Tax filing season is arguably the most nerve-wracking time: battling documents, figures, and important dates is an all-consuming task. In addition, filing your taxes demands a constant awareness of your finances, tax strategy, and IRS regulations.
A change in one could significantly impact the rest, and this is undoubtedly true for changes that the Internal Revenue Service (IRS) often implements through tax season.
Changes in laws, policies and tax forms can throw your preparation off track. Unfortunately, we’ve seen multiple instances of the same over the last few years due to Covid-19 and the bills passed to alleviate its effects.
However beneficial or necessary, these changes leave taxpayers like you scratching their heads while trying to make sense of these amendments and additions.
No one likes to be caught off-guard, and certainly even less so by the IRS. So we’ve compiled a list of changes you can expect to see on this year’s forms, so you can be prepared to optimize your tax bills.
So, What’s New This Year in Personal Income Tax Return?
Taxpayers can expect to see various changes on their tax forms for the last financial year, especially regarding deductions and credits. Keep reading to know more.
Form 1040 and its schedules
This year’s Form 1040 is far from compact, with Schedules 1,2, and 3 all having expanded to take up close to two pages each. This elongation is due to additions to income and extra taxes, each getting their sections instead of being grouped into one confusing bundle. Additionally, there are many changes related to credits and deductions that we’ll discuss below in more detail.
Lines 19 and 28 on Page 2 of Form 1040 were adjusted to account for changes made to the credit and consider that it was fully refundable for 2021.
Earlier, the credit was only partially refundable (up to $1,400 per child) and was only applicable for children 16 years and younger (now, parents can claim the credit for 17-year-olds).
Earned income tax credits
The Earned Income Tax Credit was upgraded due to changes in the American Rescue Plan Act. Most importantly, the Credit now allows more childless taxpayers to claim the credit.
The age limit has also been increased to allow people aged 19 to 65 to claim the credit on their 2021 tax returns. Line 27 of Form 1040 has been modified and expanded to accommodate these changes.
Recovery rebate credits
In 2020, the Recovery Rebate Credit on Form 1040 was meant for people who didn’t receive their first and/or second check or those who received an incorrect amount.
For 2021 however, it must be noted that the credit is only for those who did not receive their third check or for those who didn’t receive the entire amount. Therefore, taxpayers must lower their credit claims to account for this.
The Savers Credit aims to encourage lower and middle-income taxpayers to save for their retirements. The credit was allowed for 10%, 20%, or 50% of the first $2000 saved, depending on income and filing status. However, for the 2021 tax return, taxpayers can claim a 50% credit if their AGI is $19,750 or less. Form 1040 considers this.
Due to adjustments for inflation, the deductions that taxpayers can claim are much higher and are reflected on your tax forms. The increments to the 2020 amounts are as follows:
$300 extra for married couples filing jointly
$1,350 per spouse for couples over the age of 65
$150 extra for single filers, $200 for those over 65
$150 for head-of-household filers
Earlier, deductions claimed for any charitable donations would affect taxpayers’ AGIs. This is no longer the case, and the space allowing you to check the $300 charitable contribution option has been moved elsewhere in the form.
Additionally, married couples can now individually claim deductions instead of being counted as one entity. That means that married couples can claim up to $600 in deductions for donations.
You can then appropriately complete line 15 on Form 1040 pertaining to taxable income.
Taxes for the self-employed
The tax breaks that self-employed taxpayers can take have been tweaked and include:
Deductions of up to 100% for business meals (to be claimed on Line 24b, Schedule C).
Long-term care insurance premiums do not have to be itemized and can be deducted on Line 17, Schedule 1.
An unemployment compensation benefit worth $10,200 was in effect from 2020 but no longer. Therefore, any compensation earned in 2021 will be fully taxed in the upcoming tax return season. The same must be mentioned on Line 7, Schedule 1 of Form 1040.
Student loan discharges
Students with undergraduate and graduate student loans no longer worry about the forgiven student debt being a part of their taxable income. Earlier, this amount had to report on Line 8c, Schedule 1, but now this can be left blank.
The best thing taxpayers can do at the moment is to take stock of how these changes affect their filing statuses and strategies and then prepare their documents accordingly.
However, the complexity of filing your taxes cannot be understated, and often the best thing to do is to hire a tax professional to help. With close to two decades of helping Indians in the US prepare for, and file their tax returns, AOTAX is the best. We can help you get everything in order and ensure that your tax forms are error-free. Sign up for free today!
It’s that time of the year when most Indians residing in the US are searching for whether and how to file tax returns online. The first question – do you even have to file taxes – is easy. The answer is yes, probably even if you are not a U.S. citizen.
If the government considers you a US tax resident (more on this later), then you have to report all income earned to the IRS and pay taxes. However, that does not automatically mean that your income will be taxable. You’re simply reporting it to the United States government.
The second question – how to file tax returns – is trickier. So, here’s a cheat sheet that tells you all you need to know about filing returns.
How to File Tax Returns Online for 2022?
The tax season begins on Monday, January 24, 2022. From that date, all permanent residents and tax residents can start filing their taxes. Also, even if you aren’t considered a tax resident, it is a smart idea to file them anyway. Why? You might qualify for a tax credit or be able to claim a refund.
Do green cardholders have to pay taxes?
Yes, all green card holders are US tax residents. They need to report all income and pay taxes, whether earned in the US or internationally. You must file tax returns using the IRS Form 1040 by April 15, 2022, even if you haven’t stayed in the US all year.
What about nonimmigrant visa holders?
If you’re in the US on a nonimmigrant visa, you may have to file taxes, depending on whether you’ve passed the Substantial Presence Test (SPT). The test declares that a nonimmigrant visa holder who has spent 31 or more days in the US in the current year is a tax resident.
You’re also a tax resident if you spend 183 days (calculated using a weight system) in “the current year and the two years immediately before that.”
As green card holders, all nonimmigrant visa holders use IRS Form 1040 to file taxes, and they have to do it by April 15th. The difference is that they only report income earned in the US. No taxes need to be paid for earnings outside the country.
The US government uses a progressive tax system, so people with lower taxable income pay fewer taxes, and those with higher income pay more. So, how does the US calculate how much tax you need to pay? By dividing your income into tax brackets. Each bracket has its corresponding tax rate, and for this year, it is:
37% for individual single taxpayers with incomes over 539,900 ($647,850 for married couples filing jointly).
35%, for incomes over $215,950 ($431,900 for married couples filing jointly).
32% for incomes over $170,050 ($340,100 for married couples filing jointly).
24% for incomes over $89,075 ($178,150 for married couples filing jointly).
22% for incomes over $41,775 ($83,550 for married couples filing jointly).
12% for incomes over $10,275 ($20,550 for married couples filing jointly).
10% for single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly).
The benefit of a progressive system is that the tax rate does not apply to your entire income, irrespective of which bracket you fall into.
Pick how to file your tax return
You can file tax returns online, by hand, or hire a tax preparer. Filling out the Form 1040 manually and then emailing it is not a great idea because the process is much, much longer.
If you expect a refund, filing taxes online is better because the IRS processes e-filed returns faster. There is plenty of tax software that makes it very convenient.
The third option is to hire someone who provides tax preparation and filing services. You should strongly consider it if you are filing taxes for the first time, have never prepared tax returns using software, or have a complicated revenue stream. Professional guidance is crucial in the last instance.
Say you have a business that makes your finances complicated, or you also earn through a side gig, then a professional would make it easier to understand which forms are required, what common deductions to factor in, etc.
Collect all your documents
The last step before you sit down to file your tax returns online is to gather all your documents. You will need an ITIN, which is an individual taxpayer identification number. It’s issued by the IRS to people who do not have a Social Security number (SSN). You will also need to gather all:
Proof of income.
Proof of taxes already paid.
Proof of expenses to get tax credit or deductibles.
Filing taxes is never easy. But it becomes a daunting task the minute you get your provisional (and later permanent) green card. After that, you have to report all your income earned anywhere globally, even if you don’t spend a day in the US throughout the year.
For tax purposes, the US considers you their resident. It’s also a laborious task for Indians who have just gone to the US and filed their returns for the first time.
The changes in the NRI norms in India 2020, resulting in higher tax liability
The novel coronavirus has been spreading across the world very rapidly making millions and millions of people sick. To put a brake on the speedily spreading coronavirus, domestic and international flights had been stopped on an interim basis by the Indian Government. As a result, many NRIs who had visited India had to extend their stay in India till the restrictions on flights are lifted.This extension in the stay of the NRIs and the foreigners in India due to the pandemic COVID-19 might lead to an increase in their tax liabilities. Non-resident Indians may be stuck in the country due to the restrictions imposed on travel, illnesses, or restrictions being imposed by the other countries. This extended stay can cause higher tax incidence if the stay exceeds the prescribed thresholds unless specific exemptions are provided by the Government to reduce the extra tax liabilities. In simple terms, the extended-stay by an NRI in India can bring him into the Indian income tax fold.
The taxation regime
According to the Income Tax Law, a person can be classified as a resident or a non-resident of India based upon his duration of stay in the country during a financial year.
An NRI who is visiting India becomes a resident of India if he stays in India for 182 days or more in a financial year along with a stay of 365 days or more in four preceding years. This criterion applies to an NRI who is either a citizen of India or a person of Indian origin.
However, according to the latest Finance Act, 2020 there have been certain amendments made to the tax residence criteria. From the Financial year 2020-21, the threshold for the period of stay for an NRI staying in India has been reduced to 120 days from 182 days.
So, an NRI can become a tax resident with a minimum of 120 days stay only if the NRI is earning above Rs. 15 lakhs in a particular financial year. In this case, the NRI would be taxed on his global income
However, the threshold of 120 days does not apply for those NRIs who have an Indian income of less than Rs. 15 lakhs and would become a resident only on a stay of 182 days in India.
The Indian Income Tax Law does not differentiate between the voluntary or involuntary stay of an NRI in India for the determination of his residence for taxation. NRIs staying in India beyond their prescribed thresholds would attract tax liability even if they wanted to leave India.
Extension of lockdown and implications of being a tax resident
Due to the ongoing lockdown and non-resumption of International flights, an NRI would be taxable on his Indian income. NRIs would also face problems related to dual tax residency or citizenship. However, an NRI who became a tax resident of India is not liable to file his tax returns in India immediately. The process of taxation would need an evaluation on a case-to-case basis.
An NRI who has a taxable income in India above the basic limit of exemption i.e. Rs. 2.5 lakhs should file an income tax return in India. NRIs becoming tax residents of India might also face other problems such as taxability of the interest on their NRE accounts. Moreover, there might be changes in the TDS rates on their Indian income.
However, the Government of India might give some clarification on the matter related to the tax residency of the NRIs who have been bound to stay longer in India due to the current COVID-19 situations. The OECD (Organization for Economic Co-operation and Development) has recommended for some exemptions in the threshold limits related to the tax residency of NRIs. However, there has been notification on this but the Government might issue relaxation on this.
If there are no relaxations from the Indian Government, then the NRIs will have to file income tax returns in India. But, the NRIs need not pay any tax in case of the absence of an income in India. Also, they do not need to pay any tax on their foreign income in India.
Hence, it is important for the NRIs who have been held up in India due to the lockdown to consult about the impact of the new regulations related to tax residency rules in India. They must understand the rules and fulfill the compliances if applicable in their case.
Filing an Amended Tax Return corrects information that changes Tax calculations and may result in additional refund / reduced tax liability. This includes making changes to filing status and dependents or correcting income credits or deductions.
1. The Earlier You File, the Earlier You Get Your Refund
A good reason to file your taxes early you’ll get your money sooner.
According to the IRS, the average refund was more than $2,800 for 2016 and 2017 Tax Filers…so why miss on that earlier claim and why give you an interest free loan to IRS?
Every year taxpayers have too much tax withholds from their pay checks which means IRS is getting interest free loans from the tax payers. So it’s better to get your hard earned money back from IRS ASAP by filing your tax return early and put that money into your savings account, where it can start accruing interest for you rather than leaving it with IRS till the tax filing deadline.
Getting refund early might also help you to pay your outstanding bills, credit card bills and other debts.
The IRS begins accepting e-filed returns every year in the mid of January.
2. You’ll give yourself more Time to Pay or Plan for Payment
Filing early gives you an extra time to pay taxes you owe.
Let’s say if you prepare & file your taxes in the month of January and determine how much you owe, you will get almost 2 & half months time to arrange your payments to IRS.
It is not mandatory that you need to pay your taxes along with the tax return. You can file your tax return as soon as IRS opens the E-filing window and pay the amount you owe by the deadline (i.e., April 15th)
3. You can prevent yourself from Tax Fraud
The IRS estimates that millions of taxpayers were victims of Identity theft tied to tax returns every year.
Most tax returns frauds occur early in the tax season. If thieves file a return using your Social Security number before you do, the IRS will reject your return since their records shows the refund has already been paid.
If you are a victim of Identity theft, it’ll be on you to get things sorted out, which could not only delay your refund but also constitute a major headache. The IRS says it can take 120 to 180 days (or longer) to resolve tax-related identity theft cases.
So if you file your tax return early and gets on IRS records, it makes it harder for thieves to file a second one and grab your refund.
4. You’ll reduce Stress
Early filers eliminate tax deadline stress.
If you are up against the filing deadline, there is added stress of meeting the deadline. If you file early, you eliminate this stress.
There’s always peace of mind from filing early.
Once your return is filed early, give yourself a small reward for being so efficient and responsible. Then relax while everyone else stresses out about getting their taxes done on time.
5. Your Tax Preparer will have more time for you
By mid-March of the 2017 Tax Season (i.e. 2016 Tax Returns), nearly 78 million people had already filed their income taxes, that left the remaining 68 million people just one month to file theirs by the deadline.
Early filers have greater access to their tax preparer. As the tax deadline approaches, your tax preparer’s schedule tightens. It is best to get on their calendar early when they have more time to devote to you and your return.
Additionally, tax professionals often increase their fees as the tax deadline approaches. So waiting may also cost you more to have your return prepared.
6. Tax Returns Aid in Loan Documentation
You may need your tax return to buy a home.
Some lenders for mortgages may want to see a completed tax return as proof of income. Getting your tax return done early, whether you owe money or expect a refund, gives you a head start on the paperwork you will need for these processes and can reduce delays during the process.
7. File early to fund an IRA before Tax Deadline
If you file early and get a refund, you can use the same money to fund an Individual Retirement Account (IRA) before the April 15th deadline.
Let’s say if you are eligible to get a deduction for IRA in your Tax Return but don’t have funds for the contribution before April 15th, the smart way to is to file your tax return early to get the refund and use the same refund for IRA contribution which would help you to increase your tax savings.
Filing your taxes long before the April 15 deadline might not be your top priority, but there are many benefits to completing your return early. By filing early:
You avoid the last-minute stress,
Have time to plan for paying taxes you may owe,
You can get your refund faster and
Avoid fraud by filling out your tax forms sooner rather than later.
2017 FILING SEASON STATISTICS
IRS Cumulative Statistics comparing 04/22/2016 and 04/21/2017