All you need to know about Tax Deductions for Contributions
for the NRI in the US.
Giving Tuesday is said to be a day when individuals and businesses are helping the needy by making various charitable contributions. This would also increase the possibilities by which the tax bills of NRIs can be trimmed before the year 2020 comes to an end. The Giving Tuesday this year would be even more special as a lot of people are having genuine needs due to the adverse impact of the pandemic COVID-19. However, it is also necessary to understand which organization would qualify as a charitable organization.
NRIs in the US are aware of the concept of donating for charity and then writing off the donations made. However, there seems to be some confusion related to the exact concept behind this. Some Americans consider that contributions made to any organization can be deducted. Some others feel that the value of time that has been spent on volunteering can be deductible. But, the concept behind both these ideas is not true. Let us check out the real concept underlying the tax deductions related to charitable contributions and their functioning.
According to the IRS, charitable contributions occur for an NRI when he donates money which can include securities, goods/services, or business ownership to a particular organization. The market value of the contributions made would be deducted from your income tax returns.
The IRS has specified that for any particular donation or contribution to be qualified as charitable it must be made to a qualified organization. If contributions are made to any political parties, individuals, and any other candidates then those contributions are not tax-deductible. In general, the only deductible charitable donations are those contributions that are being made to a scientific, literary, educational or religious organization that has a 501(c) (3) status obtained from the IRS. NRIs can use the IRS Search Tool to have a clear understanding of which organization qualifies as a charitable organization.
Different categories of contributions
In addition to money, other things which can be donated or contributed are:-
- Valuable items
- Any of these above-mentioned items contributed would qualify for a tax deduction.
- In case, if the value of the contributions made is $250 or more than that then a written acknowledgement has to be obtained from the charitable organization about the donation.
- In case, if the value of the charitable contributions which are non-cash is more than $500 then the NRI would have to mention some information about the charitable organization and the donation that was made while the income tax return would be filed.
Many NRIs consider the time which they have spent in volunteering can make them eligible for tax deductions. However, this is not legal according to the guidelines of the IRS. The value of a particular person’s time is completely different from the value of another person’s time and it is difficult for the IRS to verify the worth of a particular person’s time. It is also not feasible to deduct any of your expenses related to volunteering for taxes. However, costs like the cost of gas, oil, uniform, air/bus transport, etc. which is related to your volunteering work can be deducted for tax.
- When making charitable contributions and using them for availing tax deduction is the intent then the paperwork is the most necessary thing.
- Any kind of cash/non-cash contribution which is of the value of $250 or more will need a written acknowledgement from the organization to which the charity has been made.
- Also, IRS Form 8283 must be included along with your income tax returns for the non-cash donations which are more than $500 in value, and for the non-cash property which is more than $5000 in value.
- Moreover, the qualified appraisal would also be needed for any non-cash property or non-cash donations that have been made by an NRI.
Deduction of charitable donations
- If an NRI is donating to a qualified charitable organization, the contributions made can be eligible for tax deduction only when the deductions are itemized and are not claimed as Standard Deduction.
- According to the guidelines of the CARES Act, a new charitable deduction of up to $300 would be permissible on the taxes of 2020 if cash donations are made for a 501(c) (3) organization and the deductions are not itemized.
Hence, charitable donations made to proper charitable organizations would be helpful from the tax deduction point of view. The NRIs must have a clear view of the rules associated with charitable contributions and tax deductions to avail the benefits easily.
Tax deductions for your child born in the US.
When the deadline for the tax return filing approaches, you should keep your details ready for review so that you do not miss any necessary detail. If you have a kid, then it is feasible that you can obtain some good tax benefits.
If you are going to claim your child as a dependent, then there are certain dependency requirements which your child must meet.
- Your first step is applying for the Social Security Number of your baby. It will take nearly two weeks for your Social Security Number to arrive.
- Another criterion is that your child should have been living with you for a period of more than half of the year. The time which your newborn child has spent in the hospital would not be taken into consideration here.
Changes in your tax filing status.
- In case you were single and now after having a baby you are supporting your household, your tax filing status would change to “Head of the Household”.
- By this tax filing status, you would be able to obtain a much larger standard deduction and even more favorable tax brackets.
- So, you can save more on your taxes after being the Head of Household than you were saving while you were Single.
- However, when married and having a child your filing status would not change.
Child Tax Credit.
This is considered to be one of the best tax breaks for the parents. You can claim Child Tax Credit up to $1000 for each qualifying child.
Some criteria must be met for your child to be the qualifying child.
- Relationship – If you are going to claim this credit, then your biological children, foster children, adopted kids, step-children are eligible. Moreover, some of your other family members can also qualify.
- Age – Your children must be of the age of either 16 years or younger than that to avail of this credit.
- Dependent – You will have to claim your child as your dependent on the federal taxes.
- Support – Your child should not have been provided half of the support.
- Resident – Your child should have stayed with you for nearly half of the year or more.
- Citizenship – Your child can qualify if he is a US citizen, US resident alien, or a US National.
Claiming the tax breaks for medical expenses and child care.
- Medical expenses related to the birth of your child and child care are deductible.
- These expenses are deductible only when they are exceeding 10% of your AGI (Adjusted Gross Income).
- To qualify these expenses for deductions, these expenses must be itemized.
- If you are a working parent, then you are eligible to claim credit for Qualified Child Care Expenses.
- You can also claim the Child and Dependent Care Credit if you have paid some worker or Daycare center for taking care of your child while you were working.
- To qualify for this credit, you should be able to identify the individual who has given support or taken care of your child. You and your spouse should have earned income to avail of this credit if you are filing the returns jointly. Moreover, the expenses paid for child care should not be given to your spouse or any other dependent on your tax returns.
- This credit is based on your income and can exceed up to 35% of the child care expenses which qualify for a credit. This can be up to maximum expenses of $3000 for one child and $6000 for more children.
- However, your Child and Dependent Care might get reduced if your employer is providing you with dependent care benefits that are tax-free.
Some additional tax breaks.
There are some other tax breaks which parents can enjoy such as:-
- You can qualify for obtaining the Earned Income Tax Credit.
- Any gifts i.e. in the form of money or property would be free of tax for you and your kid if received from grandparents and other relatives.
- You can also be eligible to participate in QTP i.e. Qualified Tuition Program which is being offered by your State. Even though there is no immediate break for the taxes, the earnings in the account would be tax exempted. You could also obtain state deduction or credit for the contributions made.
So, these factors would help you to understand the different facets related to the tax deductions associated with your child born in the US.
Tax implication for home-buyers in the US
More and more Americans are now looking for purchase of vacation homes, rental income properties, and comfortable places to settle down after retirement. US Tax laws governing the ownership of property are quite complex and have different tax implication for both residents and non-residents.
Tax benefits of homeownership in the US
- The main tax benefit of owning a house in the US is that the homeowners do not need to pay taxes on the imputed rental income from their own homes.
- Homeowners will not have to count the rental value of their homes as taxable income even though that value is just a return on investment such as that of stock dividends or interest on a savings account. So, the rental value of homes is a form of income that is non-taxable.
- Homeowners are allowed to deduct mortgage interest, property tax payments, and other expenses from their federal income tax if they are itemizing their deductions.
- According to the tax rules, in a well –functioning Income tax system there must be deductions made for mortgage interest and property taxes. But, the current Federal Income tax system does not tax the imputed rental income.
- Furthermore, homeowners can also exclude up to a certain limit the capital gain which they realize from the sale of their home.
- Both residents and non-residents in the country must pay taxes on any property which has been generated by renting a property that is located in the US and also by any gain realized from the sale of the property.
In the US, a landlord can count the rent received as income whereas the renters may not deduct the rent which they are paying. A homeowner can be considered as both the landlord and the renter. However, the tax code of the country would treat the homeowners in the same way as the renters by ignoring their simultaneous role as their landlords.
Deduction of mortgage interest
Those homeowners who are itemizing their deductions may reduce their taxable income by deduction of the interest that has been paid on the mortgage of their home. Those taxpayers who do not have their own homes will not have the ability to make any deductions for the interest paid on the debt incurred in the purchase of goods and services.
However, there have been certain changes introduced by the TCJA (Tax Cuts and Jobs Act). Before the changes introduced by the TCJA, the deduction was limited to the interest paid up to $1 million of debt which has been incurred either to purchase or substantially rehabilitate a house. Homeowners can also make a deduction on the interest that is paid up to $100,000 of home equity debt regardless of how the borrowed funds have been used. The TCJA has also limited the deduction to interest on up to$750,000 of the mortgage debt which has been incurred after 14th December 2017 to either buy or improve a first or second home.
Deduction of property tax
Homeowners who can itemize their deductions may also have to reduce their taxable income by deduction of property taxes which they pay on their homes. This deduction can be said to be a transfer of federal funds to the jurisdiction which imposes a property tax and allowing them to raise the property tax revenue a lower cost to its constituents.
Profit from home sales
Usually, taxpayers who sell assets must pay capital gains tax on any profit which is made out of the sale. But, homeowners might exclude from the taxable income up to $2, 50,000 of capital gains on the sale of their homes. This is feasible when certain criteria i.e. the homeowners must have maintained their home as a principal residence for two years out of the five preceding years and may not have claimed the capital gain exclusion for the sale of the other home during the previous two years.
Effect of deductions and exclusions
These benefits are more useful for those taxpayers who are in the higher-income tax brackets rather than to those who are in the lower-income tax bracket. The difference in the tax impact results due to three main factors: compared with lower-income homeowners, those with higher incomes face higher marginal tax rates, typically pay more mortgage interest and property tax, and are more likely to itemize deductions on their tax returns.
So, if you are a house owner or are planning to buy a house in the US these tax implications would be of great help to you in understanding the details related to the tax system.
Can the market losses be utilized to adjust tax payment?
Losses incurred in the stock market can be termed as Capital Losses. Capital Losses are said to be incurred when a capital asset such as an investment or a real estate decreases in its value. When this capital asset is sold at a price which is much lower than the actual purchase price of the asset, then the capital loss is realized. There are always fluctuations in the stock market and your investments might give you huge profits or even bring your losses. Losses are always demotivating; however, you can note that capital losses can be used to reduce the income tax bill which you owe to pay to the IRS.
Tax Rules related to Capital losses
Like it is mandatory to report Capital gains as income, similarly, Capital losses can be used as deductions on your tax returns.
Capital losses are mainly of three categories which are listed below.
- Realized Capital Loss – Realized capital loss occurs after you have sold your asset or investment.
- Unrealized Capital Loss – These losses are those capital losses which do not need to be reported.
- Recognizable Loss – Recognizable loss is defined as the amount of loss that can be declared in a given year.
According to the US Tax laws, your realized capital losses can have an impact on your income tax bill. Moreover, realized capital losses can be used for lowering the income tax bill only if the asset you have sold was owned for investment. Also, you need to think wisely and create realized capital loss; for instance, if you sell a coin collection for a price lower than its cost price intending to utilize it as a deduction on income tax bill it would not be acceptable.
Determination of Capital Loss
- For calculation related to income tax purposes,
- Amount of capital loss = Number of shares sold, times the pre-share adjusted cost basis – the total sale price.
- Cost Basis price refers to the fact that it provides the basis from which any capital gains or capital losses are figured, of the stock share, is the total of the purchase price and any fees(such as any commission or brokerage fees).
- There is a need to adjust the cost basis price if there was a stock split during the period you had owned the stock. You will have to adjust the cost basis concerning the magnitude of the stock split.
Deduction of Capital Losses
- Capital losses can be used to offset the capital gains in a taxable year. By this, you would be able in the removal of some portion of your income from your tax return.
- A capital loss can be used by you to offset your ordinary income but up to a limit of $3000 in a year in case of a lack of capital gains by which you would have been able to offset your capital losses.
- If you are willing to deduct your stock market losses, then you would have to fill Form 8949 and Schedule D while filing tax returns.
- Your short term capital losses would be calculated against your short term capital gains by using Part I of Form 8949 to arrive at the net short term capital gain or loss. In case of a lack of capital gains for that year, the net would be a negative number equal to the total of your short-term capital losses.
- Part II of Form 8949 will be used for the calculation of your net long term capital gain or loss. It would be equal to any long term capital losses minus long-term capital gains.
- The next step is the calculation of the total net capital gain or loss by a combination of your short-term capital gain/loss and the long-term capital gain/loss. The resulting figure would be entered into Schedule D Form.
- If your net figure obtained is a negative number (the difference between short term and long term gains/losses) which indicates an overall capital loss then this loss is deductible from any other taxable income with a limit on the amount set by the IRS.
- For taxpayers, filing tax returns as Married and filing jointly the maximum amount deductible from total income is $3000. However, for taxpayers filing tax returns as Single or Married and filing separately the maximum deduction permissible is $1500. Moreover, if the amount of your net capital loss is more than the permissible limit you can carry it forward for the next taxable year.
Hence, you must attempt to take your tax-deductible capital losses in a very tax-efficient manner to have maximum benefit. Choosing a short-term capital loss for tax deduction would be more advantageous than that of a long-term capital loss. In general, you should opt for taking any capital loss in the year in which you are tax-liable for short-term gains or in which you have obtained zero capital gains as this would help in saving on your ordinary income tax rate.