Of course, being your boss comes with its own set of perks and perils: you can wear your pajamas to your home office or take a day off anytime you like. However, these advantages look bleak when you sit down to file your taxes, don’t they?
Moreover, tax filing as self-employed gets complicated if you are a self-employed non-resident Indian (NRI) in the US. So, we’ve put together a guide to help NRIs claim their tax breaks and reap the benefits.
What are the Tax Implications for Self-Employed NRIs in the US?
There are over 3.1 million NRIs in the United States, and most of them are self-employed. The Tax Cuts and Jobs Act (TCJA) of 2017 provides a 20% tax deduction on qualified business income (QBI).
NRIs and US residents can claim this deduction on their QBI. Thus, any income you earned while in the US is eligible for this deduction which expires in December 2025. In addition, there are 28 other deductions you can claim during tax filing as self-employed. Below we list out 14 such deductions:
14 Deductions and Benefits of Tax Filing as Self-Employed Individuals in the US
Freelancers and small business owners often worry about paying a significant chunk of their earnings to the IRS as taxes. However, they can avail of 28 other deductions and reduce their tax burden while filing as self-employed.
In addition, they can reinvest the saved money to grow their businesses.
Let’s take a look at some of these deductions:
1) Self-employment tax deduction
Self-employed individuals must pay 15.3% of their income as self-employment tax. The 12.4% goes to social security and 2.9% to Medicare.
This tax is paid by employees and employers jointly. However, you have to pay the entire amount as a self-employed individual. The good news is that you can deduct half of it from your taxes while filing as self-employed.
2) Home office deduction
If you work from home, you can claim a tax deduction for it. However, there are two formulas for calculating the amount: standard and simplified. For the standard option, you must keep track of all expenses such as electricity bills, repairs, and so on.
There is a pre-determined IRS rate for the simplified formula that changes each year. The current rate is $5 per square foot, and your home office should be no more than 300 square feet.
The best way is to calculate which formula provides the most benefit for you and apply it accordingly. For example, you can debit mortgage interest and depreciation if you own the home.
3) Deduction for internet and phone bills
Nowadays, almost all businesses are online and have a website. In this tax benefit, you can claim the costs of running the website, including internet connectivity.
Moreover, if you work from home and have a single phone line, you can deduct 100% of long-distance business phone calls. Nevertheless, if you have a second line for work only, you can claim back the entire phone bill from your taxes.
4) Health insurance premium
If your spouse’s healthcare plan does not cover you, deduct your healthcare premiums from your tax bills. However, if your plan covers your spouse, dependents, and children under the age of 27, you will gain extra benefits.
5) Meal deduction
The burger you ordered for work lunch is not tax-deductible. However, meals ordered during business travel or to entertain a client falls into this category.
The cost of entertainment, on the other hand, is not covered. Only food and beverages purchased from a restaurant qualify for this deduction. Currently, a full deduction is allowed, but it will expire after December 20, 2022.
6) Travel deduction
This deduction is available for business trips to meet new clients or learn new skills. While it covers the entire cost of transportation, only 50% of meals are covered. Moreover, the travel should be away from one’s work city and purely for business reasons.
7) Vehicle use deduction
If you are a baker, you can deduct the cost of driving your car to deliver your sweet treats. Instead, you can opt for the standard rate of 58.5 cents per mile.
Alternatively, you can opt for actual expenses that require you to record the times you drove your car for work. You can also claim tax incentives on vehicle repairs, insurance, and depreciation. Choose the formula which gives you the most benefit.
8) Interest deduction
The interest you pay on your business loan may be credited back to you through tax refunds. Nevertheless, you should use it for business purposes. For example, if you use the money for a quick trip to Hawaii, you will not receive tax benefits.
9) Education deduction
Being a student for life not only keeps you young but also generates tax benefits. As a result, taking courses to improve your current business skills will earn you a tax deduction. However, if you are a travel agent, a drawing course on Craftsy is not tax refundable.
10) Deduction for business insurance
Insurance is taken to protect your business, office space, and equipment, such as fire insurance, car insurance, and credit insurance, which is also tax-deductible.
11) Rent deduction
Renting office space, office equipment, or canceling a business lease is tax-deductible. However, you cannot deduct the rent if you own the space.
12) Deduction for startup costs
Startups can claim a maximum of $5000 for a business. In addition, startups can deduct their market research costs, travel expenses, attorney and accountant fees, and advertising costs in this segment. If their startup is an LLC or corporation, they can deduct an additional $5000 in organizational costs.
13) Advertisement deduction
Money spent on Facebook and Google ads, as well as on billboards, are tax-deductible.
14) Deduction for retirement plan contributions
This deduction is an investment in your future security. When you purchase a Simplified Employee Pension plan, the premium is tax-deductible.
These and other deductions are detailed in Schedule C of Form 1040, downloadable from the IRS website. Take advantage of it now and reap the rewards later. First, however, keep all records, receipts, and documents for the mentioned expenses if you are filing as self-employed. If the IRS conducts an audit, these will be used to support your claims.If you are a self-employed NRI in the United States and are unsure how to file your taxes, contact AOTAX. With over 15 years of experience in US taxation laws, we have helped over 2 million tax compliant. Our tax experts will assist you in tax filing as self-employed.
To file a yearly tax return is unavoidable for millions of people in the United States. However, the IRS granted everyone until July to file their tax returns last year because of the COVID-19 pandemic. Since no such extension has been offered this year, you will have until April 15 to submit your forms.
However, just because you have the option of filing later does not mean you should. To file early this year, you must do it in February. In February, the IRS will accept returns for the 2021 tax year.
Early filing can result in a more accurate return, more time to pay a tax payment, and a lower risk of identity theft related to taxes. In addition, there is no reason to wait for individuals with simple tax returns.
This article will see why claiming tax returns early on is beneficial and how can AOTAX help Indians working in the US.
Why File Taxes Early?
Although many taxpayers file their tax returns on or before April 15 each year, there is no need to put it off until the last minute. Indeed, submitting your tax return early can make sense for several reasons, including obtaining your refund faster and reducing your risk of identity theft.
Even if you don’t file early, there are compelling reasons to start your tax planning as soon as possible. For example, it offers you the time you need to gather the documents and information you’ll need to claim all of your deductions—avoiding the stress of rushing for receipts at the last minute.
The Benefits of Filing Taxes Early
There are several advantages to filing tax returns early instead of waiting until Tax Day:
1. File early for a faster refund
You may prevent procrastination, get peace of mind, and cross this critical item off your new year’s to-do list by filing early. So, why not submit yours once the IRS announces that it will begin processing returns?
The IRS issued refunds to 129.8 million filers for the 2020 filing season, averaging $2,815 per refund.There’s no reason to let the government keep your money for any longer than necessary if you have money flowing to you. In addition, because the IRS will not be as busy early in the tax season as it would be in April, filing sooner means a faster refund.
Some people rely on their tax refunds to cover significant expenses. If you file early, you’ll get the money sooner and avoid having to take out an expensive short-term loan to meet those charges, which is especially important if you’re still paying off your holiday obligations.
2. File early to avoid identity theft
The sooner you file, the less time a fraudster has to file in your name and steal your money. This can cause havoc, especially if the fraudster claims bogus deductions, fails to declare income, or otherwise taints a tax return filed in your name.
It might take months to clean up a mess like this. Unfortunately, you may not realize you’ve been a victim of identity theft until the IRS alerts you to a potential problem with your tax return. The IRS warns that you should be on the lookout for tax-related identity theft if:
According to IRS records, you have to pay money for an employer you did not work for.
Due to a duplicate Social Security number, you cannot e-file your tax return.
When you haven’t taken any action, you receive an IRS notice that your current online account has been accessed or disabled.
You get a notice from the IRS that an online account in your name has been created (and you did not make it.
You receive a letter from the Internal Revenue Service (IRS) inquiring about an unfiled tax return that appears suspicious.
You get a tax transcript in the mail even though you didn’t ask for it.
You receive notification from the IRS that you owe extra tax or that your refund has been offset, or that measures have been taken against you for a year in which you did not file a tax return.
Filing early allows you to fully comprehend any changes in tax legislation and deal with life situations that may affect your filing status. Last-minute mistakes can result in audits, resulting in penalties and interest. This premise is more essential than ever, given the Tax Cuts and Jobs Act (TCJA).
Your certified public accountant (CPA) or other tax preparers will be less busy than in April in January and February. Early access implies your CPA will have more time to properly analyze your case and assist you with your tax return.
You will need information from your most recent tax return, whether you’re purchasing a house or going back to school (and applying for financial aid). You will have the most up-to-date information if you prepare your taxes early.
4. Avoiding amended returns
You’ll have more time to file a correct return if you start early. An incorrect return will most certainly be rectified. Audits are more likely to occur when returns are amended.
Here are some things to keep in mind as you strive for precision:
Official documents contain errors. W-2s, 1099s, interest statements, and anything else used to substantiate a deduction should all be checked. In addition, mistakes are made by businesses, banks, and financial organizations. Before you file, ensure you correct any such errors.
Early filing may result in the loss of essential documents, such as a 1099 or K-1 that arrives late. Therefore, double-check that you have all the necessary documents before clicking “submit” or dropping your return in the mail.
Amendments that are not complete. If you have to change your return, don’t just fix the parts that benefit you. Anything incorrect should be corrected.
Changes to tax forms. Form 1040 has changed due to the Tax Cut and Jobs Act (TCJA) of 2017. If you previously filed Forms 1040-EZ or 1040-A, you will no longer be able to do so. If you’re above the age of 65, you can now use the new 1040-SR “U.S. Tax Return for Seniors”.
Legislation enacted before April 15 may not be implemented into paper tax forms or outdated tax software. So keep an eye on the news. Also, keep an eye out for any alterations that may have gone unnoticed. You can file an updated return if necessary.
5. Time to save
If you owe the IRS money, filing early provides you more time to save. However, even if you owe the IRS money, there may be a compelling reason to file your tax return right away.
You don’t have to pay any taxes you owe until the filing deadline if you file your return in the middle of January. However, if you prepare your Form 1040 ahead of time, you will have more time to coordinate your payment.
In addition, those that need to calculate out how much they will owe the IRS will benefit from the extra time.
Waiting to find out you owe more than you anticipated could put a strain on your finances. So, to avoid an unexpected tax bill, the IRS recommends monitoring your withholding and tax payments in the fourth quarter of the year.
6. Avoiding a tax extension
If you file your tax return early, you may not need to file an extension. Rather than being a financial need, time extensions are frequently required owing to disorganization.
Some people who wait until the last minute to file their taxes simply need more time to hunt for more deductions or gather receipts.
If you rush the process too close to the deadline, you’ll almost certainly need the assistance of a tax professional to help you organize your finances and file your return.
Even worse, if you file an extension but don’t pay what you owe if there is a balance owing, the IRS will charge you interest and penalties on the unpaid tax bill until it is paid in full.
What Happens If You File Your Taxes Late?
Most people have until April 15 to file their federal income tax returns and pay any taxes they owe. However, the IRS is authorized by law to impose penalties on taxpayers who fail to file a tax return or pay taxes owed by the due date. In the absence of reasonable cause, a failure to file a penalty is assessed on returns filed after the deadline or extended deadline.
What are the consequences of filing taxes late?
Is a penalty imposed by the Internal Revenue Service for not filing taxes on time? Yes, there is:
For each month or part of a month that your return is late, the combined penalty is 5% (4.5% late filing and 0.5% late payment), up to a maximum of 25%.
The late filing penalty is imposed on taxes that are not paid by the due date. Therefore, the total tax displayed on your return fewer amounts paid through withholding, estimated tax payments, and allowable refundable credits equals unpaid tax.
If you still haven’t paid after five months, the failure to file a penalty will be increased to 25%; however, the failure to pay fine will remain in effect until the tax is paid.
Failure to file and pay results in a total penalty of 47.5% of the tax (22.5% late filing and 25% late payment).
If your return is more than 60-days late, the minimum penalty is the lesser of $435 or 100% of the tax that must be declared on the return.
The Bottom Line
Many people wait until the last possible moment to file their federal income tax returns every year. Despite this tendency, there are several reasons to file your taxes as soon as feasible.
You should file your return as quickly as possible if you are eligible for a refund. There are additional benefits to filing early for individuals who owe a balance.
Are you looking at filing your taxes early? Then, AOTAX can relieve you of this burden by filing your Tax Returns for you.
We are Registered Tax Agents with vast hands-on expertise, and we take great pride in assisting our clients in achieving their objectives. Thanks to a team of highly skilled and experienced Tax Accountants, we do everything we can to reduce your tax liability while making the overall taxation process as efficient, simple, and cost-effective as possible.
The person you refer and who pays taxes through our services is also eligible for this referral bonus. This bonus amount can be used to deliver their tax services or exchanged for an Amazon gift card.Contact us if you are an IT professional working in the USA and looking at filing tax in the USA.
With the golden ticket of H1B visa comes the clear path toward the American Dream. And of course, with the American Dream comes the American Reality—the brick-and-mortar behind-the-scenes that go towards building a life in the USA.
Tax returns are very much a part of this reality, and while reaping the system’s benefits may be smooth-wading through, the paperwork at the end of it is not.
However, filing your tax returns doesn’t have to be all drudgery and doom. Being organized is critical, and we help you out below with an extensive list of all the possible documents and forms you may need to file individual income tax returns.
Who Qualifies for Tax Returns in the US
However, before diving in, let’s quickly look at who exactly qualifies for paying taxes and receiving the returns that come with it.
To refresh, any individual who meets the ‘Green Card Test’ or the ‘Substantial Presence Test’ is considered a resident alien and thereby is liable to pay taxes in the same manner as any US citizen.
Here’s a breakdown of the two tests:
The Green Card Test—if you have not renounced your alien registration card (a green card), and neither has your privilege of immigrant status been terminated by the USCIS or a federal court, you pass the Green Card Test.
The Substantial Presence Test—you pass the SPT if you have been residing in the US for at least 31-days of the current year and 183-days total over the current year and the two years preceding it. More specifically, this count must include all days in the current year, one-third of the days present in the year before the current year, and one-sixth of the days present two years before the current year.
Now, let’s look at precisely what you need to file a complete and accurate tax return. To make things easy, we’ve grouped the documents according to their function.
Personal Information and Dependent Information
Basic information forms the crux of tax returns in the US, so it is essential to keep the following documents handy:
Previous tax returns and statements for reference.
Social Security or Tax ID numbers for both you and your dependents, if any.
Income-Related Documents
Furnishing proofs of earnings is an integral part of filing your taxes. As an Indian professional residing in the US, it is important to note that you are liable to declare your global income (from every source) in your tax returns.
That means earnings on mutual fund dividends, interest earned on stocks, bank deposits, and fixed deposits, among others, are all taxable. Below is a list of documents you may require while filing:
W-2 forms from employers.
Form 1040 to declare taxes paid in previous years and to declare foreign income.
Form 1099 series, each ending with a different suffix for different revenues earned. For instance:
1099-INT (interest income)
1099-G (government payments and tax refunds)
1099-K and 1099-MISC (freelance gig payments)
1099-R (pension income)
1099-S (stock sale income)
1099-B (property sale income)
1099-DIV (dividends)
1099-SSA (Social Security benefits)
Form 1095-A for Health Insurance Marketplace Statements.
Records of cryptocurrency transactions and interest earned.
Expense records such as bank or credit card statements.
Compiling the applicable documents below could help reduce the taxes you pay:
Records of donations to charity.
Homeownership documents such as mortgage payments and property tax statements.
Medical expense statements such as hospital and doctors bills and health insurance payments.
Childcare and educational expenses include daycare fee payments and tuition fees or loan payments.
Proofs of retirement account contributions.
Records of state and local income taxes paid.
Documentation for Credits
Tax credits are as valuable as deductions and help reduce your tax liability. It is important to have the necessary documentation in your tax return to claim these.
Here are some of the most common tax credits you can claim:
Child Tax Credits that are worth up to $3600 per child. Hold on to Letter 6419 for the same.
For foreign income tax credits, fill in and attach Form 1116 to your return to reduce the brunt of taxes paid on income earned back in India.
Adoption Tax Credits for families that have adopted children.
Dependent Tax Credits in case you are supporting a dependent while unemployed yourself. This credit reduces liability to offset the cost of paying for a dependent without a steady income.
Income Adjustments and Declarations
With personal and financial changes such as job changes, getting married, or having children, it is advisable to reconsider your withholding.
In a country with regulations far different from what we’re used to in India, preparing for tax season is taxing, saying the least. However, organizing your receipts, statements, and forms is an excellent first step to take.
However, filing on your own without knowing how to claim credits or deductions or whether you’re even eligible for them is doing a great disservice to your bank balance.
AOTAX has been helping Indian IT professionals in the US for more than 15-years and is well-versed in the challenges you face and how to get the best returns in your situation. Let us help you with our planning, advisory, and consulting services to ensure you only have to enjoy the American Dream while we take care of the American Reality. Sign up for free today to get a feel for how we work and what we can do for you.
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.
3 percent for overpayments
2 percent in case of any corporation
One-half or 0.5 percent for the portion of a corporate overpayment which exceeds 10,000
3 percent for any underpayments
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.
As India is developing rapidly, globalisation has resulted in more opportunities. Stronger economic ties with developed markets like the US has made many Indian’s studies and work overseas. Such Non-Resident Indian’s living in the US, juggle between two different tax jurisdictions. NRI taxation rules are completely different as compared to the rules applicable to ordinary Indian residents. Hence, the tax provisions for Non-Resident Indians are separately dealt under ‘NRI taxation’ section of Income Tax Act, 1961. NRI taxation involves the host of obligations and reporting requirements along with changing tax provisions each year which makes it quite complicated. With the beginning of the new financial year, NRIs residing in the US may have to face challenges or tax complications in below areas.
Determining tax residential status in India
Primary challenge for NRI wanting to undertake tax compliance is determining the tax residential status for the year in India. Residential status is classified as Non-Resident Indian (NRI, Resident but not Ordinarily Resident (RNOR) or Resident and Ordinarily resident for tax purposes depending on number of days spent in India. It could get quite complicated to understand the status.
An individual is deemed to be non-resident in India if any one of the conditions below is satisfied.
Your stay in India during the previous year is less than 182 days
Your stay in India during the four years immediately preceding the previous year is less than 365 days and you have been in India for less than 60 days in the previous year.
A resident individual is considered as RNOR, if any of the below conditions are not satisfied or only one of the below condition is satisfied.
You are resident in India for at least two years out of 10 years immediately preceding the relevant year
Your stay in India is for 730 days or more for seven years immediately preceding the relevant year.
Important thing to consider here is previous year is period of 12 months starting from 1st April to 31st March.
Income tax return forms
Which ITR (income tax return) form to use for filing is the next challenge that you would face being NRI. With the change in norms, NRIs are now required to use either ITR2 or ITR3 for filing income tax. NRIs with no business/profession income can file income tax in ITR2. ITR3 needs to be used if you have business/profession income to report.
Tax treatment of investments and income
For NRIs, only income earned in India is taxable. When it comes to understanding exchange control norms and tax implications on making investments, it’s quite complex. To understand complex income tax provisions relating to income and investments in India comprehensively, it’s wise to seek expert help. As income earned by NRIs is subjected to double taxation, it becomes imperative for NRIs to understand tax implications before making investment choices. Also, there are provisions to save tax liability to an extent which needs to be carefully understood. With the complexities involved and time constraints, liaising with banks and other financial institutions where investments are held also could get challenging.
Tax relief claims
After understanding the tax treatment, there are also many provisions available for saving tax liabilities which can be beneficial for NRIs such as Double Taxation Avoidance Agreement (DTAA). However, the process of claiming benefits under DTAA could be challenging as one needs to provide extensive disclosures such as overseas tax residency certificate. Tax identification number of home country and details of assets held abroad etc.
Conclusion
A strong economy needs more stringent tax regime for the increased development. As India is aiming towards strengthening economy, tax regimes are getting stricter and stringent. Understanding the taxation process and keeping yourself updated on change in provisions and norms can help you effectively adhere to tax laws and stay tax compliant. Being an NRI, seek help of professional experts to file income tax returns and plan your taxes for the year ahead efficiently.
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