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.

Does every NRI in the US need to file their Income Tax?

Does every NRI in the US need to file their Income Tax? Everyone in the US is not required to file their Income Tax return every year. In case, your total income for a year does not exceed a particular threshold then you would need to file a federal tax return. The amount of income which you would be able to earn before you are needed to file a tax return would be based on the type of income, the age of the NRI and the filing status of the NRI. Gross Income Thresholds Most taxpayers are eligible to claim the Standard Deduction. As an NRI, the Standard Deduction amount for which you would be eligible for is mainly determined by your age and your filing status. The Government usually decides this amount before the tax filing season arrives and this amount would increase for inflation each year. By the help of Standard Deduction and other deductions, your income can be reduced to determine your taxable income. In general, if your income is less than your Standard Deduction then you do not need to file a federal tax return. You would not need to file a federal income tax return if the below-mentioned criteria are true.
  1. If you are below the age of 65 years
  2. If you are filing your tax returns with the Single status
  3. If you do not have any other special conditions which would require you to file the tax returns such as income obtained from self-employment
  4. If your income is less than $12,400 i.e. the Standard Deduction in the year 2020 for a taxpayer.
What would happen if you are only receiving Social Security Benefits? In general, cases, if your only source of income is the Social Security Benefits then you would not have to file a tax return. However, Social Security Benefits have another aspect i.e. if you are married and are filing your tax return separately from that of your spouse then some of your Social Security Benefits must have to be included in your taxable income to know if it is greater than the Standard Deduction you are claiming. Taxability of Social Security Benefits In order to find out if the Social Security Benefits which are receiving are taxable or not, the below-mentioned steps can be implemented.
  1. You can add one-half of your Social Security Income to all other types of income which you are receiving including the income which is tax-exempt.
  2. After that, the amount obtained can be compared to the base amount for determination of your filing status.
  3. In case, the total will be more than the base amount then some of your Social Security benefits would be taxable.
When a dependent would need to file a federal tax return? NRI taxpayers who are claimed as dependents on the tax returns of another person have different filing requirements with the IRS. The income of a dependent can be “unearned” when it would be derived from certain sources such as dividends or interest. If the unearned income of a dependent is more than $1,100 in 2020 then tax return must be filed by the dependent. Filing a Tax return to claim a tax refund There might be instances when there would be the need to file a tax return for an NRI such as taxes would have been withheld from a paycheck and a tax refund is due. If too much amount has been withheld from your paycheck, then the only method by which you would be able to obtain your tax refund is by filing their tax return.
  1. For instance, if you are an NRI who is a taxpayer with a single filing status and earns $2500 during a particular year and $300 is being withheld from your paycheck then you can obtain a refund of $300 as your income is less than Standard Deduction.
  2. If you have a refund due then the IRS would not automatically issue the refund. You would have to file a tax return so as to obtain your refund which is due.
Conclusion Hence, if you are an NRI in the US then there are various criteria which are applicable for determining your tax liability. You must be well aware of these criteria and file your tax returns accordingly.

Capital Gains tax on selling your property in 2020.

Capital Gains tax on selling your property in 2020

When you are selling real estate which has been held by you as an investment, the tax implications might be different based on the period for which you have held the property. The tax rules also depend on whether the property is a home or any other category of real estate. If it is a home sale, then it is considered as a particular type of capital gains which has its own set of taxation rules.

 If you are selling property that you have held for less than a year, then it is known as Short-term capital gains. You would have to pay taxes for the Short-term capital gains at the same rate as that of the Income taxes. However, the rates are based upon the income bracket under which you fall.

 When you are selling property which you have held for more than a year, then the profits obtained is known as long-term capital gains. The rates at which the long-term capital gains are taxed are your taxable income, your filing status which can be single, married, and filing taxes separately and married and filing jointly/head of the household.

 Let us have a look at the tax rates for the long-term capital gains of the year 2020.

a.Individual rate or when you are filing as a single

Income

Long-Term Capital Gain Rate

$0 to $40,000

0%

$40,000 to $441,450

15%

$441, 451 or above

20%

 b. Married and filing taxes jointly 

Income

Long-Term Capital Gain Rate

$0 to $78,750

0%

$78,751 to $488,850

15%

$488,851 or above

20%

 c. Married and filing taxes separately 

Income

Long-Term Capital Gain Rate

$0 to $39,375

0%

$39,376 to $244,425

15%

$244,426 or above

20%

 d. Head of the Household 

Income

Long-Term Capital

$0 to $52,750

0%

$52,751 to $461,700

15%

$461,701 or above

20%

Example to illustrate capital gains tax implications on Real estate

In case you are married and filing taxes jointly along with your wife. You and your wife have a taxable income of $200,000 for the year 2020. By this, you would be included in the tax bracket of 15% for the year 2020.

Then you had purchased land in California less than a year ago. However, you had some emergency and needed cash. You had estimated a profit of $10,000 when you had purchased the land. If you sell it now immediately it would be a short-term capital gain and you would have to pay tax $2400 for it. But, if you waited for some more time and sell it then it can be considered as a long-term gain and would be taxed at 15%. So, you would have to pay $900 less or $1500 for the land. Thus, you would have an $8500 gain on the investment.

How much tax can you exclude?

  • If you are selling the house in which you are staying current, then your capital gain would not be taxed up to $250,000 if you are filing your tax returns as a Single.
  • This exemption is based on the IRS Section 121 Exclusion.
  • If you are married and are filing your tax returns jointly, then you can avail of the benefit of a tax exemption of up to $500,000.
  • You would qualify for this exemption only if you are the owner of the home and have used it as your primary residence for a minimum period of 2 years out of the five years before the sale date.
  • There can be some factors which might not let you avail this normal exclusion such as
  1. If you are liable to pay expatriate tax
  2. If the home or the real estate which has been sold by you was not your main residence
  3. If you have not lived there for 2 years out of the 5 years before the sale
  4. If you have not owned the house even for 2 years out of the 5 years before the sale of the house.
  • If you are married and are filing your taxes jointly, then only one out of both of you must satisfy the owning criteria to avail of this tax exclusion.
  • You can still claim the tax exclusions even if any of the criteria are not satisfied if the house was sold or exchanged due to some changes in your employment place, health issues, or any unexpected circumstances.

How to file your Capital Gains Tax?

In 2019, the IRS had said to report your capital gains and losses on Schedule D and report the amount on your Form 1040.  However, now if you are receiving Form 1099-S, Proceeds from Real Estate Transactions, you should report about the sale of the home even though the gain obtained from the sale is excluded under the IRS Section 121 Exclusion.

Conclusion

So, these are the important tax implications on any capital gains you have obtained by selling property. You should also keep in mind that if your investments are being sold they might be subject to an additional 3.8% income tax.

Is your income tax refund guaranteed?

Is your income tax refund guaranteed?

You would file a tax return claiming the refund of your income tax if the excessive deduction of tax has been done at the source or during the payment of self-assessment tax. Your income tax refund is guaranteed if you and the IRS are on the same terms related to your refunds. Mostly, the IRS pays back the refunds within 10-15 days of the receipt of the tax return filing.

 There are some major factors that would help you to determine how fast you can receive your tax refund.

  • How early you have filed your income tax return?
  • If you e-filed the tax refund or have sent by mail?
  • If you are claiming any tax credits such as EITC and CTC
  • If you have any existing debts with the Federal Government or not

 Once your tax returns have been e-filed, you can check the status of your tax returns by

  • You can use the Where’s My Refund tool by the IRS to find out the status of your income tax refund.
  • You can also call the IRS on the Customer Support number to understand the status of your tax refund.

Can your tax refund be held back?

 Your tax refunds can be held back by the IRS and then obtaining your tax refund may not be guaranteed under the below-mentioned scenarios.

 a.The inaccuracy of your tax return

 Your tax refund can be held back by the IRS if there has been an error made by you while filing your tax returns. There are chances that there is a discrepancy in the return that has been filed in the past.

  • If the IRS thinks that there has been an error made by you while filing your tax returns, then your refund can be changed by the IRS. In case, you feel that the change has done is incorrect, you can prove this to the IRS and ask for a reversal. You have 60 days within which you can do so.  After 60 days are over, you will have to file for an amended return so that the IRS would issue your refund.
  • If you have claimed some erroneous deductions, then the IRS can conduct an audit to find out about the accuracy of your tax returns. If you can prove to the IRS that the claimed deductions are correct then the IRS will issue your refund.
  • The IRS has the authority to freeze your refund if your previous tax returns are being audited and it feels that you owe additional taxes to the IRS.

 b.You owe back taxes

 If you have pending taxes to be paid to the IRS, then the IRS would keep your refund to pay your taxes. The IRS can also take your refund if you are on a payment plan known as an Installment Agreement. However, if you are unable to pay your taxes in one go you must get into a payment agreement with the IRS for minimizing your penalties. This would also help in the prevention of collection enforcement actions.

 c.You have unfiled back tax returns

 In case, you have unfiled tax returns then the IRS can freeze your refund and start a delinquent return inquiry. This will continue until you have filed your pending tax returns and have also cleared all the associated pending tax bills.

d. A problem in your tax account

 The IRS might suspect some problem with your IRS tax account and thus hold your tax refunds.

  • Victim of tax identity theft –

    The IRS might suspect that there has been a tax identity theft. You will have to contact the IRS for proving your identity. Once, your identity is proved you can obtain your tax refund easily.

  • Dependent related discrepancy –

    This might happen when someone else has claimed your child as a dependent on his tax return. You will have to explain and prove it to the IRS that you should be able to claim the dependent on your tax refund.

 e.Other debt

 There are some other categories of debts that might be pending on you such as Student loans, Child Support, Unemployment compensation re-payments, or the State Taxes.  These debts can be collected from the IRS by holding on to your refunds.  However, to resolve this problem you would have to get in touch with the source of your debt and not the IRS.

So, if any of these reasons are not expected in your case then your income tax refund is guaranteed.

Who qualifies to be your dependent when you file your Income Tax Return?

Who qualifies to be your dependent when you file

your Income Tax Return?

 By claiming your dependents, you would be able to save a huge amount of taxes. So, if you have a family you must know how the dependents are defined by the IRS for income tax purposes. However, you may not completely aware of who in your family can qualify as your dependent or not.

 

Who would qualify as a dependent?

 Mainly, there are two types of dependents i.e. 

  • Your qualifying child
  • A qualifying relative

 In both the conditions, the below-mentioned criteria must be fulfilled for qualifying to become dependent. 

  • The person must be a US citizen, a US resident, a US national, or a Canadian/Mexican resident. Some people think of claiming a foreign exchange student who is staying with them temporarily. This is feasible only if the foreign exchange student fulfills this above-mentioned condition.
  • You would not be able to claim a person as your dependent if he claims a personal exemption for himself or is claiming another dependent on his tax forms.
  • You would not be able to support the claim of a person who is married and files taxes jointly with his spouse.

Qualifying child. 

  • To be a qualifying child, the child doesn’t need to be your biological child. The child must be related to you and can be your brother, sister, adopted child, stepchild, niece, or nephew as well.
  • The qualifying child must be below the age of 19 years unless he is suffering from some disability (permanent and total). However, there is an exception to this rule and you can claim a child in case of him being below the age of 24 years and being a full-time student for a minimum period of 5 months in a year.
  • The child should be a citizen of the US, US national, or a United States/Canadian/Mexican resident.
  • A child would be qualifying if he is dependent but not self-supporting. He must be living with you for more than a year unless there are exceptions like living with the other parent in cases of divorce or being temporarily absent, etc.
  • If you and your spouse have been divorced then, you can use the tie-breaker rules found in the IRS Publication 501. These tie-breaker rules are the basis for the establishment of income, the parentage, and even the residency requirements for claiming the child.  

Qualifying relative.

In case, you are supporting your parents or any other relative then certain conditions should be fulfilled to claim the dependency exemption. 

  • The person whom you are supporting should be your relative and this category of relatives would include:-
  1. Your biological child, your foster child, your stepchild, or, your grandchild.
  2. Your siblings, half-brother, half-sister, stepbrother, step-sister, or the descendants of your siblings.
  3. Your parents, stepfather, stepmother, grandparents, or other ancestors.
  4. Uncle or Aunt such as brother or sister of your parents
  5. Your in-laws can include your father-in-law, mother-in-law, daughter-in-law, son-in-law, brother-in-law, or sister-in-law. However, this can only be feasible when the marriage is active and not if there has been a divorce or separation.
  • The person whom you are supporting must have a taxable income not more than $4200 in the year 2019. However, this limit goes up every year with the changing rules.
  • The relative who would be qualifying for obtaining a tax exemption must have been living at your residence throughout the year or would be on the list of those people who do not live with you.
  • You should have paid for the support of the person in more than half of the person is being supported by multiple people who agree in multiple support agreements that the exemption can be claimed by you.

Conclusion.

So, the process of including qualified dependents for claiming tax exemptions is one of the best benefits which you can avail. By claiming these dependents, you can very easily avail several tax credits and deductions which would help in reducing your tax bills. Hence, you must understand carefully the qualifying criteria for claiming dependents failing which you would miss the opportunity of availing the benefit of low tax bills.

 

Extended Timeline For US Tax Filing

Extended Timeline For US Tax Filing

Extended Timeline For US Tax Filing

While the entire world is struggling to combat the effects of the dreadful COVID-19, the US Government has come up with new initiatives to provide some relief to the public who are paying the taxes. The Treasury Department in the US and the IRS have jointly announced last week that the US Government is extending the tax –filing deadline to 15th July 2020. This decision has been taken by the US Government to give the taxpayers extra time to handle their taxes amidst the outbreak of COVID-19.

The COVID-19 outbreak was declared as a National emergency last week by the President of the US. Also, the President had invoked the Stafford Act which gives him the power to mobilize the federal resources. The taxpayers would get an additional period of 90 days for filing their taxes and the IRS will not charge any interest or penalty for this time extension. However, for those taxpayers of the country who have already filed their taxes this year would not be affected in any means by these changes made.

File Tax Sooner If A Refund Is Due

Even though the US Government has extended the timeline, those taxpayers who don’t owe any money to the IRS can consider filing their tax by the original deadline of 15th April 2020. This would be wiser as the taxpayers would be able to collect their refunds sooner. This would be very helpful for those citizens who have already started seeing their economic condition and earnings being affected by the outbreak of the pandemic COVID-19. 

Moreover, it is just that the Federal Government has provided this extension in tax filing but different states in the country have formulated different guidelines concerning the tax filing extension. It is advisable for those taxpayers who are planning to delay their federal taxes to understand in detail about the tax filing extension that their State Governments are offering as well.

The Due Date For Tax Filing In Case Of An Extension

There might be some taxpayers who may be concerned about their ability to pay the taxes even by 15th July 2020 due to the loss of a job or other financial issues related to the outbreak of COVID-19. These taxpayers can contact the IRS and discuss their options. The IRS has short-term and long-term payment plans which would help the taxpayers to pay their taxes conveniently. Short-term plans would give taxpayers around 120 days to pay the taxes whereas long-term plans taxes can be paid in installments over several months.

 Earlier, when the tax filing deadline was 15th April and a taxpayer who would get an extension will not have to file his tax returns till October. However, now with the IRS pushing the tax filings date to 15th July 2020, it is quite not sure how long the taxpayers would be able to get if he is filing for an extension. But with the various options made available by the IRS, it is quite sure that taxpayers would have some relief.

Deadline For Quarterly Estimated Tax Payments 

Many people are required to make quarterly estimated tax payments to the IRS in case of their income not being subject to the taxes of payroll withholding. This estimated tax payment is made by the division of the year into four payment periods with each period having its payment due date. Now, since IRS has extended the timeline for filing the taxes to 15th July 2020 it is quite uncertain that what would be the impacts upon the deadline of quarterly estimated tax payments. 

Some Important Steps To Consider Before The Previous Deadline  

Filing of 2017 tax return 

 If there is a refund due of the year 2017 for a taxpayer and the tax return has not been filed, then it must be filed by 15th April through the Form 1040 or Form 1040-SR to claim the money failing which IRS would keep the money.

 Max out 401(k) by 31st December 2020 

The contributions made towards the traditional 401(K) help in reducing the total taxable income of an individual. Many employers also contribute to the savings made by an individual; so, if there is enough contribution made then there are opportunities to obtain some money as well.

Contribution towards IRA and HSA

 The contributions which are made to an IRA and HSA are eligible for a tax deduction. This contribution must be done by the April deadline every year. Now, even though the tax filing deadline has been extended to 15th July 2020 there have been no announcements made on the deadline for IRA or HSA contributions. So, it is advisable to accomplish this task by the April deadline to avoid any further hassles.

 

Conclusion

Hence, with the global economy coming to a standstill and numerous lives being affected due to the pandemic COVID-19, this action by the US Government is applauding. This would reduce a lot of pressure on those expecting to owe money to the US Government. However, if there is a refund expected then it must be claimed immediately so that the cash can be utilized during this period of emergency.

References

https://www.fool.com/taxes/2020/03/24/the-tax-deadline-has-been-extended-should-you-wait.aspx

https://www.cpapracticeadvisor.com/tax-compliance/news/21130318/irs-extends-2020-income-tax-filing-deadline-to-july-15

https://www.usatoday.com/story/money/2020/03/20/taxes-2020-irs-delay-april-15-tax-filing-deadline-july-15/2883840001/

https://www.cpapracticeadvisor.com/tax-compliance/news/21129714/when-is-the-new-irs-tax-filing-deadline-for-2020-coronavirus-delay

https://turbotax.intuit.com/tax-tips/tax-planning-and-checklists/important-tax-deadlines-dates/L7Rn92V1d

https://www.nerdwallet.com/blog/taxes/april-deadline-taxes/