Tax filing season can be stressful, to say the least. With several documents, investments, proofs and bills to take care of, various Forms can make things a bit more overwhelming. Thus, the golden rule of starting early always pays off. When you start early, you have additional time at hands to review your filing and more importantly, fill the Forms as accurately as possible without much stress. IRS Form 1099-INT is one such form that the expects during your tax filing. What is it about? And when and why you should file it, let’s find out.
What is it?
Form 1099-INT by the IRS must be used by taxpayers to declare their earned interest. All investors receive the form by their payers of interest at the end of the year with a breakdown of the interests earned and any other related expenses. $10 is the minimum value, above which a payer must provide the Form to its investors. At the same time, you need not attach all the Forms 1099-INT with your tax returns.
Details of 1099-INT
It is essential that you understand the details of the Form, which will, in turn, help you fill the appropriate information in your tax return.
This box contains any income that you receive which is taxable, such as interest earned on savings accounts.
This box represents any penalties that you have been charged with, due to premature withdrawals.
The contents of this box represent interests earned on bills, bonds or Treasury notes.You need to be a bit careful since some of them are tax-exempt.
This box reports any taxes that were withheld by your payer.
This box contains information about your investments that earn interests with state and local governments. A municipal bond would be a good example of it.
Information Contained in Report
Form 1099-INT contains the following information.
The name and address of any payer.
The name and address of the recipient.
Any foreign taxes paid.
Any form of state taxes withheld.
Any form of federal taxes withheld.
Identification numbers of the payers as well as recipients.
The amount of interest paid (only if it exceeds $10).
Total bond premiums.
Total bond premiums on the tax-exempt ones.
Total amount of interest that is exempt from taxes.
Total amount of interest earned on Treasury bonds, US savings bonds etc.
Reporting Form 1099-INT
The Box 1 income, as mentioned above, must be reported in the taxable income row of your tax return. The interests earned is taxed in the same way as other sources of income. Box 2 mentions about the penalties, for which you can opt for deductions when it comes to the adjusted gross income. One must not forget to report the taxes withheld mentioned in Box 4. You should include the amount in your tax return under Payments.
All the interest that you earn on deposits made to your bank accounts, amounts that were withheld from your federal taxes or foreign taxes, dividends paid by insurance companies, indebtedness etc. must be reported in Form 1099-INT.
Apart from the above, interests earned in the form of real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT) or collateralized debt obligation (CDO) must also be reported in the Form 1099-INT.
Individuals earning more than $1,500 in interests must declare all their payers in Part 1 of Schedule B of Form 1040. Also, you can only include income that you have received and not the ones that you are owed.
Understanding the New 2019 Federal Income Tax Brackets And Rates
The tax filing season for 2018 is just around the corner. However, the IRS has gone one step ahead and published the modifications for the year 2019. The modifications include changes to the Federal Income Tax brackets and enhancement of limits for certain tax credits. The intent of these modifications is to make them inflation proof.
There are some chances that you might get confused, but don’t be. During the tax filing season, you would be primarily focusing on income tax related activities for the year 2018. The current modifications implemented by the IRS will be applicable from the 1st of January. Which means, that you do not immediately have to worry about them. Your first focus should be to complete the tax returns for 2018 in a smooth manner.
Once you are done with filing your taxes for 2018, you can shift your focus to 2019. Since there are some modifications, you might have to make some changes with respect to tax estimations if you are self-employed or to your withholding taxes.
What is the need for changes?
There is a term called indexing in the tax code, which calls for regular modifications to the tax brackets. Every year the IRS adjusts the tax brackets so as to account for inflation. A good example of the same would be, if the inflation for the previous year was 2%, the enhanced tax brackets would be approximately 2%.
If you were to consider numbers, the following example would be a better representation. Take for an example that the taxable income for a bracket starts at $50,000. If the country were to witness inflation of 2% in the previous year, the IRS would adjust the same tax bracket to $51,000. The IRS usually rounds off the numbers. The IRS would usually round off the numbers in increments of $25, $50 or $100 depending on the needs.
The whole intent of these modifications is to get rid of a concept called bracket creep. According to bracket creep, you will end up getting into a higher tax bracket with raises in your pay. Even though the pay would be just enough to beat the inflation, you will end up paying higher taxes. Indexing ensures that you stay in the same tax bracket after accounting for inflation.
Till the year 2017, indexing would use the data from CPI or customer price index to adjust the inflations. However, the recently passed Tax Cuts and Jobs Act of 2017ensures that the C-CPI is considered for the indexing. C-CPI stands for Chained Consumer Price Index.
The indexing is not only applicable to tax brackets but also to other tax numbers such as alternative minimum tax and standard deduction etc.
Updated Tax Bracket
Following is the detailed tax bracket for the year 2019. With the help of indexing, the brackets have approximately gone up by 2%.
10% tax bracket
For someone who is single and earns up to $9,700.
For someone who is married filing jointly or any qualifying widow earning up to $19,400.
For someone who is married filing separately earning up to $9,700.
For someone who is the head of the household and earns up to $13,850.
12% tax bracket
For someone who is single and earns between $9,701 and $39,475.
For someone who is married filing jointly or any qualifying widow earning between $19,401 and $78,950.
For someone who is married filing separately earning between $9,701 and $39,475.
For someone who is the head of the household and earns between $13,851 and $52,850.
22% tax bracket
For someone who is single and earns between $39,476 and $84,200.
For someone who is married filing jointly or any qualifying widow earning between $78,951 and $168,400.
For someone who is married filing separately earning between $39,476 and $84,200.
For someone who is the head of the household and earns between $52,851 and $84,200.
24% tax bracket
For someone who is single and earns between $84,201 and $160,725.
For someone who is married filing jointly or any qualifying widow earning between $168,401 and $321,450.
For someone who is married filing separately earning between $84,201 and $160,725.
For someone who is the head of the household and earns between $84,201 and $160,700.
32% tax bracket
For someone who is single and earns between $160,726 and $204,100.
For someone who is married filing jointly or any qualifying widow earning between $321,451 and $408,200.
For someone who is married filing separately earning between $160,726 and $204,100.
For someone who is the head of the household and earns between $160,701 and $204,100.
35% tax bracket
For someone who is single and earns between $204,101 and $510,300.
For someone who is married filing jointly or any qualifying widow earning between $408,201 and $612,350.
For someone who is married filing separately earning between $204,101 and $306,175.
For someone who is the head of the household and earns between $204,101 and $510,300.
37% tax bracket
For someone who is single and earns above $510,301.
For someone who is married filing jointly or any qualifying widow earning above$612,351.
For someone who is married filing separately earning above $306,176.
For someone who is the head of the household and earns above $510,301.
The taxation for capital gains works differently than income taxes. While there are about 7 tax brackets for income, there are merely 3 tax brackets when it comes to capital gains. And they range between 0 to 20%. People with considerable income from capital gains enjoy these benefits.
Since the capital gains tax is lower income tax, it is favorable for investors. The following is the updated tax brackets for capital gains.
0% tax rate
For someone who is single, and the earning is less than $39,375.
For someone who is married filing jointly, and the earning is less than $78,750.
For someone who is the head of a household and the earning is less than $52,750.
15% tax rate
For someone who is single, and the earning is between $39,376 and $434,550.
For someone who is married filing jointly, and the earning is between $78,751 and $488,850.
For someone who is the head of a household and the earning is less than $52,751 and $461,700.
20% tax rate
For someone who is single, and the earning is above $434,551.
For someone who is married filing jointly, and the earning is above $488,851.
For someone who is the head of a household and the earning is above $461,701.
As per the new tax laws, personal exemptions have been completely eliminated. Until 2017, you could claim up to $4,050 for yourself, spouse or dependent children, it no longer is valid.
The standard deductions have replaced it and they are roughly twice the amount. The following is updated standard deduction.
Status of Filing
Fiscal Year 2018
Fiscal Year 2019
Married filing jointly
Head of the household
Alternative Minimum Tax
The alternative minimum tax or AMT came into existence in the 1960s to levy taxes on individuals who took a lot of tax breaks. In the event that these individuals were to exceed a certain limit, the second set of taxes would be applicable if their income were to be calculated normally.
As per the tax code, there is an income exemption for AMT. Any amount below this would not be applicable. As is the case with all other figures, the AMT is also indexed for inflation. Following are the updated numbers.
For single taxpayers, the exemption amount stands at $71,700 and the phaseout begins at $510,300.
For taxpayers who are married and filing jointly, the exemption amount stands at $111,700 and the phaseout begins at $1,020,600.
Contributions Towards Retirement
For the year 2019, the base contribution levels are being increased by $500. Yet, the catchup contributions for individuals above 50 remains the same. This is how the retirement contributions will look like.
IRA contributions stand at $6,000 versus $5,500 for the previous year. There is also a provision of $1,000 as catch-up if you are older than 50 years.
For employer-sponsored plans, such as 401(k), 403(b), 457 etc. the amount is $19,000 which is an increase over the current $18,500. And you can opt for a $6,000 catchup if you are older than 50 years.
There are certain other modifications as well. Such as the lifetime gift and estate tax exemption will see an increase to $11.4 million from the current $11.18 million. The annual gift exclusion of $15,000 remains as it is.
Even though they might seem small, these modifications ensure that you are not impacted by the inflation. If you are currently occupied with the 2018 tax filing, it is better to return at a later date and revisit the clauses.
Tips for NRI’s to become compliant with FATCA and the IRS
The first step towards becoming compliant to any norm is to be aware of what it is. FATCA or Foreign Account Tax Compliance Act came into existence some years ago to counter tax evasion by taxpayers.
As per the tax code, any individual who is a resident of the USA is a green card holder or a citizen of the USA, must pay taxes. To extend it further, taxpayers need to declare their global income and pay appropriate taxes on the same.
There are quite a few high-profile tax evasions in the past, which forced the IRS to take corrective measures.
Approaches of FATCA
There are two primary approaches that FATCA takes. Firstly, it expects US taxpayers to provide details of their foreign income. If they own any kind of assets outside the USA, they must report them to the IRS. By filing Form 8938, you can provide all the necessary details to the IRS.
The second approach involves foreign financial institutions providing information regarding the assets of individuals. The institutions need to provide information regarding financial accounts, the assets or accounts that individuals hold in different countries.
How to get FATCA Compliance
You must do the following steps to be compliant with FATCA.
A simple declaration that mentions your PAN details.
The country of your birth.
The country of your current residence.
Your current occupation.
Your annual income.
And whether or not you are a politically exposed individual or not.
For individuals who have paid taxes in any part of India, they need to provide a tax identification number.
What should be reported
The following are certain conditions in which an NRI needs to report their earnings as per FATCA to the IRS. Financial institutions also need to report the same to the IRS as well.
If the total value of the income is less than $50,000 at the end of the fiscal year, there is no need to report the same. However, if the amount has exceeded $75,000 at any point in the year, the amount must be reported to the IRS.
The above threshold is for individuals staying in the USA. For the ones who stay outside of the USA, the threshold values are even higher.
The threshold levels differ for single tax filers and married tax filers as well.
This declaration of income includes mutual funds and other financial accounts.
Outcomes of Non-compliance
The consequences of non-compliance of FATCA differs depending on the account types. You might have to face any of the following, depending on the kind of holdings.
The IRS had offered a deadline of 30th April 2017 to present a self-signed certificate. In the event of failure of presenting the same, the accounts would be frozen.
In simple words, the financial institution would forbid the account holder from making any financial transactions.
Mutual Fund Investors
A similar deadline was introduced for mutual fund accounts as well. As is the case with the bank accounts, the mutual fund accounts would also be blocked if they are non-compliant with FATCA. Being blocked doesn’t allow individuals to do any sort of transactions on the accounts.
NPS account holders also need to get the FATCA compliance done. The lack of which will deem their accounts blocked.
You need to download the form and self-sign it and send the same to NSDL-CRA to get the certification done.
The IRS is quite serious when it comes to tax evasion. If your financial accounts aren’t already FATCA compliant, it is high time you get them done
With more and more people shifting to the US for a better future, the above question becomes even more pertinent. Are the interests earned from NRO/NRE/FCNR accounts taxable in the USA?
The simple answer to the question is Yes. The interests that you earn from such accounts is taxable in the USA. However, it is not as simple as it might sound and it as a complete process that you must follow.
The following steps will help you ensure that you are able to determine the income from other sources such as NRO/NRE/FCNR accounts earning interest. And that the income is taxed appropriately so that it doesn’t come to bite you at a later date.
Any income generated from the above means is taxable in the USA if you are a US person. Thus, the first step involves determining whether or not you are a US person. You must meet any of the following conditions for the same.
Are a citizen of the USA.
Are a former legal permanent resident but due to some reasons wasn’t properly expatriated.
Are a legal permanent resident.
Are a national of another country but have cleared the Substantial Presence Test.
In short, if you are a Green Card holder, OCI, PIO or a legal resident of the USA (holding L1B, H1B, H4 EAD or other work visas of the USA)you must pay taxes on the above-mentioned income.
Every year the IRS publishes the year-end treasure rates for various currencies. These can hold as a good starting point to consider the conversion rate. You can use this rate to convert your Indian income from NRO/NRE accounts into the US Dollar.
For example, if you have earned about INR 15,000 as interest from your NRO/NRE account, and consider an exchange rate of 75, the dollar equivalent would be $200. INR 150,000/72 = $200.
You can then use this amount for tax purposes.
Taxes in India
Any interests that you earn on NRE accounts is not taxable in India. This means that banks will not deduct any amount from your earnings directly.
Similarly, any interests that you earn on your FCNR account is not taxable in India.
However, things change a little bit when it comes to NRO accounts. Any interests that you earn on NRO accounts are charged at 30% plus applicable taxes.
Depending on how your bank operates, it can either be deducted from your account directly, or you might have to file at the end of the year.
Taxes in the USA
Once you are a US person, you are expected to file your taxes and returns. In other words, you will have to file Form 1040 using any of the tax filing services or directly with the IRS.
Irrespective of which method you use, it is important that you fill the Schedule B in the Form 1040. Schedule B includes the income generated from your Indian assets or accounts.
In case you have paid taxes in India, you would need to mention that in your tax returns. This is applicable for NRO accounts. As far as NRE and FCNR accounts go, you will have to mention the income from the accounts and that will be added to your annual income in the USA for the fiscal year.
For the year 2016, as many as 21,428,230 filings were there for Schedule B out of which 18,781,052 were electronically filed.
Depending on the tax bracket that you are a part of, you will have to pay appropriate taxes. And for the taxes that you have paid in India, the DTAA will ensure that you do not pay taxes twice.
4 Tax Benefits that you should not miss if YOU ARE PARENT?
Being a parent is not easy and not is it cost-effective. Tax creditRight from the moment of birth, you must endure expenses such as diapers, baby food, toys and other essentials. It is possible that one might get a bit exhausted and hope for a quick break.
Well, the quick break is there for your taking in the form of tax benefits.You can claim your parenting related expenses, which will in turn lower your liable taxes via deductions and tax credits. Here is a list of few tax benefits that you as a Parent should not miss or ignore.
Child Tax Credit
Tax credits essentially lower your taxes dollar for every dollar spent. If you have a few kids, you can use these tax credits to lower your taxes by a considerable margin. However, you can claim the credits for only qualifying children. Here are a few conditions.
You children must be below 18 years of age.
Your children must be a citizen of the USA, or a resident alien or a national.
You must declare your children as dependent on your tax claims.
Your children must be living with you for at least half of a financial year.
You can declare your own children, step children, foster children, half brother or sister, or a dependent such as grandchildren as your dependents.
You can claim the credits for several children, as long as you declare them as dependent and they are not listed as dependenton anyone else’s tax filing.
Adoption Tax Credit
With the help of adoption tax credit, you can easily offset some of the expenses related to adopting a child. Of course, there are few limitations when it comes to income and amount that you can claim per child. Here are a few expenses that you can claim under this clause.
Travel expenses related to court.
Food expenses related to court.
Attorney and court related fees.
In the event that you adopt a child with special needs, you can claim the entire Adoption tax credit. Irrespective of whether or not it surpasses your actual expenses. Since it is non-refundable, you must ensure that it doesn’t exceed your actual tax liability.
Higher Education Credits
Sending your kid for higher education is not cheap these days. Here are two credits that you can avail.
Lifetime Learning Credit (LLC)
American Opportunity Tax Credit (AOTC)
You can use the AOTC for up to four years, whereas the LLC can be carried forward as long as your kid pursues education.
The following expenses qualify for the above credits.
Enrollment related fees
Expenses related to school materials
There are certain clauses in AOTC, which allows you for tax credit even if that results in zero tax liabilities.
Student Loan Deduction
You can avail deductions in your tax filing based on the payments that you have made for student loans. Since it is a deduction, you can reduce your net taxable income and thus lower the taxes.Here are a couple of conditions that are applicable.
A student loan should come from a qualified institution.
The loan should not be from any relative.
There are certain income limits that apply to deductions.
Your child’s enrollment for the degree should be more than half of the duration.
For the fiscal year 2016, as many as 19,273,883 taxpayers had opted for child tax credit. You can be one of them and save your hard earned money.
Form 940 to report your annual Federal Unemployment Tax Act (FUTA) tax. Together with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. 940 forms must be mailed or e-filed to the IRS. For more information talk to our Aotax customer support executive.