for your parents or grandparents, then it is feasible to claim them as dependents while filing your tax returns.

  1. You can be a qualified relative to claim dependents only when you have provided more than half of the financial support for your parents/grandparents in the year 2020.
  2. In the year 2020, the taxable income of your dependents must have been less than $4300.

Conclusion

Hence, you might be staying in a nuclear family or a joint family setup; you must be aware of the tax deductions which you can claim for your dependents and family members.