As a relatively new resident in the US, there are many things to adjust to – a different culture, new sights, distinct workplace norms, and unfamiliar financial regulations. With so many things to get used to as an Indian professional in the States, taxes definitely sit high on the priority list.
IRS guidelines and the tax return system can be confusing, especially to newcomers who are unaware of the finer details that need to be considered when filing their income tax returns. The implications can include large and unnecessary financial losses. The best way to avoid receiving lower refunds and incurring penalties is to file your tax returns correctly.
What Are Some Common Mistakes That Individuals Make?
Mistakes are meant for learning, not repeating. That’s why we’ve compiled a list of the most common errors individuals make in their tax filings. Read on to know more about what they are, and how you can avoid them, while simultaneously maximizing returns.
1. Not Being Aware of Important Deadlines
Having a clear idea of important dates on the tax calendar can help you plan financially according to payment deadlines and refund dates, which is something many people neglect to consider. Paying your taxes on time and budgeting expenses according to when you’re likely to receive your refund can greatly ease financial burdens. Additionally, respecting IRS deadlines means you can avoid any nasty penalty fees, and also make the most of deductible contributions within the requisite timeframes. Being a fiscally responsible resident can help you avoid unnecessary legal obstacles, and does wonders for your personal finances.
2. Not Proofreading Your Forms
As is rightly said, the devil is in the detail. A shockingly large number of US residents receive delayed refunds because of their own doing. Silly spelling mistakes and small discrepancies in values declared on tax return forms can cause delays that can last weeks or even months.
Even the smallest of errors could result in you having to redo your taxes altogether, so make sure the information matches what is given on forms such as the W-2, or 1099, etc. Always remember to dot your I’s and cross your T’s!
3. Not Checking Your Eligibility and Residential Status
As an Indian professional and H1B visa holder, the Substantial Presence Test is an important component of being able to reside in the country legally and to receive the requisite benefits from paying taxes. The SPT is used to determine how long you have been in the country, and whether you are considered a resident for tax purposes. For more information, visit the IRS webpage.
4. Not Safeguarding Important Documents
Documentation is undoubtedly the most significant facet of filing your tax returns. The taxes you are liable to pay, and the refund you are eligible to receive, both hinge on the supporting documents you provide. This includes financial statements, mortgage statements, letters from the IRS substantiating credits you have claimed, etc. Additionally, keeping past tax returns is equally critical in protecting against potential audits. The IRS has up to three years to decide whether to audit an individual and in the event you are audited, the records can make the process easier.
5. Not Checking Tax Brackets or Adjusting Tax Withholdings
Life is full of big changes: marriage, children, job changes, and relocations. What professionals often underestimate is the influence that these life changes can have on your taxable income. For instance, your marital status can impact the value of the deductions you can claim, and your employment status can influence the tax bracket you fall into. The IRS recommends revisiting your W-4 form on a yearly basis to retain control over your finances and potential tax liability.
6. Not Maxing Out Deductible Contributions
What seems to have become a buzzword, and rightly so, are deductions. We are revisiting this due to their sheer utility, although taxpayers seem to have forgotten them. When used correctly, tax deductions can considerably lower your taxable income, and therefore your tax bill. This is particularly useful while planning for your retirement, since contributions to 401k and IRA accounts are tax-deductible, hence affording taxpayers the twin benefit of smaller tax bills and growing nest egg.
7. Not Claiming Applicable Credits and Deductions
While deductions lower taxable income, credits lower tax bills. Both are incredibly useful in maximizing returns when harnessed strategically. Tax credits such as the Child Tax Credit, Kiddie Tax Credits, and Other Dependent Credits lower tax burdens. Additionally, proofs of payments towards loans, fees, charitable donations, and state taxes among others do the same. Most taxpayers fail to take note of where their money is going throughout the year, and then miss out on the opportunities to reap the benefits owed to them. It’s important to remember that the IRS cannot assume anything about your expenses and lower your tax bill in good faith. Getting sizable returns depends on what you declare and claim.
8. Not Filing Online or Asking for a Direct Deposit
The IRS is still battling large backlogs with skeleton staff amidst ongoing legislative changes, and hence urges taxpayers to file their returns online and opt for a direct deposit. Doing so will quell mounting frustration from both ends, and will quicken the refund process. Those who file electronically and provide their bank details can expect their accounts to be credited within 21 days of submission. Of course, it could take a little longer for those who have claimed credits that are prone to be misused (such as the Child Tax Credits), simply due to more stringent verification procedures.
9. Not Consulting a Professional
There is a reason we don’t self-medicate when we’re sick, a reason we don’t fiddle with our cars when it has broken down, and opt instead to visit a doctor or a mechanic. There is an implicit understanding and trust in the professional we choose to consult. We believe in their expertise and heed their advice.
There is no reason the same logic should not be followed when it comes to something as important as filing your taxes, especially when you’re dealing with tax returns in the US as a foreigner.
AOTAX is just the professional team you need: with over 15 years of experience, we’ve taken care of the finances of countless Indian IT professionals. We’ve helped ease tax burdens and made year-round tax preparations much easier. If you’re going to trust a professional, trust AOTAX and sign up for free today!
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.
How to leverage your income tax refunds amidst the
COVID-19 pandemic?
Currently, the entire world is facing the dreadful consequences of coronavirus. Millions and millions of people have been impacted and the global economy has come to a standstill. In the US, the impact of the pandemic COVID-19 is intensifying each day. Millions of Americans have become unemployed and the economy of the country is regressing.
In such difficult times when the livelihood of the common people has been impacted in such a worse manner, Americans see a dint of hope in the Income-tax refunds which they would obtain. Even though the Federal Government has provided Stimulus Checks, additional money is always helpful in such bad times.
If you have filed your Income Tax Returns and are waiting to receive a hefty amount from the IRS, then you should also think about avenues by which you can leverage your refunds during these critical times.
Let us have a look at some of the best options to leverage your income tax refunds during this pandemic COVID-19.
a.Emergency Savings Account
You should open a savings account and try to put a major part of your Income tax refund into that account as an Emergency Savings Account. This would be helpful in case emergencies are arising due to the pandemic such as a medical emergency or you lose your job, unfortunately. This Emergency Savings Account will be your savior in difficult times.
b.Increase your contribution into your 401(k)plan
You can utilize this opportunity to increase your contribution to your 401(k) plan. In case, you have been contributing only 3% of your paycheck but your employer matches up to 6% then you can double the pre-tax income which you are investing in your retirement funds. It can lead to your monthly paycheck being a little low but you will be investing for good and your taxable income would also be low.
c.Investment into Stocks
When you have already made your contributions to your retirement account, then you must invest your income tax refunds into purchasing stocks or mutual funds. Generally, the stock market would deliver better returns than that of a Savings Account and Treasury bonds. But, sometimes there are risks involved in the stock market and the returns are not guaranteed. Investment in stocks by tax refunds is a good idea if you are saving to attain long-term goals.
d.Paying down the existing debts
When you obtain your Income Tax returns, it is wiser to pay off your debts quickly. The high-interest debts must be paid off on priority as this would help you in saving a lot of money in the future. Usually,debts are associated with credit card dues and if you are fortunate enough to not have credit card dues then you should pay off your car loan or student loan.
e.Contribute to Regular or Roth IRA
If you are thinking about your long term savings, you must contribute your income tax refund into Regular or Roth IRA. If you and your spouse have a modified AGI of less than $203,000 then you can be able to contribute up to $6000 to Roth IRA in 2019 or $6500 if you are 50 years or above.
f.Contribute to HSA
You can open HSA if you do not have one as HSAs are a very good option to keep aside some money for medical expenses i.e. may be routine or emergency medical expenses. Your unused funds in the HSA keep on rolling to the consecutive years and the remaining money can be utilized during retirement once you are above 65 years of age.
g.Investment into an ETF
You can invest your income tax refunds in broadly diversified ETFs which are a safe investment option. ETFs would include thousands of stocks, low volatility, and any risk compared to individual stocks. Investing in ETFs would be good as they are passive and have a low expense ratio.
h.Make donations
This is a philanthropic option and perhaps one of the best ways to utilize your money obtained by a tax refund. You can make your donations into mainly those charitable organizations which support a good cause and are working towards a cause that you support.
In addition to all these available tax refund investment options, you must some a considerable amount of cash in your hand during these emergency times. Moreover, you can invest some of your money in self-care avenues like taking up any online courses/training or workshop. This would be helpful in your career in the future and would return you an incremented paycheck
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