Tax implication for home-buyers in the US

Tax implication for home-buyers 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

 

  1. 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.
  2. 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.
  3. Homeowners are allowed to deduct mortgage interest, property tax payments, and other expenses from their federal income tax if they are itemizing their deductions.
  4. 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.
  5. Furthermore, homeowners can also exclude up to a certain limit the capital gain which they realize from the sale of their home.
  6. 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.

Imputed Rent

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.

Conclusion

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.

Tax Implications on the decrease of interest rates by the IRS in the 3rd quarter

Tax Implications on the decrease of interest rates by the IRS in the 3rd quarter

Tax Implications on the decrease of interest rates by the IRS in the 3rd quarter

The pandemic COVID-19 has brought huge havoc in the lives of the Americans. Millions of Americans have been affected by this dreadful disease and are struggling between life and death. Businesses across the country have been shut down some temporarily and many permanently. The rate of unemployment in the country is soaring high and it is a state of economic fallout for the Americans.Tax Implications on the decrease of interest rates by the IRS in the 3rd quarter

In such adverse circumstances, the US Government has taken up various initiatives by which the economic lives of the Americans can be improved up to a certain extent. The deadline for Federal Income tax return filing and payment due for 15th April 2020 had been postponed till 15th July 2020. The Federal Government had also made Stimulus Checks available for the Americans under the CARES Act. Many other unemployment benefits, paid leave benefits and much more have been made available for the Americans to alleviate the burden they are facing due to the impact of COVID-19.

One such initiative by the IRS to bring some relief to the taxpayers during these stressful times is the lowering of the tax interest rates for the third quarter of the year 2020.

Decrease in the tax interest rates for the 3rd quarter

On 4th June 2020, the IRS announced that the interest rates for the 3rd quarter 2020 will be decreased effective since 1st July 2020. 

The new rates after the reduction would be as follows.

  1. 3 percent for overpayments
  2. 2 percent in case of any corporation
  3. One-half or 0.5 percent for the portion of a corporate overpayment which exceeds 10,000
  4. 3 percent for any underpayments
  5. 5 percent for large corporate underpayments

According to the Internal Revenue Code, the rate of interest can be determined quarterly. For taxpayers who are other than the corporations, the rate of overpayment and underpayment is equivalent to the federal short term rate plus 3 percentage points.

Interest rates on the Overpayment and Underpayment of taxes

Section 6621 of the Internal Revenue Code helps in the establishment of the interest rates on the overpayment and the underpayment of tax.  According to the Section 6621(a) (b), the overpayment rate can be calculated as the sum of the federal short-term rate plus 3 percentage point (with an exception of 2 percentage points in case of a corporation), except for the rate for that portion of a corporate overpayment of tax that exceeds $10,000 for a taxable period is the sum of the federal short-term rate added to 0.5 of a percentage point. 

According to Section 6621(a) (2), the underpayment rate can be said to be the sum of the federal short-term rate plus 3 percentage points. 

Section 6621(c) states that for the purposes of interest payable under Section 6601 on a large corporate underpayment, the underpayment rate under Section 6621(a)(2) can be determined by the substitution of 5 percentage points for 3 percentage points.

Furthermore, Section 6621(b) (1) states that the Secretary would be determining the federal short-term rate for the first month in each quarter. Section 6621(b) (2) (A) states that the federal short-term rate determined for any month under Section 6621(b) (1) is applicable for the first quarter starting after that month.  As per Section 6621(b)(3), the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary with accordance to Section 1274(d) which is rounded to the nearest full percent.

The Federal short-term rate which is rounded to the nearest full percent based upon the daily compounding determined in April 2020 is 0 percent. Thus, accordingly, an overpayment rate of 3 percent and an underpayment rate of 2 percent are established for the quarter beginning 1st July 2020.  The rate of overpayment for the portion of a corporate overpayment which exceeds $10,000 for the quarter beginning 1st July 2020 is 0.5 percent. The rate of underpayment for large corporate underpayments for the quarter beginning 1st July 2020 is 5 percent. These rates would be applicable to the amounts bearing interest during that particular quarter.

Sections 6654(a)(1) and 6655(a)(1) state that the underpayment rate which has been established under section 6621 is applicable in the determination of the addition to tax under sections 6654 and 6655 for failure by a taxpayer in payment of the estimated tax for any taxable year. So, the 3 percent rate is also applicable to estimated tax underpayments for the third quarter which begins on 1st July 2020. Moreover, according to section 6603(d) (4), the rate of interest on the Section 6603 deposits is considered to be 0 percent for the third calendar quarter in 2020.

How business entities would obtain benefits from the suspension of tax compliance programs by the IRS?

How business entities would obtain benefits from the suspension of tax compliance programs by the IRS?

How business entities would obtain benefits from

the suspension of tax compliance programs by the IRS?

Tax Compliance programs by the IRS has been taking a series of steps related to tax legislation as an effort to alleviate the stress common people are facing due to the outbreak of COVID-19. The rapidly spreading COVID-19 has led to the reduction in sales, slowdown of businesses, people being laid off from their jobs and huge economic adversities. In such a chaotic situation, the IRS’s initiatives on the suspension of tax compliance would act as a boon for the taxpayers, especially for the business entities. 

How business entities would obtain benefits from the suspension of tax compliance programs by the IRS.One such major initiative taken by the IRS is the implementation of the “People First Initiative” which would help in providing relaxation to those business entities who are facing uncertainties related to their taxes.

People First Initiative

The People First Initiative includes the postponement of certain payments that are associated with the installment agreements and offers in compromise.According to IRS, these measures included under the People First Initiative would start from 1st April 2020 onwards and would continue up to July 2020.The major changes which have been included in the People First Initiative are the postponement of the payments which are related to the Installment Agreements, the Offers in compromise, Audits, and other enforcement activities.

Installment Agreements

  • The IRS has announced that it has suspended the existing installment agreements that were due in between 1st April and 15th July 2020. Those taxpayers who are not able to comply with the terms of the installment agreement can suspend their payments due during this period. The IRS would also not consider any installment agreement of this period as a defaulter. However, the interest would be accruing on the unpaid balances. 
  • Also, the IRS has made provisions by which taxpayers either individuals or business entities who would not be able to make payment for their federal taxes can take the help of the monthly payment agreement by the IRS.

 

Offers in Compromise (OIC)

  1. The taxpayers who have pending OIC can provide additional information for support till 15th July 2020. Without the consent from taxpayers, IRS would not be closing any OIC which is pending before 15th July 2020.
  2. Taxpayers who have accepted OICs can suspend their payments until 15th July 2020. However, interest would be levied on the accrued balances which are unpaid.

 

3.Those taxpayers who are delinquent in the filing of their tax return for the year 2018, the IRS would not issue an OIC as a defaulter for them.

 4.Any delinquent returns of the tax year 2018 must be filed by the taxpayers either before or on 15th July 2020.

Automated Liens

and

Levies

According to the regulations of the IRS, no new automatic liens and levies would be carried out till 15th July 2020.

 

Activities related

to field collection

  • All activities related to liens, levies and any seizures associated with a personal residence that are initiated by the field revenue officers will be suspended till 15th July 2020. 
  • The field revenue officers will, however, continue to perform seizures and similar activities for high-income non-filers whenever needed.

 

Passport Certifications to the State Government and Private Debt Collection

  1. For the seriously delinquent taxpayers, the IRS would provide Passport certifications to the State Government. This procedure has been suspended currently till 15th July 2020.
  2. Moreover, new delinquent accounts will also not be forwarded by the IRS to the other private collection agencies for working on them until 15th July 2020.

Field, Office and other correspondence audits

  1. Any in-person field, office or correspondence audits will not be carried on till 15th July 2020. There can be audits or examinations remotely by the examiners of the IRS. Taxpayers should also co-operate with the IRS and provide all information that is requested for faster tax processing. 
  2. There might be some situations in which the taxpayers might be interested in the examination or audit. If the audit or examination is beneficial for the parties and the required IRS personnel are available then the audits/examination can start.

 

 

Refund claims

The IRS would continue to work on the processing of the refund claims without making any in-person contact.

Earned Income Tax Credit and

Wage Verification Reviews

  • The taxpayers have time till 15th July 2020 for responding to the IRS that whether they qualify for the EITC or their income has to be verified. 
  • Through 15th July 2020, taxpayers will not be denied these credits if they have a failure in providing the requested information.

 

Independent Office of appeals

The Office of appeals would be continuing to work on their cases. There might be a conference which would be held by telephone or through videoconferencing. For all the cases of the Independent Office of appeals, the taxpayers should promptly respond to any request made for information.

Statute of limitations

There would no disruption in the protection of the statute limitations by the IRS. The taxpayers are encouraged to co-operate with the IRS in extending those statutes whose expirations may be jeopardized. Otherwise, notes of deficiency would be issued by the IRS to protect the interests of the Government in the preservation of these statutes.

Conclusion

Hence, with these several changes being implemented by the IRS in the tax regulation the plight of the individual taxpayers and business entities would reduce by a considerable amount. With these tax relaxations and suspensions, business entities are sure to cope up with the losses that have been incurred due to the outbreak of COVID-19.  

References

https://tax.thomsonreuters.com/news/irs-suspends-certain-compliance-programs-due-to-covid-19/

https://www.forbes.com/sites/kellyphillipserb/2020/03/25/irs-will-ease-tax-payment-guidelines–limit-collections-activities-during-covid-19-crisis/#5a8cdb9c4dca

https://www.forbes.com/sites/robertwood/2020/03/25/irs-eases-installments-due-slows-audits-sweeping-relief-puts-people-first/#2eb525c93855

https://www.accountingtoday.com/news/irs-suspends-key-tax-compliance-and-enforcement-programs-to-adjust-covid-19-effort

  

 

Buying a property in India? Here’s all you need to know about taxation norms

Buying a property in India? Here’s all you need to know about taxation norms

Buying a property in India? Here’s all you need to know about taxation norms

Whether you have bought a property in India or are planning to buy one, here all you need to know about taxation norms, it is quintessential that you are aware of the tax implications. This will help you plan your taxes and make the most of the available tax breaks. And most importantly, it will keep you away from surprises which might burn a hole in your pockets.

Property Taxes in India

In simple terms, any taxes that you must pay for your property would be tagged as property taxes. Primarily there are two types of property taxes in India,

  • Maintenance Taxes
  • Sales Taxes

Buying Property in India

Before you can proceed with buying a property in India, you must be aware of the eligibility criteria. There are no restrictions when it comes to buying a property for resident Indians. Indian nationals or people with Indian origin can buy property in India even if they live abroad. However, you cannot buy a property if you have moved to Iran, Nepal, Bangladesh, Bhutan, Afghanistan, Pakistan or Sri Lanka.

If you are neither a resident of India nor Indian, you cannot buy a property in the country. To be a legal resident, you must have spent at least 183 days in a financial year.

Who Must Pay Property Taxes?

A buyer of the property would end up paying most of the taxes in the form of sales tax. And if you are selling a property, you would be entitled to pay any capital gains taxes. And the owner of a property is responsible for paying out any maintenance taxes applicable.

Types Of Property Taxes

Here are the different types of property taxes that one must bear during ownership.

  1. Sales Tax

The sales tax comes into the picture while both buying or selling a property. And the tax collected is used for the following purposes.

  • Registration charges
    • The buyer of the property must pay the registration charges in front of a registration officer. The registration charges are set by the respective states and are usually at 1%.
  • TDS
    • TDS or Tax Deducted at Source comes into the picture when the property transactions qualify to be ofhigher value. The TDS must be paid by the buyer of the property and is applicable for transactions that exceed INR 50 lakhs. The buyer must deduct the TDS from the total transaction value and submit the same to the income tax department.
  • Service Tax for properties that are under construction
    • For properties that are under construction, you might have to pay service taxes. The central government is responsible for these taxes and not the local authorities. The charges are usually 3.75% to 4.5% of the total property value.
  • Capital gains tax
    • If you sell a property and make profits in the transaction, you are liable to pay capital gains tax on the same. Properties held for 2 years, long term capital gains are applicable and the properties which are held for a lesser duration, qualify for short term capital gains tax. Currently, the short term capital gains tax is at 15% and long term capital gains tax is at 20%.
  • Stamp duty
    • The Stamp duty charges are paid to the state government and depend on a variety of factors such as the location of the property, the property, its age, etc. The stamp duty charges vary depending on the state and can range between 35 to 10%.

Being aware of the above property tax types will help you plan your taxes and take appropriate actions so that you are not caught off guard.

Reference:

https://transferwise.com/au/blog/property-tax-in-india

https://www.nkrealtors.com/blog/save-taxes-on-the-sale-of-property-in-india/

https://economictimes.indiatimes.com/nris/tax-implications-for-nris-on-purchasing-property-in-india/articleshow/42085833.cms