The top 7 Tax Changes in 2020

The top 7 Tax Changes in 2020

The top 7 Tax Changes in 2020

There have been certain changes in the tax rules for the financial year 2020. Let us have a look at these changes that have taken place in the tax rules for the year 2020.

Unemployment benefits

For millions and millions of Americans, the unemployment benefits are a major area of concern this tax year. Moreover, reporting the unemployment benefits on tax returns stands as a problem for many as well. As per the IRS, the compensation obtained on unemployment is considered to be taxable and should be reported on your federal tax return for the year 2020. The taxable benefits would be including all the special unemployment compensation which is authorized under the CARES Act i.e. Coronavirus Aid, Relief, and Economic Security.

 Forbearance for Student loan

 Temporary relief has been offered from the Student loan debt to millions of students in the United States due to the pandemic. This has been quite helpful for those who have lost their employment due to the outbreak of the COVID-19.

In March 2020, the US Secretary of Education has instructed for the following:-

  • To stop loan collection in default
  • Temporary suspension of the payments related to Student loan
  • Interest rates would be set to 0% for the upcoming 60 days

These forbearances were valid until 31st December 2020 and are even would remain valid in the upcoming months.

 Removal of withdrawal penalty

 In these difficult times, many Americans are considering withdrawal of retirement funds as the last option to handle their financial crisis. In general, early withdrawals made from your IRA, 401(k), or the 403(b) account can lead to penalties. However, by the provisions of the CARES Act, those Americans making early withdrawals from their retirement accounts would not have to face the 10% penalty. This waiver of penalty is applicable for the borrowing that has been done during the financial year 2020.

 Self-employed PPP

 The PPP (Paycheck Protection Program) was expanded in April 2020. Additional funding of around $310 billion was included in this program. Sole proprietors, businesses that have employee strength of around 500, self-employed persons, etc. are mainly eligible for availing the benefits under the PPP. The loan taken under the PPP can be completely forgiven if the funds would be utilized in making payments that are related to rent, utilities, interest on mortgages or payroll costs, etc.

 Stimulus payments

 The Stimulus payments or otherwise known as the Economic Impact Payment was one of the main focuses of the CARES Act. By the mid of the last year, around $269 billion has been paid in the form of Stimulus checks to the Americans as a means to alleviate the financial adversities caused due to the pandemic COVID-19.

It is a common concern among Americans now if they need to report their Stimulus payments in their upcoming tax returns. However, according to the IRS, the Stimulus payments are not needed to be included in the Gross Income. So, the Americans do not need to include their Stimulus Payments in their taxable income and even do not need to pay any Income tax on that payment.

 Additional eligible expenses

 With the implementation of the CARES Act, there have been some modifications in the rules related to the accounts like HRA, HSA, Health FSA, and Archer MSA. Now, millions of Americans have been able to utilize these accounts for reimbursable products. Moreover, those products and medicines which are available over-the-counter can be reimbursed now without the need for a prescription. The taxpayers should keep their receipts of purchases intact to make their claim submission for reimbursement.

 The new charitable contribution deduction

 The American taxpayers are now able to take up the advantage of a new category of tax deduction i.e. Cash donation to qualifying charities. This can be up to $300 for the tax returns irrespective of the tax filing status of the taxpayer. This can be applicable even if the tax filers are not itemizing any deduction.

Another change is the removal of the deduction limit on charitable contributions. In general, the deduction limit on the charitable contributions for those who are itemizing their deductions is 60% of their AGI (Adjusted Gross Income). However, with the CARES Act, this limit has been lifted up to 100% for the tax filers who wish to claim their $300 deduction for charitable donations made.

Conclusion

Hence, with these important changes made into the tax system for the year 2020, the financial adversities faced by the Americans due to the pandemic can be reduced considerably.

 

Tax Tips for the Self Employed NR Indians in the US

Tax Tips for the Self Employed NR Indians in the US

Tax Tips for the Self Employed NR Indians in the US

If you are an NRI in the US and have just started your entrepreneurship, then you should be aware of the different tax implications related to self-employment. Some of these tax implications can even help reduce your tax liabilities.

Let us now have a look at the different facets associated with the tax rules for the self-employed NRIs.

Offices at home

When you are working comfortably from your home, it can help maximize your tax write-offs. In case, you are using a specific home office for your work or your business then that be claimed while filing the tax returns.

Those expenses which you can deduct as a part of your deduction for the home office can also include a part of expenses related to the home i.e. the mortgage interest, rent, taxes on real estate, utilities, insurance, etc. Moreover, you would also be eligible for the deduction of the total expenses that have been incurred in the repairs and the painting that is required for your home office.

Hiring part-time employees

If you have grown-up kids and they are on holiday, the best idea to keep them engaged is by hiring them for doing some of your office work. If you are hiring your kids for cleaning the office, running your deliveries, data entry, answering phones, etc. then you would be able to claim a tax deduction. You can claim that wages are deducted under Schedule C. However, this deduction can only be done until the compensation to be obtained is reasonable for the activity performed.

In case, your kids are below the age of 18 years the wages paid to them would be exempted from Social Security taxes and Medicare taxes. Moreover, if your kids are below the age of 21 years they would not owe the Federal Unemployment taxes. Even by these part-time hires, the tax liability of your family would be reduced as your children would not owe any income taxes on this income obtained.

Planning for retirement

By opting for a retirement plan, you would be lowering your taxable income. If you are a self-employed NRI the best retirement plan for you is the SEP (Simplified Employee Pension Plan). You have the option to put in up to less than around 25% of your earnings done from self-employment or put in up to $57,000 for the tax year/$58000 for the tax year 2021. You can compare this with the limit of $6000 which has been put on the contributions made to the IRA for the tax year 2020.

Mileage

If you would have been an employee who is traveling regularly to work then the expenses related to driving to your office and back could not have been claimed under tax deductions. Since you are self-employed then any work-related travel such as traveling to meet any client, going for work to some other location, etc. can be claimed as a tax deduction. In the year 2020, work-related travel done for a mile can be used to claim 57.5 cents along with the parking cost and any other tolls that have been paid. So, you must track your mileage coverage for work so that it can be used to claim deductions.

Business Travel

When you are a self-employed NRI and are traveling to another city in the US for work it is possible to claim a tax deduction for 100% of the costs incurred in the travel. Moreover, during the travel period, it can also be feasible for you to claim the expense incurred in your hotel stay and 50% of the expenses incurred in your meal. However, this is only possible for those days for which the travel has been work-related.

Moreover, under the provisions of the CARES Act, 100% of the expenses incurred in business meals can be claimed as tax deductions rather than 50%. This would be feasible starting in the year 2021 and would continue throughout the tax year 2022.

Conclusion

Hence, these tax guidelines would be helpful for you to lower your tax liability if you are an NRI and self-employed in the US.

 

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 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.