Wondering how to get debt-free this year?

by | Oct 31, 2020 | IRS, Tax Extension, tax filing, Tax Planning, Tax Preparation, Tax Refund, Taxtips

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

Capital Gains tax on selling your property in 2020.

by | Oct 26, 2020 | capital gains, income tax, IRS, tax filing, tax savings, taxes

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.

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

by | Oct 24, 2020 | capital losses, tax filing, Tax Planning, Tax Preparation, Tax Refund, Taxtips

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.

Is your income tax refund guaranteed?

by | Oct 21, 2020 | income tax, IRS Tax Refunds, tax filing, Tax Refund

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.

Health coverage and tax exemptions.

by | Oct 18, 2020 | tax deductions, Tax exemption, tax filing

Health coverage and tax exemptions.

 According to the individual shared responsibility provision of the Affordable Care Act, you and the members of your family must have the qualifying health coverage. In case there is no coverage available for each month, you would have to make a payment called an Individual shared responsibility payment at the time of filing the Federal Income Tax return.

However, there are some taxpayers who qualify for an exemption from the requirement of making the above-mentioned payment. The major causes for this exemption can be:-

  • Those taxpayers might not be having access to the health coverage which is affordable,
  • Those taxpayers might have had a coverage gap which is less than three calendar months or
  • Those taxpayers have low income and expansion of Medicaid was not done by their respective states.

Moreover, there can be some taxpayers who would have health coverage or would qualify for the exemptions for some months and would owe payments for other months.

The Interactive Tax Assistance Tool of the IRS helps in the determination of your eligibility for a coverage exemption or your responsibility for making the payment of individual shared responsibility. The exemption might have been obtained anywhere; it must be reported by you on Form 8965, Health Coverage Exemptions while filing your Income Tax Returns.

Health Coverage Exemptions

The list of some of the available major health coverage exemptions is mentioned below.

  • Unaffordable coverage –

    The available health coverage you have would be considered unaffordable. Your coverage would be considered as unaffordable when the lowest amount which you must have paid for the employer-sponsored coverage or for the coverage that has been obtained by the Marketplace is much more than a particular percentage of the household income you have for the year.

  • General hardship –

    This means that you had experienced certain circumstances which prevented you from availing the health coverage under a qualified health policy. These circumstances can be eviction, homelessness, domestic violence, foreclosure, unpaid medical bills, etc. 

  • Short coverage gap –

    This would mean that you were without any coverage for almost three consecutive months during a year. 

  • Income below the return filing threshold –

    This exemption means that your gross income lies below the minimum threshold needed to file a tax return. 

  • Certain noncitizens –

    This exemption is for those who are not US citizens and are not present in the country as per the laws. You can qualify for this exemption even if you are having a Social Security number (SSN). 

  • A resident of a state which did not expand Medicaid –

    The income of your household is below 138 percent of the federal poverty line for your family’s size. Moreover, during any time of the year, you resided in a state which did not participate in the Medicaid expansion.

  •  Members of the Indian tribe –

    This health coverage exemption is available for you when you are a member of a Federally-recognized tribe of India or were eligible for services from an eligible Indian health care service provider.

How to report the coverage exemptions which have been obtained from the Marketplace?

If you are obtained health coverage exemption from the Marketplace, then you would receive an Exemption Certificate Number (ECN). You can report this exemption by entering the ECN in Part I of your Form 8965, Health Coverage Exemptions in Column C. In case, your application for health coverage exemption has not been processed until your time of filing tax returns you must complete Part I of your Form 8965, and your Colum C must have the entry as “Pending”.

 Procedure to obtain coverage exemption.

  • Some of the health coverage exemptions can be easily obtained by applying in the Marketplace. However, there are some which can be obtained by filing a tax return.
  • In case, you have an income which is below the minimum limit for filing a tax return you would avail exemption from making individual shared responsibility provision. You are not even required to file the federal income tax return for claiming the exception. But, if you are filing a tax return then you must claim a health coverage exemption with your return.
  • You can claim health coverage exemptions on Form 8965, Health Coverage Exemptions, and attach this to Form 1040, Form 1040A, or even Form 1040EZ.

 The process to claim coverage exemptions with the IRS

  • In case, your household income is below your tax filing threshold and you are filing a tax return then you must use Part II of Form 8965, Health Coverage Exemptions.
  • The other exemptions are usually claimed on Part III of Form 8965.
  • You must file only one Form 8965 along with your Forms 1040, 1040A, or 1040EZ for reporting all the health coverage exemptions for yourself, your spouse as well as your dependents.

 Conclusion.

So, these basic details on health coverage and tax exemptions would help you in understand the process better.

COVID-19 tax relief to the small business owners

by | Oct 12, 2020 | COVID - 19, income tax, tax filing, tax form, Tax Payers

COVID-19 tax relief to the small business owners

The pandemic COVID-19 has affected the economic condition across the entire United States. Business owners all over the country are struggling to survive and lower the impact of the pandemic on their business. Meanwhile, the US Government has introduced various forms by which tax relief can be obtained by the small business owners in the year 2020. Most of these changes belong to the FFCRA (Families First Coronavirus Response Act) and the CARES (Coronavirus Aid, Relief and Economic Security Act). These changes in tax regulations would be helpful for the business owners and the employees to survive the crisis caused by the pandemic.

  Employee Retention Credit

 The Employee Retention Credit is a part of the CARES Act which is mainly designed to keep the employees on the payroll during the times of pandemic.

  • The refundable tax credit which is available is 50% of up to $10,000 in the wages that have been paid to the employees by a business owner whose business has been impacted by the COVID-19.
  • This credit is available to all the employers irrespective of the size of the business and it also includes tax-exempt organic
  • There are only two exceptions i.e. State and Local Government and their instrumentalities and those small businesses which take small business loans such as the PPP loans. 

The qualifying employers for obtaining the Employee Retention Credit must fall into either of the two below-mentioned categories: – 

  1. The employer whose business has been suspended completely or partially by the Government because of the coronavirus pandemic during this quarter.
  2. The gross receipts by the employer are below 50% of a similar timeframe in the year 2019. If the employer’s gross receipts are more than 80% of a similar timeframe in 2019, then they are not eligible for the credit after the quarter-end.

 Paid Sick Leave Credit and Family Leave Credit

 Paid Sick Leave Credit is designed in such a way by which the business would be eligible to obtain credit for an employee who has not been able to work because of having symptoms of coronavirus and is being quarantined or self-quarantined.

  • Employees are entitled to the paid sick leave for up to 10 days at the regular rate of pay up to $511 in a day and $5110 in total.
  • Employers are also eligible to receive credit for payment of those employees who are not able to come for work due to caring for a family member who has been affected by COVID-19 or for taking care of a child whose school/daycare is closed due to COVID-19.
  • These employees would receive paid sick leave for up to two weeks at the two-third rate of the employee’s regular payment or up to $200 in a day and $2000 in total.
  • Moreover, employees can also avail paid family and medical leaves which would be equal to two-thirds of their normal pay ranging up to $200 in a day and $10,000 in total.
  • Also, qualifying leave of 10 weeks would be counted towards the family leave credit.
  • Eligible employers or business owners can immediately receive this credit for sick leave and family leave along with the expenses for a health plan and the employer’s portion of Medicare tax on the employee’s leave.
  • The employers eligible for receiving these credits will report their qualified wages and the associated cost of health insurance for each quarter on their employment tax returns for each quarter or by filing Form 941 which begins with the second quarter.
  • In case, the employment tax details of the employers are not enough for covering the credit then the business owner can submit Form 7200 and receive the advance payment from the IRS.

 Deferred Payment of Payroll Taxes

 By the CARES Act, employers are allowed to defer the payment they do for their employee’s portion of the Social Security Taxes. These taxes would have been due in between 27th March 2020 and 31st December 2020. The employers can make these payments in the form of instalmentse. half by the end of 2021 and the other half by the end of 2022.

  • There is no necessity of special election for the businesses for the deferment of their deposits and payments. The IRS is working on the process of revision of Form 941 for reflection of these changes.
  • This option can be availed by most of the employers; however, those employers who have received the PPP loan would be able to defer the payments until receiving notice that their PPP loan has been forgiven.

 Conclusion

 So, these credits and tax rules will help the small business owners to save their business and also lower the impact of COVID-19.