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.

The top 5 Life Events that can change your Tax Schedule.

The top 5 Life Events that can change your Tax Schedule.

The most important phases of our lives have a great impact on our finances which can be more than we expected at times. You are purchasing a new house or you are becoming a parent, these life events are going to have an impact on your finances definitely.

So, let us have a look at those major life events which can have an impact on your Tax Schedule.

Marriage

When it is about your marriage and your taxes, it is necessary to ensure that the name with which you are filing your tax return must be the same as that of the name in your Social Security Card. In case your address has been changed then it can be changed at the time of your tax return filing. You would also have to make a choice of either married and filing returns jointly or married and filing returns separately.

Becoming parents

If you are becoming parents, then it is also going to have a great impact on your finances. This may be the case if you are having your own child or if you are adopting a kid. If you are going to have a new member in your family then the first and foremost important thing which must be kept in mind is the Social Security Number of the new child. By this, you would be able to claim your child on your income tax return in the next year. This would include your ability of taking the advantage of the federal child tax credit and the deductions that can be availed under the qualified child care expenditure. If you are adopting a kid, you would receive additional credits which would also include adoption charges, court fees, and all other necessary expenses related to transportation.

Purchase of a new house

If you have not started the itemizing of your tax returns, this is the ideal time to do so. There are a large number of new deductions available which would include private mortgage insurance, taxes related to real estate, and qualified home mortgage insurance. You can obtain a large number of benefits from Residential Energy Credits. In case, you have purchased a new water heater but it was expensive but you can use it in the form of savings in the future.

Demise of spouse

This is quite an unfortunate situation and you may not like to discuss it much. But, this situation would arise and you must be well-prepared for such a situation. Firstly, you must be qualifying as a widow or a widower and you should claim this status within a period of two years from the death of your spouse. The qualifying widows or widowers can avail themselves the same standard deduction as that of those Americans who are married and are filing their tax returns jointly.

Change in job

It is quite a well-known fact that a large amount is withdrawn from the paychecks of the taxpayers every year. Due to this, many American taxpayers get a huge amount of tax refund after filing their tax returns. If you obtain a good amount of tax refund it would appear quite attractive, but you would most prefer to have that amount with yourself throughout the year rather than waiting to obtain the refund at the year-end. So, if you have had a change in the job very recently then this is the best moment when you can make adjustments to your Form W-4 and have complete control of the tax scenario for filing your tax returns the next time. You should keep in mind that if you have a higher withholding it would increase your refund but your paycheck amount would be less. But, if withholding is less; you would be able to access your funds whenever the need arises.

Conclusion

So, you must always keep the tax implications in your mind if you have made any changes or are planning for making any changes in the near future. You must keep in mind the planned as well as the unexpected events of your life to plan your taxes accordingly and avail yourself of the benefits too.

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

How to make the most of your capital losses in 2020?

How to make the most of your capital losses in 2020?

Capital gains can be said to be the profits that are made when you can sell an investment for more price than at which you have purchased them. On the contrary, if the investments you have made sell at a price which is less than the price at which you bought them is known as Capital Loss.

 If you have incurred some capital gains this year and you also have some capital losses in your portfolio, then you can consider the harvesting of these capital losses. By harvesting these losses, you would offset the gains as a result of which you would not have to pay any taxes on the Capital gain income. This process is also termed as Tax-loss harvesting.

 Let us check out the process by which you can begin the process of offset of your capital gains by the harvest of capital losses.

 

Computation of the gains

 You should make a list of the sale you have done related to your stocks, bonds, and real estate during the year. You can add the capital fund dividend which you are expecting into your mutual funds.

 

Offset the losses which have been realized

 This would include the various stocks you had purchased when the stock market was high. You even thought or expected the stock market to go higher. However, you had to sell your stocks at a point when the stock market dropped.  You also had to sell your stocks at a price that was lower than your purchase price. Moreover, while this process of loss offset you should not forget about the loss carryovers from the previous years. You would be able to find the loss carryovers on Page 2 of the previous year’s Schedule D of your income tax return.

 

If gains are more than losses, check out for unrealized losses

 It might be the scenario that you are holding on to a stock whose prices have dropped. You might be hoping that the prices of the stocks would increase or they will regain their value. You can consider this time as the best time to sell the stock that you have been holding.

 

Checking of the Income Tax bracket

 Before you decide to sell your stock which has dropped in value, you must think about taking some advantages out of the lower capital gain tax rates. For most people, the maximum capital gains rate is around 15%. The rate at which the capital gains are taxed varies according to your taxable income and your filing status i.e. Single, Married and filing jointly, Married and filing separately, Head of the Household.

 

Wash Sale Rule

 The awash sale is said to occur at a point in time when you are either selling or trading securities/stocks at a loss. This wash sale occurs within 30 days of before or after the sale of the securities.

  1. You can purchase substantially identical securities.
  2. By a fully taxable trade, you can acquire substantially identical securities.
  3. Substantially identical securities can be acquired by the use of a contract or option.

If this is done then any loss incurred on the sold assets can be disallowed by the IRS.  However, there are a few steps that can be taken to ensure that the capital loss incurred can be used to offset your capital gain.

  1. You must wait for a minimum of 31 days before you start re-investing into another Stock Fund.
  2. The next step is to invest in a similar type of fund.

 In case, you have disallowed the loss incurred from a wash sale, then you must add up the cost of the disallowed loss into the cost of new securities. This would lead to an increase in the cost of your new stock and also reduce the gains on the sale of the newly purchased stock.

 

Avoid harvesting too many losses 

 After you have offset the losses which you have incurred against the gains, the excess losses could reduce up to $3000 of the ordinary income obtained from employment or different other sources. In case, your capital losses are much more than that then the excess losses can be carried over to the upcoming year.

 

Conclusion

 So, these above-mentioned techniques and strategies would help you in making the complete use of capital losses in the year 2020.esting.

The top 10 FAQs answered for taxpayers in the US-2020.

The top 10 FAQs answered for taxpayers

in the US-2020.

There have been various changes in the tax laws due to the outbreak of the pandemic COVID-19. Due to the adverse impacts of the pandemic, millions of Americans have become unemployed and are facing a huge financial crisis. To alleviate the situation of economic distress which is being faced by the Americans the IRS has introduced various changes into the tax laws for the year 2020.

 The major change which was announced by the IRS was the postponement of the due date for filing federal income tax returns and for making the payment of the Federal Income tax. This due date was on 15th April 2020 which was postponed to 15th July 2020. Moreover, there would be no accrual of any interest or no penalties for failure in payment of taxes or failure of tax return filing by 15th April 2020. The interest accrual and penalties will begin after 15th July 2020. This relief has been made available for all types of taxpayers such as individuals, an estate, a trust, a corporation, or any business entity.

 Now, since there have been such important tax reforms introduced by the IRS there must be several queries in the minds of the taxpayers.  So, let us have a look at some of the major queries of the taxpayers related to the reforms in the tax laws. 

  • What do I need to do to avail of the extension of tax return filing due date from 15th April 2020 to 15th July 2020?

 No, you do not have to do anything to avail of the extension of the tax return filing due date to 15th July 2020. You will not have to file any additional forms or contact the IRS to avail of this relief in the tax filing deadlines. If you have to pay any taxes that are due, you can do that by 15th July 2020. After 15th July 2020, if you need a further extension then you would have to file a request for an automatic extension.

  • Is there a need to be sick, quarantined, or have any impact from COVID-19 to qualify for this relief?

No, you do not have to be sick, quarantined, or impacted by the COVID-19 in any form to avail of this tax relief introduced by the IRS.

  • How and by when do I need to make the payment for my first and second quarter Estimated Income Taxes 2020?

 The due date for the first quarter and second quarter Estimated Income Taxes was on 15th April 2020 and 15th June 2020. However, you can make both the payments by 15th July 2020. You can do this in the form of a single payment with an amount that is adequate for covering both the first and second quarter Estimated Income Taxes 2020.

  • What would be the due date for the rolling over of the entire or a portion of a qualified plan loan offset into a retirement plan?

If you are filing your Federal tax returns by 15th July 2020, then the due date to roll over a part of a complete qualified plan loan offset into an eligible retirement plan is by 15th October 2020.

  • I had made an excess contribution to my IRA during the year 2019. Is it feasible to avoid the excise tax if I withdraw the excess amount by 15th July 2020?

Yes, you can avoid excise tax if you withdrew the excess amount contributed by 15th July 2020. But, you must not have taken any deduction for the excess contribution which you have done. Moreover, you can even avoid the excise tax if you withdrew the excess amount not only by 15th July 2020 but also by 15th October 2020.

  • Are the tax return filing and payment deadline for exempt organizations, businesses, or any other entities which have the due dates for filing on 15th May 2020 or 15th June 2020 have been extended?

All the tax return filings and payments related to the Federal taxes which are from 1st April 2020 till 1st July 2020 have been postponed to 15th July 2020.

  • I wanted to file a claim for my Tax Refunds for the year 2016. This has to be done by 15th April 2020. Do the tax relief laws allow this claim to be done later?

   Yes, with the changes in tax laws you can file your claim for obtaining tax refunds for the year 2016 by 15th July 2020.

  • What do I need to do in case I have filed for an automatic extension for filing the 2019 tax returns? I owe Federal taxes to the IRS.

 You can file your tax returns by 15th October 2020; but, you will have to pay your taxes by 15th July 2020.

  • Has the IRS postponed the tax return filing deadlines for partnership firms and S-corporations which were due on 16th March 2020?

No, there has been no postponement by the IRS for the tax return filing deadlines for the partnership firms and S-corporations that were due on 16th March 2020. This tax relief is only for filings and payments which are after 15th April 2020 and before 15th July 2020.

  • Does this relief give me more time to contribute to my IRA, HSA, and Archer MSA?

Yes, you can make contributions to your IRA, HSA, and Archer MSA at any time in a year or by the tax return filing due date.

Hence, these common FAQs on the tax payments related to 2020 will resolve your queries related to the tax return filing and tax payments.

Most Important Year-End Tips To Increase Your Tax Refunds

Most Important Year-End Tips To Increase Your Tax Refunds

Most Important Year-End Tips To Increase Your Tax Refunds

A quick look at the calendar and you will realize, this year has come to an end. And even before you realize, the tax season will be close. Instead of rushing during that time, you can take a few simple steps this holiday season to reduce your tax liabilities and increase your tax refunds. Most Important Year-End Tips To Increase Your Tax Refunds.

1.Retirement Planning

Planning for your retirement is a great way to add funds for your retirement and make handsome savings in the form of taxes for the current financial year. You can take the help of either traditional IRA or 401(k) to contribute to your retirement planning. Self-employed individuals can save up to 25% of their income under SEP IRA up to a maximum of $56,000 for the current year.

2.Upskilling

If you have been planning to take some classes to improve your skillset, this might be the best time to enroll. You can start with enrollment and make the payments for the next quarter by the 31st of December. This will help you get some valuable tax credits of up to $2,000 with the help of Lifetime Learning Credit.

3.FSA

Taxpayers who have FSA or Flexible Spending Account, it might be the right time to give your doctor a visit. While there is no hard and fast rule to use the FSA amount but there might not be a lot of benefits in keeping the amount as well. You can only carry forward $500 to the next year. The FSA plans usually allow subscribers to use these funds for up to 2 and a half months in the next year.

4.Charitable Donations

You can make this holiday season a little bit better for the people who are in need. If there are any unused household items or clothes, you can donate them to the less fortunate. Such donations can help you reduce your tax liability, provided you donate to qualified charitable organizations and if you itemize the items. Alternatively, if you volunteer for charitable organizations, you can claim the miles that you drove at 14 cents for each mile driven.

5.Shuffle your Investments

Some investments in your portfolio might not have performed as you expected them to. Investments that have gone down in their value can help you reduce your tax liabilities. You can use the loss to offset the gains that you have received from other investments. However, you must sell the loss-making investments to offset them with the profit-making ones. Should your losses exceed the profits, you can use up to $3,000 against your income.

6.Defer Any bonuses

Taxpayers expecting a year-end bonus for the hard work that they have put in, might find themselves in a spot. The bonus might push you to another tax bracket or increase your tax liability by a healthy margin. If you can, do speak with your boss to deter the bonus to January of next year. This way, you won’t have to taxes for the bonus in the current year.

7.Other Dependent Credit

Taxpayers supporting their grandparents or parents, or other loved ones can benefit from Other Dependent Credit. If they qualify to be non-child dependents, you can claim the Other Dependent Credit. You can claim up to $500 under this category and receive dollar by dollar reduction in your taxes.This tax credit is relatively new and not many taxpayers use it.

Each dollar that you save is a dollar that you earn. Using the above methods, you can save takes on your income and boost your tax returns as well.