Can the market losses be utilized to adjust tax payment?

Can the market losses be utilized to adjust tax payment?

Can the market losses be utilized to adjust tax payment?

Losses incurred in the stock market can be termed as Capital Losses. Capital Losses are said to be incurred when a capital asset such as an investment or a real estate decreases in its value. When this capital asset is sold at a price which is much lower than the actual purchase price of the asset, then the capital loss is realized. There are always fluctuations in the stock market and your investments might give you huge profits or even bring your losses. Losses are always demotivating; however, you can note that capital losses can be used to reduce the income tax bill which you owe to pay to the IRS.  

Tax Rules related to Capital losses

Like it is mandatory to report Capital gains as income, similarly, Capital losses can be used as deductions on your tax returns.

Capital losses are mainly of three categories which are listed below.

  • Realized Capital Loss – Realized capital loss occurs after you have sold your asset or investment. 
  • Unrealized Capital LossThese losses are those capital losses which do not need to be reported.
  • Recognizable LossRecognizable loss is defined as the amount of loss that can be declared in a given year.

According to the US Tax laws, your realized capital losses can have an impact on your income tax bill. Moreover, realized capital losses can be used for lowering the income tax bill only if the asset you have sold was owned for investment. Also, you need to think wisely and create realized capital loss; for instance, if you sell a coin collection for a price lower than its cost price intending to utilize it as a deduction on income tax bill it would not be acceptable.

 

Determination of Capital Loss

  • For calculation related to income tax purposes, 
  • Amount of capital loss = Number of shares sold, times the pre-share adjusted cost basis – the total sale price.
  • Cost Basis price refers to the fact that it provides the basis from which any capital gains or capital losses are figured, of the stock share, is the total of the purchase price and any fees(such as any commission or brokerage fees).
  • There is a need to adjust the cost basis price if there was a stock split during the period you had owned the stock. You will have to adjust the cost basis concerning the magnitude of the stock split.

Deduction of Capital Losses

  • Capital losses can be used to offset the capital gains in a taxable year. By this, you would be able in the removal of some portion of your income from your tax return.
  • A capital loss can be used by you to offset your ordinary income but up to a limit of $3000 in a year in case of a lack of capital gains by which you would have been able to offset your capital losses.
  • If you are willing to deduct your stock market losses, then you would have to fill Form 8949 and Schedule D while filing tax returns.
  • Your short term capital losses would be calculated against your short term capital gains by using Part I of Form 8949 to arrive at the net short term capital gain or loss. In case of a lack of capital gains for that year, the net would be a negative number equal to the total of your short-term capital losses.
  • Part II of Form 8949 will be used for the calculation of your net long term capital gain or loss. It would be equal to any long term capital losses minus long-term capital gains.
  • The next step is the calculation of the total net capital gain or loss by a combination of your short-term capital gain/loss and the long-term capital gain/loss. The resulting figure would be entered into Schedule D Form.
  • If your net figure obtained is a negative number (the difference between short term and long term gains/losses) which indicates an overall capital loss then this loss is deductible from any other taxable income with a limit on the amount set by the IRS.
  • For taxpayers, filing tax returns as Married and filing jointly the maximum amount deductible from total income is $3000. However, for taxpayers filing tax returns as Single or Married and filing separately the maximum deduction permissible is $1500. Moreover, if the amount of your net capital loss is more than the permissible limit you can carry it forward for the next taxable year.

Hence, you must attempt to take your tax-deductible capital losses in a very tax-efficient manner to have maximum benefit. Choosing a short-term capital loss for tax deduction would be more advantageous than that of a long-term capital loss. In general, you should opt for taking any capital loss in the year in which you are tax-liable for short-term gains or in which you have obtained zero capital gains as this would help in saving on your ordinary income tax rate.

References

https://www.investopedia.com/articles/investing/062713/capital-losses-and-tax.asp

https://www.investopedia.com/articles/personal-finance/100515/heres-how-deduct-your-stock-losses-your-tax-bill.asp#:~:text=Deducting%20Capital%20Losses&text=If%20you%20don’t%20have%20capital%20gains%20to%20offset%20the,forward%20to%20future%20tax%20years.)

 

The income tax complication with the financial New Year for the NRI’s residing in the US

The income tax complication with the financial New Year for the NRI’s residing in the US

The income tax complication with the financial

New Year for the NRI’s residing in the US

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.

 

Income Tax Planning for an NRI planning to return to India

Income Tax Planning for an NRI planning to return to India

Income Tax Planning for an NRI planning to return to India 

Income Tax Planning for an NRI planning to return to India .It might so happen that one fine day you decide to pack your bags and come back home. When you do,there are a few things that Income Tax planning must take special care of. For starters, your investments and tax implications. In general, the tax laws for NRIs returning to the country are fairly generous. However, youmust not be complacent.

A bit of careful planning will ensure that you do not run into any surprises when you come to India, as far as your overseas income and investment are concerned.Tax Resident Status Your tax liability on the income largely depends on your residential status. The FEMA (Foreign Exchange Management Act) and the Income Tax Act govern all these tax rules and regulations. The FEMA keeps a track of all the transactions taking place outside the country for Indian residents. These transactions include foreign bank accounts,money transfers, remittances, lending, gifting, etc. Any investment in real estate or mutual funds is also taken care of by the FEMA. The income tax act on the other hand, looks after the tax liability arising out of such investments. As per the FEMA guidelines, an NRI is someone who currently stays out of India but either is a citizen of
India or a person of Indian origin. They must meet either of the following conditions to become a PIO or a person of Indian origin.

– Has held an Indian passport anytime during their lifetime.
– Has a spouse of Indian origin.
– Was a citizen of India or has grandparents or parents who are Indian citizens.

Foreign Assets
The FEMA offers strict and clear guidelines for foreign assets. As per the law, an NRI has the liberty to own, transfer, hold or invest in assets that are outside the country. However, this only comes into the picture if the person bought the asset during their stay abroad or if they have inherited the assets. And not otherwise.

Indian Assets
Should a person choose, they can hold on to their Indian assets during their stay in other countries. These include bank accounts, investments, assets etc. however, there are special accounts to hold these. Usually, the two bank account types available for NRIs are FCNR or Foreign Currency Non-Resident and
NRE or Non-Resident External Rupee. You can use these accounts to deposit any earnings from outside the country to your local bank accounts.

Income Tax Act
The income tax act has clauses with the help of which NRIs can save taxes on their global income for as many as three fiscal years. On coming back to the country, they must convert their NRE or FCNR accounts to RFC accounts. Any interests earned on FCNR and NRE accounts are exempted for NRIs and RNORs.

 If an individual was residing in foreign country ordinarily, and brings in money to India, the same is exempted from taxes up to a period of seven consecutive assessment years. The only condition being that the wealth tax exemption is not applicable to income tax and assets which are brought during the stay in India.
For NRIs who receive their pension from former employer post moving to India may be taxable. Of course, if there is any double taxation agreement between both the countries, it would govern the taxes.
NRIs who are moving back to India permanently, need to consider the above points. Being aware of applicable tax laws and proper planning would ensure a smoother transition phase and allows users to benefit from tax breaks. Since returning NRIs have quite a few tax breaks available for them.