Tax Implications on the decrease of interest rates by the IRS in the 3rd quarter

Tax Implications on the decrease of interest rates by the IRS in the 3rd quarter

by | Jun 28, 2020 | COVID - 19, Interest Rates, Internal Revenue Code, Tax implications

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.

  1. 3 percent for overpayments
  2. 2 percent in case of any corporation
  3. One-half or 0.5 percent for the portion of a corporate overpayment which exceeds 10,000
  4. 3 percent for any underpayments
  5. 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.

References

  1. https://www.irs.gov/newsroom/interest-rates-decrease-for-the-third-quarter-of-2020
  2. https://www.accountingtoday.com/news/irs-interest-rates-to-fall-in-third-quarter
  3. https://www.irs.gov/pub/irs-drop/rr-20-13.pdf
  4. https://njcpa.org/resources/consumers/disaster-recovery-guide/full-article/2020/06/04/irs-interest-rates-decrease-for-the-third-quarter-of-2020

 

Top #5 Life-Changing effects and their tax implications for NRIs in the US

Top #5 Life-Changing effects and their tax implications for NRIs in the US

by | Sep 19, 2019 | federal income tax, income tax, NRI, tax deductions, tax rate, Tax Refund, taxes

Top #5 Life-Changing effects and their tax implications for NRIs in the US

Tax implications,Life is a storehouse of changes; every person experiences certain life-changing events that can bring a transition in the entire course of the life of a person. These life-changing events can also bring a great transition in the taxation methodologies of an individual. Tax implications moreover, life-changing events and changes in the rules of taxation are the two major factors that will always cause either an increase or decrease in your taxes.

You can face this type of situation in your life when you have numerous changes happening together in a year. These changes will affect the payable taxes and you need to adjust to these changes.

When you are an NRI in the USA, you will have a number of taxes to be paid such as Medical Care Tax, Federal Income Tax, Social Security Tax, Global Income Tax, etc. These numerous taxes will reduce your take-home salary considerably and on top of this, when you have life-changing events and their implications to be addressed you will really have a tough time in handling these issues.

Let us have a look at the top 5 most crucial life-changing events and the impact they can have on the tax of an NRI in the USA.

Tying the knot

Mostly, all married NRI couples receive tax benefits in the US as they would file the taxes jointly now. This results in lower tax rates and more tax benefits.  But, sometimes if both the spouses are earning too high and are filing their taxes jointly then there might be a scenario of penalty. This might occur due to the reason that by filing joint tax returns, the couple is paying much more taxes than they should have paid as singles. But, there have been various tax reforms that have lowered the tax rates for these couples.

Welcoming a little bundle of joy in your life

This is, in fact, a real life-changing event and would be a crucial phase in life. Your little bundle will not only bring happiness into your life but also will help you in reducing your tax liabilities. The Child Tax Credit helps NRIs in the US in reducing their liable taxes. By this, if your child is below the age of 17 years then you can get a tax credit of $2000 known as Child Tax credit. Moreover, other additional credits are associated with this i.e. Child and Dependent Care Credit and the Earned Income Tax Credit. All of this would be helpful in saving a substantial amount of money.

Separation

Getting separated legally or getting divorced is a tough phase of life and has certain implications related to your taxes as well. According to the new tax laws in the US, the spouses who will be receiving the alimony do not have to pay tax on the received alimony. However, the spouse who will be making the payment cannot claim this as a tax deduction. Precisely, alimony paid is not a tax-deductible component for the payer and also is not included in the income of the spouse receiving it.

This will be the law implication for those married couples who got legally separated after 2018 or before 2019 and then later certain modifications were made into the deductions associated with alimony.

Death of a partner

There is nothing more painful than losing your partner or spouse, but the laws of paying taxes related to this are even more hurtful. You will need to file for an estate tax return depending on the size of your estate and the assets in your estate. Moreover, new tax law states that you will need to pay estate tax only when the value of your estate is above $11,400,000.

Buying or selling a house

There are many additional deductions that you can claim if you are buying a new home or selling a home. When buying a new house, you will be able to claim deductions like paid points, interest on the mortgage, other real estate taxes, etc. However, while selling a house you will not be liable to pay taxes above $500,000 on the gains in case of filing tax returns jointly along with your spouse.

Hence, these life-changing events not only bring a change in your mental state but also affect the state of your tax liabilities. After these events, either you tend to pay more taxes or pay fewer taxes in some respect depending on the taxation laws.

The income tax implications of selling your property in India for the NRI’s residing in the US

The income tax implications of selling your property in India for the NRI’s residing in the US

by | Apr 16, 2019 | Blog, global income tax, NRI, Tax Planning, Tax Refund

The income tax implications of selling your property in India for the NRI’s residing in the US

Indian real estate market is the third largest in the world. Attractive real-estate opportunities, RBI’s general permission and falling rupee value against dollars in recent times have created more interest among Non-resident Indians to invest in immovable properties in India. Along with buying a property of their own, many NRI’s may even have inherited properties in India. When it comes to dealing in property transactions for NRIs, taxation is one of the vital aspect to be considered. Let’s take a look at the income tax implications of selling property in India for NRI residing in the US.

Tax implications of selling property in India

Under the Income Tax Law in India, income from selling property is taxed under the head ‘capital gains’. Taxability on capital gains will be based on the period of holding of the property. Capital gains are taxable in the year of property transfer irrespective of receipt of sale consideration. Here are the tax treatment for capital gains arising out of selling of property in India.

  • Short-term capital gains: If you are selling the property before 24 months from the date of property purchase, gains are treated as short-term capital gains which are taxable at the normal tax slab applicable for you as an NRI. The buyer is liable to deduct TDS (tax deducted at source) at 30% rate irrespective of the tax slab.
  •  Long-term capital gains: If you are selling the property after 24 months or two years from the date of property purchase, gains are treated as long-term capital gains. For which, tax will be applicable at the rate of 20% with applicable surcharge and cess.

Capital gains are calculated as the difference between the sale value and cost of purchase. In case of inherited property, date and cost of purchase to the original owner (from whom the property is inherited) need to be considered for computing capital gains. In case of long-term assets, cost of purchase is indexed to adjust for inflation.

Tax exemptions to reduce tax-outgo

NRIs can claim tax exemptions under Section 54 and section 54EC on long-term capital gains arising out of sale of residential property in India.

  • Section 54: As an NRI if you sell a long-term residential property, you can claim tax exemption on the gains if you acquire another residential house either one year before the sale or two years after the sale of property. Exemption can also be claimed if you construct another residential house within a period of three years from the date of transfer of such property. However, exemption claim is limited to the lower of total capital gains on sale of property or cost of purchase/construction of new property. And, no exemption can be claimed in respect of property purchased or constructed outside India.
  • Section 54EC: As an NRI, you can also save tax on your long-term capital gains by investing in tax saving bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). To claim the tax exemption on long-term capital gains on sale of property, you need to invest in these bonds within six months from the date of transfer of property. Maximum of Rs. 50 lakhs is allowed to invest in these bonds which are redeemable after three years.

In order to avoid the deduction of TDS, it’s important to produce the relevant proofs or certificate of exemption to the buyer. However, you can claim refund of excess TDS deducted at the time of filing income tax return.

NRIs residing in US needs to keep in mind the tax implications applicable for them in US (country of residence) while selling property in India. It’s important to report the income and related details without any errors. Erroneous tax returns can land you in trouble. IRS sends out more than 9.1 million of notices every year to tax payers for erroneous tax returns. Failing to respond to notice can attract penalties.

Conclusion

Selling property for NRIs is not really a complex thing if taxation and legal aspects are dealt properly. Seeking professional help can smoothen the process and help in saving the tax liability to certain extent.

 

 

 

Tax implications for your Indian Properties

Tax implications for your Indian Properties

by | Nov 29, 2018 | Blog, Investment & Income, Tax Planning, Tax Preparation

Tax implications for your Indian Properties

Tax implications for your Indian Properties.The real estate market has always been one of the most lucrative ones for investment. Tax implications for your indian properties.This applies to residents of India as well as non-resident Indians. However, there is a small aspect that not many are aware of or pay a lot of importance to, taxation.

If you are a currently in the United States of America and there is a property that you own in India, you are liable to pay taxes owing to certain terms and conditions. We will find out more about those situations or scenarios where you will end up paying taxes for those properties.

Resident status

Before we get to other details, it is important to know your residential status. A Non-Resident Indian is an individual who still holds an Indian Passport but has emigrated to another country on a temporary basis. This could either be related to work opportunities, education or residence. Any individual who spends more than 182 days outside the country would fit into the category.

Tax Implications

Taxes on your Indian property will only come into the picture if you earn more than INR 2,50,000 in India, excluding any sort of capital gains taxes. There are two major possibilities for earning money from your Indian property. You can either rent it or sell it to earn a profit.

Income from Rent

Any form of rental income exceeding INR 2,50,000 would be taxed like it is for a normal Indian resident.

  • The municipal tax is the first one to be deducted from your total rental income.
  • From the remaining, amount a standard deduction of 30% is allowed. It can also be used to offset any interest on a home loan that you pay for the property.
  • In the event, that you own more than one property but do not use it for residential purposes, you can claim it as self-occupied. In such cases, a notional rent is calculated on the property and taxes are applicable on the other properties.

Capital Gains

As the name suggests, this scenario would come into the picture if you sell a property and make some profit out of the transaction. There are two simple variables to such transactions. Firstly, the duration for which you held the property before selling it. And secondly, the cost variance in buying and selling the same.

  • If you hold on to a property for less than 2 years and decide to sell, it would come under the purview of short-term capital gains. In such cases, the gain is taxed as per the income tax slabs.
  • If you hold on to a property for at least 3 years before selling it, the same would qualify as a long-term capital gain and taxed accordingly. According to the current laws, it would stand at 20% and you would end up paying cess and surcharge on the top of it.

Certain Exemptions

NRIs can also benefit from certain tax exemptions that are in place.

  • Section 54

If you buy a property and decide to sell the same after 2 years from the purchase, and reinvest the total amount in buying another property within a span of 2 to 3 years, the profit that you make from the previous transaction is exempted.

  • Section 54EC

In the event that you hold on to a property for three years or more, it would qualify as a long-term capital tax. However, the gains on the transaction can be completely exempted if you decide to reinvest the same in bonds issued by NHAI or REC within 6 months of the sale.

These are some of the major tax implications that you need to be aware of, regarding your Indian properties.