The erstwhile Tax Mistakes to avoid in 2021

The erstwhile Tax Mistakes to avoid in 2021

The tax laws in the US are quite complicated but the taxpayers make quite simple mistakes while filing their tax returns. 

Let us have a look at the most common tax mistakes which are made by the US taxpayers and can be avoided during this tax year.

  • Not filing tax returns on time

According to the estimates made by the IRS, 20% of the US taxpayers would wait till the last date for filing their tax returns.  However, waiting till this last minute can cause them to miss the deadline.  Even if the taxpayers are filing a request for an extension in the deadline to file the tax returns there would be the need to pay any tax that is owed by the actual deadline. In case, the tax payments are not made by the due date then the taxpayer would be charged interest by the IRS.

  • Incorrectinformation

This is one of the most common mistakes made by the taxpayers while filing their tax returns. Some of them either leave some boxes blank or some make a typo error while filling important details like Social Security Number.

One of the easiest methods by which you can avoid this is by importing the tax return which has been filed in the previous tax year. By this, you can avoid any typo error associated with manual entry of the filing information.

 Not aware of the latest tax laws

The US tax laws are not only complicated but are subject to minor changes every year. It is imperative for the taxpayers to know in detail about the changes that have been made into the tax laws so that they do not miss the details on the tax deductions and credit.

  • Filing status errors

The filing status of a taxpayer would determine the tax rate of a taxpayer and his eligibility to avail the tax deductions. If a wrong filing status is being chosen by a taxpayer then he would have to either underpay or overpay the taxes which would have its own implications on the cost. For instance, married couples who are filing tax returns jointly have different rules than those who are filing their returns separately.

 Making wrong choices about itemizing

While filing your tax returns, you can either choose between itemizing or claim a Standard deduction. If you are itemizing then you would not be able to claim Standard Deductions. Out of the two, you can choose either one out of the two choices. 

There are certain deductions which you can claim easily without the need for any itemizing. These deductions can be making contributions into the IRA or the deduction related to the Student loan interest. However, some deductions can only be claimed if itemized which gives up the right for claiming the Standard Deduction. 

  • Not getting any help while tax filing

Tax filing is complicated and should not be done on your own. You can take the help of various software programs which are designed with the aim of making tax filing easier and simpler. You can answer a series of simple questions which would help you in identifying your deductions and credits and thus, simplifying your process of filing the returns.

Moreover, taxpayers can also take assistance from tax professionals then it would be a great option to avoid any mistakes while tax filing.

  • No copy of the return

Usually, the tax experts and professionals would advise on keeping a copy of the tax return filed for a period of at least two years. That’s a general time period for which the IRS would be able to legally audit the taxpayers for the gross under-reporting of their income. 

  • Not reporting all income

If taxpayers are not reporting all of their income, then the probabilities are quite high that the IRS would know about them. As the IRS receives forms like Form W-2s and Form 1099S for the entire income you earn, it is quite easier for the IRS to know even if you are not reporting. 

The IRS can carry criminal prosecutions for any wrong or non-reporting of income by the taxpayers. Taxpayers can be penalized for the non-reporting of all income and it is always advisable to report the correct income to the IRS.

Conclusion

So, now since the taxpayers have an idea about the erstwhile tax mistakes it is wiser to be careful, avoid these mistakes and rule out the possibilities of being penalized.

How Much Will Future Retirees Receive in Lifetime Social Security and Medicare Benefits?

How Much Will Future Retirees Receive in Lifetime Social Security and Medicare Benefits?

Millennial couples who would retire around 2060 would approximately be receiving around $2.2 million in the form of lifetime Social Security and Medicare Benefits. This amount would be approximately double of the amount that a couple who would be retiring this year would receive.  The total Social Security and Medicare benefits are expected to rise even more for those generations which are born after the year 1995 if these programs would provide the continued benefits.

The Lifetime Social Security and Medicare Benefits and Taxes are mainly based on the reports for the Social Security and Medicare trust funds. According to the projection of this trust, a single male that is earning an average amount of wage is working every year and is retiring at the age of 65 years would receive benefits of around $570,000. In case of those couples who are going to retire this tax year with one of the spouses having a higher wage and the one earning lower wage the amount that would be received as Lifetime Social Security and Medicare benefits would be around $1,113,000.

With the rise in Social Security and Medicare benefits, the gap which is present between the benefits and the payroll taxes the employees owe will keep on growing. The main reason behind this is that the low cost of Medicare was designed in such a manner that it would only provide cover for the hospital costs; but the program now would provide cover for visits made to doctor, outpatient procedures, drugs prescribed and other categories of medical costs.

The increase in benefit amounts

The amount of Social Security and Medicare Benefits would be seeing a significant increase in future retirees. The most important cause behind this is that there is an increase in Social Security Benefits and the Medicare expenses are increasing due to modern health care services. Moreover, when life expectancies are higher it would imply that the Americans who are going to retire in the future would receive many more years of this benefit.

However, the major cause behind the financing gap which is prevalent between the benefits obtained and the taxes is the decrease in the birth rate starting in the mid-1960s. There has been a resulting shrinking in the number of the workers relative to the retirees and this has a special force in the period in which the Baby Boomers had started collecting these benefits in between the tax year 2008 and the mid of 2030s.

These issues would very soon come under the supervision of one head as the Congressional Budget Office Projects. The Government would not be able to pay complete benefits out of the funds of the trust for Social Security by the tax year 2031. 

The new President Biden has also recommended a further increase in the benefits available for the retirees i.e. approximately 9% on an average for those retiring by the year 2065. Moreover, the work of the Urban Institute reflects the fact that these changes would be able to extend the life span of the Trust funds for Social Security by only 5 years. 

Many workers at present have to face an implicit trade-off irrespective of their level of income.  The Government has promised higher Social Security and Medicare Benefits at an older age, but it has also set a small portion of its budget for the younger people and families for other programs such as student loan balances, children fall, and other programs not related to retirement.

 A large scale budget is the only solution to this trending problem related to Social Security and Medicare Benefits. 

Conclusion

So, it is necessary to understand the issues that have been present across several generations related to retirement and health benefits along with the taxes which would be applicable across the country.

Financial Goals change with change in Income and Taxes as Well

Financial Goals change with change in Income and Taxes as Well If there are any minor changes into your Income such as a pay rise or a decrease in the duration of work hours, then it is quite easy to change your financial goals. However, if there are bigger changes in your income then it becomes quite difficult to change your financial goals.  It may be a case of a promotion, a pay hike or a pay cut during adverse times like pandemic. In both of these scenarios, it is quite difficult to manage your financial goals and objectives. Let us have a look at how to manage or rather change your financial goals as your income changes. A huge decrease in your income In case, there is a huge decrease in your income then the most important thing to consider is the impact of the decrease in your life on a daily basis. Suppose, you have lost your job and you are filing for unemployment then, in that case, your expenses would be more than your income. In such cases, the best idea is to look out for those areas where you can cut your expenses to get closer to positive cash flow. If such adverse situations occur, then it is best to put your long-term financial goals on hold for a temporary period.  There might be a need for goal adjustment and it can be started by reducing your contributions to align with the decrease in income. In these adverse times when the deadly coronavirus has taken a toll on the lives and the livelihoods of people, if there is a 50% reduction in your income then your contributions towards investments and other financial avenues must be reduced by half. With the economic situation worsening every single day due to the pandemic, it is wiser to remain careful about such situations and strategies to handle such scenarios.  A huge increase in your income If you are getting a pay raise or switching jobs, you must plan towards increasing your contributions for your financial goals. You should avoid spending more and stick to a particular budget for your expenses. The bottom line is that you must try to resist the temptation to spend in a limitless manner. It is quite obvious that you are accustomed to a particular lifestyle and when your income increases you can be able to save some more by maintaining the same lifestyle. There can be a temptation in your mind to accelerate your financial goals and you can use several financial tools which can help you in accelerating your goals and increasing your savings. In case you are saving more, you would be able to achieve your financial goals easily and on time so it would be quite sensible to adjust your timelines. If financial goals are not dependent on the stock market or any other factors you can adjust them as they fit into your financial plans.  One of the best examples explaining this is your retirement. The retirement accounts which you have would definitely be invested into the stock market and if there is a rise in your income it indicates that you can retire earlier with your financial plan reflecting this. It is imperative for you to adjust your allocation of assets with an updated time frame of retirement along with your projections.  In general, a big change in your income indicates a very big change in your goals associated with savings. You should not forget to adjust your savings goals with any unexpected increase or decrease in your income. Conclusion Hence, an increase or decrease in your income can have a great impact on your financial goals. You must determine your financial goals clearly whenever there are any changes in your income and work accordingly to achieve those goals.

All you need to know about Form 1099-R

All you need to know about Form 1099-R

Form 1099-R is being used by you for reporting the distribution of benefits associated with retirements like annuities or pension plans. Precisely, the Form 1099-R can be used for reporting the distributions which you might have received from your IRA, annuity, pension, or your retirement account. Form 1099-R can be considered as a record to denote any money paid or given to an American other than his employer.  The payer who pays will fill out the Form 1099-R and will send a copy to the payee and to the IRS as well.

Who can receive a Form 1099-R?

As said earlier, the main purpose of Form 1099-R is to record income. You can receive a Form 1099-R due to some of the below-mentioned reasons.

  1. Freelancers and contractors working independently usually get a Form 1099-MISC from their clients. If you are a freelancer or an independent contractor, this form would reflect the money which the client has paid you. Form 1099-R is for employees but it is not the same as the Form W-2.
  2. Form 1099 has a Social Security Number or Taxpayer Identification Number present on it. This indicates that the IRS will know that you have received money and it will also know if that income has not been reported on your income tax return.
  3. If you are receiving only the Form 1099-R, then it does not specifically mean that you would be owing money on that money reported in Form 1099-R. There might be some deductions which can be helpful in the offset of the income

Variations of Form 1099-R

The variations of Form 1099-R includes the following forms:-

  1. Form CSF 1099R
  2. Form CSA 1099R and
  3. Form RRB-1099-R

Mostly, public and private pension plans which are not a part of the Civil Service System use the Form 1099-R. You must receive a copy of the Form 1099-R or some other variation in case of receipt of a distribution of $10 or more amount from your plans related to retirement.

Pension plans and payment of annuity

Retirement benefits are said to be an extension of the compensation which has been arranged by an employer and employee. On most of the contributions made into the retirement plans, income tax is deferred. In simple words, this means you are not liable to pay any income tax on the funds contributed to the Retirement plans until they are withdrawn by you.

Usually, the pension and annuity distributions are being made to the retired employees, employees who are physically disabled and also for the beneficiaries of any deceased employee.

Loans

Many employers would have the provision of granting loans against pension plans. Usually, these loans are not taken as distributions and are repaid with interest. The issue of Form 1099-R occurs when you have taken a loan and are not able to make the necessary loan repayment on time.

  1. If this situation arises then the amount which is not being re-paid is treated as a distribution and would be mentioned in the Form 1099-R along with the code L i.e. Distribution Code.
  2. These distributions are treated as deemed taxable income and might be subject to penalties related to early distribution.

Rollovers

By a Rollover, retirement funds can be moved or transferred from one individual to another otherwise known as a custodian without any taxes paid on the money that has been transferred.

  1. By the use of Form 1099-R, direct rollovers can be easily identifiable. This is done by the use of codes G or H in box 7 of the Form 1099-R.
  2. Rollovers can be indirect if you are the owner of the account and you take up the responsibility of the amount in the Retirement Account and would transfer the deposited money into another Retirement Account.
  3. When there is a point when there is an amalgamation of rollover and IRS principles, the distribution made is not taxed. But, you should not forget to report the amount on your tax returns. 

Early distributions

Those benefits which are paid to you before you reach the age of 59 and half years are said to be Early Distributions. For avoiding the misuse of the retirement funds, an extra 10% federal tax is imposed on the Early Distributions.  Many states also levy penalties on these early distributions. This additional tax is applicable on the full amount of distribution which is taxable unless exceptions like disability, death, IRS levy, etc.

Conclusion

Hence, the above-mentioned information about Form 1099 would be helpful in understanding the details about this and be easier for use.

How to claim your unclaimed refunds?

How to claim your unclaimed refunds?

To know that you have a refund due to being obtained from the IRS is one of the best things especially in these troubling pandemic times. If your refund amount is a big one, it can be utilized for different purposes such as paying off your debts, investing in an emergency fund, etc. However, you might have missed out on your refunds which were due to be obtained from the IRS. According to the IRS, $2,781 was the unclaimed refund amount available in the year 2020 which is expected to increase more in the year 2021.

The causes for the unclaimed refunds can be different for different taxpayers and so are the methods by which the refunds can be retrieved.

Unclaimed Tax Money and Refunds

According to the IRS, billions of refund checks are bounced back if your address has been changed or there has been a change in your bank account number. The IRS would be unaware of the information related to the new address /new bank account number. Your refund check would return and would lie unclaimed in such a scenario. 

Another vital reason leading to unclaimed tax refunds is that you considered your income to be very low. As a result, you did not prepare your tax returns and did not e-file a tax return as well. For instance, you are a salaried professional, and taxes were being withheld from your paycheck every month. However, you considered your income too low and did not file the tax returns. But, you would be able to claim the money that has been deducted from your salary in the form of a tax refund.  Also, there might be a probability that taxes were not being withheld from your paycheck but you can receive a refundable EITC (Earned Income Tax Credit).

How can you receive your unclaimed refunds?

Some of the methods by which you can easily receive your unclaimed refunds are:-

  1. In case, it has been just less than a year when your tax refund was issued you can put forward a request to the IRS for reissue of the refund. This can be done by use of the IRS’s unclaimed refund database. In this case, for protection, you would have to provide your filing status, Social Security Number, and your refund amount as well. If there is a need to address updation, it can be done here. The advantageous part is that your information related to refund would remain available on this IRS website until the next tax return has been filed.
  2. In another scenario, if it has been more than a year but less than three years since you filed your returns but have not received your refunds – you have two options available. You can request for your lost refund to be reissued. While filing the tax returns, you can use the “Married Filing Jointly” Status and complete Form 3911 which is the Taxpayer Statement Regarding Refund. Also, if you are not using this status you can give a call to the IRS at 1800-829-1954 to request for reissue of your refunds.
  3. If after filing your return request, you found out that a particular credit or deduction would have led to a refund. Or you have made an error while filing your returns then you can make amendments to your tax return and get your unclaimed tax refund. This amendment can be done by filing Form 1040X and mailing it to the IRS. This can take some additional time i.e. up to 16 weeks but would get your unclaimed refunds.

 Conclusion

 So, if you have had tax refunds but have not obtained them due to some reasons you can still receive them. Filing a return within three years of the return due date and also filing a return for an earlier year will help you in avoiding penalties related to late returns.

Wondering how to get debt-free this year?

Wondering how to get debt-free this year?

This simple guide would help you!!

Repayment of debts can give you nightmares and this entire problem is a vicious circle. With one debt leading to another, the entire process can push you into financial troubles.

 So, it is essential to get rid of your debts soon; however, it seems to be a difficult thing if done without prior planning.

 Let us check out a simple guide which would help you to get debt-free this year.

  • The Essentials

 It’s a consumer world today and it’s the current trend to purchase new and fancy items. You might be having the best of clothes, apparel, and gadgets but you are interested in upgrading them. Expansion of your wardrobe has become a hobby and a passion too.

 Let’s think rationally and put an end to this. It is necessary that you prepare a list of the essential items and only purchase those which are needed. Avoiding unnecessary purchase is the best way to minimize your expenses thus, leading to less debt accumulation.

  • Budgeting and tracking your expenses

 Budgeting is highly essential to keep your finances under control. When you make a budget, know your expenses, and spend accordingly you would be able to save. These savings can be your savior while you are struggling to get rid of your debts. There are various budgeting tools and apps available that can be utilized to keep a check on your income and spending. When you are aware of your spending habit, you can easily find out those areas where you can cut off the spending. The cut-off spending would be used in paying off debts.

 

  • Search for shopping options which are cheaper

 When you are trying to have a debt-free life, it is essential to introduce some changes to your shopping options. You can resort to techniques like shopping in bulk. This would be less expensive. Moreover, for the general household shopping, you can plan to visit the stores once during the month. Your shopping list for essential items would help you in obtaining all the necessary items at once without the need for visiting the stores and also spending again and again.

 If you fill up your cupboards with the groceries, stationeries and other items when they are on sale and then skip shopping each month for at least 1-2 months, you would be able to save quite a good amount. The savings made can be utilized in making your debt payment then you would get rid of your debts in a considerable period.

 

  • Handle your credit card wisely

 You can consider your credit card as a source of cash that would be needed at times of emergency. But, if you are making improper use of your credit card you might be accumulating debts. You should ensure that your credit card is used only in times of emergency. Avoid making payments by using your credit card; rather plan the purchase of items only when you have cash with yourself.

 You should keep on checking the records of your credit card continuously. This would help you in keeping a track of how much debt you have to pay off. Moreover, you must be aware of any fraud schemes which can occur with your credit card.  Also, if you feel that the interest rates of your credit card are too high you can negotiate with your card issuer. If you have had a good history of paying your bills on time then you can expect getting a lower interest rate.

  • Make extra money

 If you decided to get rid of your debts this year, then you must find out other methods to increase your income. You can take up an extra job or work in extra shifts, putting all extra money earned into the debt payment. Once your debts are paid off, you can stop doing this extra work if it is painful for you. Moreover, you can rent out your extra space such as a garage, or room, etc. and use the extra income for paying off your debts.

 

  • Get rid of the expensive debts first

 This is one of the smartest methods to use for getting rid of the debts which you have. You must choose one of those debts of yours which are charging the highest interest. All the extra payments you can do must be focused on getting rid of this expensive debt first.

 Once your expensive debts are paid off, utilize all the money that you were paying for that particular debt in paying off the next expensive debt of yours. By continuing this method, you would be able to pay off all the debts and would be left with the least expensive ones only. You would feel motivated by using this strategy as it helps you in getting rid of the debts quickly.

 However, there is another strategy too i.e. the Snowball Method which is a variation of this method and is also helpful in getting rid of debts easily.

  • Refinancing

 The idea of refinancing your present debts would be of great help in paying off your debts. Several loans come up with attractive rates of interest. Getting that money and using it for paying off your debts would be a good strategy indeed. However, you need to be careful and consider the opportunities cautiously while refinancing.

  • Do not accumulate debts

 The golden rule to become debt-free is to prevent the accumulation of further debts. This process is a vicious circle and it needs to stop. One of the best methods by which you can keep a check on your debt accumulation is by the restricted use of your credit card. Moreover, spending wisely by minimizing your expenses is the best method to stop any further accumulation of debts.

 After you have stopped the further accumulation of debts, you can opt for the restructuring of your installments and payment strategy. By this, you would have a good financial strategy for your debt payment.

Conclusion

So, if you are interested in saving so that your debts are paid off you need to have a mindset change. You will have to think twice before shopping, make smart shopping decisions, and turn down temptations. With a substantial amount of self-control and discipline while dealing with finances you can easily get rid of your debts this year.

References

  1. https://blog.taxact.com/steps-to-become-debt-free/
  2. https://www.nomoredebts.org/blog/money/management/12-ways-to-get-out-of-debt
  3. https://www.thesimpledollar.com/credit/manage-debt/11-ways-to-get-out-of-debt-faster/
  4. https://www.aarp.org/money/credit-loans-debt/info-07-2013/10-steps-to-becoming-debtfree-in-less-than-a-year.html