What is Recovery Rebate Tax Credit for 2020 all about?The pandemic COVID-19 had created a huge adverse impact on the financial lives of the Americans. Initially, the US Government had issued a huge round of Stimulus Checks or Economic Impact Payments up to $ 1200 for each qualified adult in a household plus $500 for each qualifying dependent. Later on, another round of Stimulus Payments has been issued for the Americans according to which each qualified individual in a household would receive Stimulus Payment of up to $600.The eligibility of Americans to receive these Economic Impact Payments is based mainly on their AGI. The IRS would mainly have a look at the tax returns of the Americans for the year 2018 or 2019 for determining their eligibility to receive the Stimulus Payments.Under the CARES (Coronavirus Aid, Relief and Economic Security) Act, a different type of credit known as “Recovery Rebate Tax Credit” has been authorized. This implies that if an American is eligible to receive the Stimulus Payment or the Economic Impact Payment, but has not received the payment or has received an amount which is less than the total amount in the form of an advance payment for the tax year 2020 then it would be feasible to claim Recovery Rebate Tax Credit on the tax returns of 2020.Who would qualify for a Recovery Rebate Credit?In general, an individual would be eligible to obtain Recovery Rebate Credit if
The individual was a US citizen or a resident alien of the US in the year 2020.
The individual was not claimed as a dependent in the year 2020
The individual has a valid Social Security Number issued for employment before the due date associated with the 2020 tax returns.
The amount of Rebate Recovery Credit to be obtained can be calculated by the IRS in the same method which was used to calculate the Stimulus payment.
Any eligible taxpayer who has not received either one or both of his Stimulus payments would be able to claim the Recovery Rebate Credit while filing their tax returns for 2020 in 2021.
There might be some individuals who would have experienced a life-changing event after the first round of Economic Impact Payment was made such as unemployment or birth of a child etc.
If an individual is single and has an adjusted gross income of less than $75000 and his Stimulus obtained is less than $1200.
If an individual is married and is filing his tax returns jointly with a gross income, not more than $15, 00, 00 and his Stimulus payment is less than $2400 then he can claim Recovery Rebate Credit.
If an American has not received $500 for every qualifying energy then he can claim the Recovery Rebate Credit.
Information required claiming Recovery Rebate CreditIn case, you have not received the full Economic Impact Payment and wish to claim more by the Recovery Rebate Credit on the taxes of 2020 then you would have to inform about the amount of Stimulus payment that was issued in the tax year 2020. A Notice 1444 is being issued by the IRS which reflects the amount that an individual was issued before any offences had happened in 2020. While filing your tax returns, an individual can have this form in front of him and do his taxes.Can a college-going student claim the Recovery Rebate Credit?If an individual is able to meet the basic eligibility criteria and has not been claimed as a dependent on his parents or anyone else’s tax returns of 2020, then he can claim the Recovery Rebate credit if he has not received the Stimulus Payment. If a college student has worked in 2020 and has federal taxes withheld from his pay, then he can get some of his withholding back either as a tax refund, claim the education tax benefits also increase their refund by the help of Recovery rebate credit.Recovery Rebate Credit – Way to claim the additional stimulusIf you have not been able to claim the extra $500 for each qualifying child in your first Stimulus Check or have not been able to claim the additional $600 for each qualifying child in the second Stimulus Check then the additional amount can be claimed by the Recovery Rebate Credit.ConclusionHence, in these challenging times of Coronavirus, the Recovery Rebate Credit would be a helpful means in increasing the amount of tax refund to be obtained by an individual or in decreasing the tax owed by an individual. Recovery Rebate Credit can be claimed on Form 1040 or Form 1040-SR in the year 2020.
Tax Deductions Available for Cancer patientsA life-threatening disease like cancer can lead to a lot of mental unrest along with a lot of financial responsibilities. If you have a health insurance plan, then it would be helpful in providing cover for some amount of the medical expenses incurred. If you are undergoing any cancer related medical treatment then your health insurance would help in providing cover for the bills incurred. But, in the medical treatment related to these life-threatening diseases there would be some additional expenses which have to be paid by you. Also, cancer patients can avail the benefit of tax breaks on their taxes by the help of their out-of-pocket expenses.Eligibility for tax deductions which are cancer-relatedIf you are able to itemize your tax deductions instead of making claim for Standard Deduction, then you can easily deduct those medical expenses which are related to regular care, medication, diagnosis, hospital stays, etc. if the expenses that have been incurred are more than 7.5% of the Adjusted Gross Income (AGI).Medical-related travels can also be claimed as deduction such as the mileage related to driving to the appointment at the rate of 20 cents per mile as well as travel-related to any seminars. Those taxpayers who are self-employed do not need to itemize their tax deductions for deduction of their health insurance premium. Self-employed taxpayers are eligible to deduct their health insurance premium as a deduction to their income.What would be done?Medical expenses that can be deductible are defined according to the IRS code as those costs which are related to the diagnosis, treatment or mitigation of diseases and are mainly for the purpose of affecting any major body part or function. Various treatments related to cancer such as the chemotherapy and radiation surgery are too expensive and the arrangement of your health insurance plans will have a major impact on the coverage of these expenses.There are several categories of cancer and in case of any rare type of cancers such as mesothelioma which would need specialized care; travel is an important part of the treatment procedure. The cost involved in the travel during cancer treatment medical procedures might be tax-deductible.There is a comprehensive list of costs which would qualify for a tax deduction and this list would include health insurance premiums which are not paid in pre-tax dollars. You might pay for the medical care you have received by your credit card, cash or personal checks during the period of the tax year in which the tax deduction was being considered.During the time of tax return filing, itemized tax deductions such as the expenses related to medical bills, mortgage interest, State and Property taxes and charitable contributions will exceed the increased Standard Deduction that has been permissible by the IRS. The permissible Standard Deduction for the US citizens is $12,000 for those who are filing using Single status and is $24,000 for those citizens who are married and are filing their returns jointly.In case of your tax deductions being itemized, the medical costs incurred should be more than 7.5% of your Adjusted Gross Income (AGI) for the year 2019. Also, this figure was different for the tax year 2018 in which someone who has an AGI of $50,000 would deduct the expenses which are out-of-pocket if they are more than $3750.ConclusionHence, in case of any life-threatening diseases such as cancer tax deductions and claiming of credits is feasible but you must be well-aware about the tax rules and regulations.
New to the US – Here’s what you need to know about filing your taxes as an NRI in the USIf you are a US resident or a US citizen i.e. an NRI, PIO or OCI you must have to pay taxes to the US Government on the global income which you have earned. A person would be defined as a US resident only if he is able to meet either of the below-mentioned tests.
Green Card Test
If during any period of a particular calendar year, according to the laws of immigration you were a permanent resident of the United States and this status has not been abandoned by the law then you would be considered to have passed the Green Card Test.
Substantial Presence Test
The Substantial Presence Test states that you should have been present in the United States physically for a period of at least 31 days during a particular year and 183 days during the three year period which would include the current tax year and the 2 years immediately before the current year. If you have a green card, then you would be considered to be a US resident for the purpose of tax irrespective of the place where you are living. In case, you are a Visa holder then there are more complicated rules associated with the Universal Taxing Jurisdiction.If a taxpayer is having income or receiving a salary from India, then that has to be reported by filing Form 1040. Also, the taxpayer would fill up form1116 if he is claiming the tax credit. By the Double Tax Avoidance Agreements (DTAA) NRIs would be eligible to receive credits for the tax that has been paid in India. This would help in providing protection from paying taxes in both nations. FBAR InformationThe FBAR Form can be considered as a reporting form for those US citizens who hold $10,000 or even more in a foreign financial account. Moreover, it is necessary for you to include the instruments like mutual funds, life insurance plans, accounts where you are considered as the signatory authority only. FATCA Reporting – Form 8938Certain taxpayers from the US who are holding some specific foreign financial assets with an aggregate value that exceeds $50,000 must report information about the assets on the Form 8938. This form must be attached to the annual income tax return of the taxpayers. Those US taxpayers who are residing abroad or who file a joint tax return can have the privilege of a higher asset threshold.Foreign Tax CreditsForeign Tax Credit is a non-refundable tax credit for the income tax which has been paid to the foreign Government due to the foreign income tax withholdings. This credit is mainly available for a taxpayer if he has either worked in a foreign nation or has some income from investments into foreign sources. There are some qualifying factors which would help in understanding if a taxpayer would be eligible to obtain a tax credit or not. Foreign Earned Income ExclusionThere is a concept of Foreign Earned Income Exclusion by which those citizens who are working outside can avail the advantage of the reduction in their taxable income. Taxpayers can also get the benefit of excluding their house expenses; however, this can be availed with the limit. There are certain rules as to who would qualify for this tax exclusion.ConclusionSo, now with these important facts related to the taxation associated with the NRIs, it would be easier to have a clear understanding of the tax norms for the NRIs.
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 ThresholdsMost 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.
If you are below the age of 65 years
If you are filing your tax returns with the Single status
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
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 BenefitsIn order to find out if the Social Security Benefits which are receiving are taxable or not, the below-mentioned steps can be implemented.
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.
After that, the amount obtained can be compared to the base amount for determination of your filing status.
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 refundThere 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.
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.
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.
ConclusionHence, 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.
It is quite obvious that there are some common misconceptions among the taxpayers related to various facts related to taxes. Some taxpayers feel paying taxes is not necessary and can be avoided whereas certain tax deductions have been labeled as loopholes. Some taxpayers even follow the bad tax advice from others blindly and land up in troubles.
So, let us understand some of the major myths associated with the taxes in the US and debunk those myths to be better taxpayers.
Myth 1:- Filing of taxes is a voluntary activity.
Even if this can be considered as falsehood, there are a large number of people who believe in this. These people think that due to the Form 1040 instruction book, the tax system is voluntary and people are not legally liable to pay taxes.
Here the term voluntary means that every individual would find out how much tax they owe, but has no relations if the filling of taxes is done on time or not. Unless there is a legal dispute, it is a bad idea to think about such theories to contest with the IRS.
Myth 2:- Illegal activity is not taxable.
Even if performing illegal activities is wrong, it cannot be considered non-taxable. The income obtained from illegal activities is taxable. If the entire scenario is being considered from a tax perspective, then the IRS does not care whether income obtained is by robbing banks or by defrauding investors. When an individual is making money, the Government is entitled to receive its share. The person can be very good at covering the tracks but, if illegal income is made and on top of that tax cheating is done it is sure to be exposed.
Myth 3:- Pets can be claimed as dependents.
A person might love his pets up to any extent, but he cannot claim them as dependents. Pets indeed obtain half of their financial support from the masters; but, they are not humans. If a dependent is being claimed falsely, then it would be counted as a fraud and must be avoided.
Myth 4:- Students do not need to pay taxes.
It can be said that this myth is partially true. If a student is being claimed as a dependent of someone else who has an income less than $12,200, then he would not have to pay taxes. But, the students should file their taxes. If the student would have an employer who would be withholding money due to some purposes then the student can receive a refund.
Myth 5:- Online income is free of taxes.
This type of rumor might have started as those who are doing business online do not fill the Form W-9 and report their income to the IRS. But, the IRS does not consider income earned from online different from that of the income earned offline. Irrespective of the medium, if you are earning more than $400 you will have to declare the income on your tax returns.
Myth 6:- The IRS would file a tax return for you.
IRS can verify your tax returns but waiting for your returns to be filed by the IRS would be quite disappointing. Your tax returns have to be filed by you only and you cannot depend on the IRS for that.
Myth 7:- Home office deductions are equal to instant audit.
There was a time when this myth was almost considered to be the truth. But, with home offices becoming quite prevalent this fact has become a myth now. Claiming a home office would increase the scrutiny but they are quite common and reduce the fear of claiming a legitimate deduction.
Myth 8:- Lack of time to do taxes.
Since we have already covered the fact that taxes are not voluntary lack of time for not filing your taxes does not form a considerable factor anymore. There are several options available for making tax filing easier and lack of time cannot be considered anymore.
Myth 9:- Your tax mistakes are your accountant’s liabilities.
Even if you are hiring an accountant, the mistakes made in tax filing are your responsibilities ultimately. You should not assume that your accountant must have taken care of all details; rather you must double-check the details before the returns are filed.
Myth 10:- I don’t have enough money for being audited.
You might think that if your income is less you will not be audited by the IRS. However, your income has less connection with you being audited. Many other factors play an important role in your audits rather than your income. Even though the probability of being audited is more for those individuals who fall under the income bracket of $100k, still those falling below this bracket can also get audited. You must maintain a detailed record of any income which can be considered as questionable.
So, these myths are the mysteries which many taxpayers in the US believe. However, these myths are far away from reality and taxpayers should avoid getting confused with these myths.
There have been various changes in the tax laws due to the outbreak of the pandemic COVID-19. Due to the adverse impacts of the pandemic, millions of Americans have become unemployed and are facing a huge financial crisis. To alleviate the situation of economic distress which is being faced by the Americans the IRS has introduced various changes into the tax laws for the year 2020.
The major change which was announced by the IRS was the postponement of the due date for filing federal income tax returns and for making the payment of the Federal Income tax. This due date was on 15th April 2020 which was postponed to 15th July 2020. Moreover, there would be no accrual of any interest or no penalties for failure in payment of taxes or failure of tax return filing by 15th April 2020. The interest accrual and penalties will begin after 15th July 2020. This relief has been made available for all types of taxpayers such as individuals, an estate, a trust, a corporation, or any business entity.
Now, since there have been such important tax reforms introduced by the IRS there must be several queries in the minds of the taxpayers. So, let us have a look at some of the major queries of the taxpayers related to the reforms in the tax laws.
What do I need to do to avail of the extension of tax return filing due date from 15th April 2020 to 15th July 2020?
No, you do not have to do anything to avail of the extension of the tax return filing due date to 15th July 2020. You will not have to file any additional forms or contact the IRS to avail of this relief in the tax filing deadlines. If you have to pay any taxes that are due, you can do that by 15th July 2020. After 15th July 2020, if you need a further extension then you would have to file a request for an automatic extension.
Is there a need to be sick, quarantined, or have any impact from COVID-19 to qualify for this relief?
No, you do not have to be sick, quarantined, or impacted by the COVID-19 in any form to avail of this tax relief introduced by the IRS.
How and by when do I need to make the payment for my first and second quarter Estimated Income Taxes 2020?
The due date for the first quarter and second quarter Estimated Income Taxes was on 15th April 2020 and 15th June 2020. However, you can make both the payments by 15th July 2020. You can do this in the form of a single payment with an amount that is adequate for covering both the first and second quarter Estimated Income Taxes 2020.
What would be the due date for the rolling over of the entire or a portion of a qualified plan loan offset into a retirement plan?
If you are filing your Federal tax returns by 15th July 2020, then the due date to roll over a part of a complete qualified plan loan offset into an eligible retirement plan is by 15th October 2020.
I had made an excess contribution to my IRA during the year 2019. Is it feasible to avoid the excise tax if I withdraw the excess amount by 15th July 2020?
Yes, you can avoid excise tax if you withdrew the excess amount contributed by 15th July 2020. But, you must not have taken any deduction for the excess contribution which you have done. Moreover, you can even avoid the excise tax if you withdrew the excess amount not only by 15th July 2020 but also by 15th October 2020.
Are the tax return filing and payment deadline for exempt organizations, businesses, or any other entities which have the due dates for filing on 15th May 2020 or 15th June 2020 have been extended?
All the tax return filings and payments related to the Federal taxes which are from 1st April 2020 till 1st July 2020 have been postponed to 15th July 2020.
I wanted to file a claim for my Tax Refunds for the year 2016. This has to be done by 15th April 2020. Do the tax relief laws allow this claim to be done later?
Yes, with the changes in tax laws you can file your claim for obtaining tax refunds for the year 2016 by 15th July 2020.
What do I need to do in case I have filed for an automatic extension for filing the 2019 tax returns? I owe Federal taxes to the IRS.
You can file your tax returns by 15th October 2020; but, you will have to pay your taxes by 15th July 2020.
Has the IRS postponed the tax return filing deadlines for partnership firms and S-corporations which were due on 16th March 2020?
No, there has been no postponement by the IRS for the tax return filing deadlines for the partnership firms and S-corporations that were due on 16th March 2020. This tax relief is only for filings and payments which are after 15th April 2020 and before 15th July 2020.
Does this relief give me more time to contribute to my IRA, HSA, and Archer MSA?
Yes, you can make contributions to your IRA, HSA, and Archer MSA at any time in a year or by the tax return filing due date.
Hence, these common FAQs on the tax payments related to 2020 will resolve your queries related to the tax return filing and tax payments.