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 tax returns can be tricky, confusing and you ought to be cautious while filing your tax returns.
So, let us give you some basic tips to follow while filing your tax returns. These tips will help in avoiding common mistakes to ensure that your taxes are filed properly and you obtain the maximum refunds.
1.Filing for an extension
You can easily file for an extension in the timeline of your tax return filing but, an extension in the due date for tax payment cannot be done. You might have the thought that you may end up having taxes to pay once your return filing is completed. So, you should pay whatever amount you owe to the IRS by the July deadline so that you could do reconciliation after the returns have been filed successfully. If you do not pay your taxes by the deadline, you might have to pay a penalty which you should try to avoid.
2.Document your charitable contributions meticulously
Nowadays, charitable contributions are getting a lot of scrutiny from the IRS. So, if you are planning to claim charitable contributions as itemized deductions in your tax returns then you must have written acknowledgment from charitable organizations for contributions made of $250 or more. The contribution made can only be claimed if they are made to a qualified organization. In case of your contribution being less than $250, you must keep a list or record of what you contributed and to whom.
3.Know about new due dates for some tax returns
There might be some information forms that would be needed by you for filing your tax returns might be having different due dates than that of your tax returns. So, you need to be alert and visit the IRS’s website for the information on these new due dates.
4.Need for amendment
Many taxpayers have to file amended tax returns due to reasons like receipt of updated Forms 1099, Schedules K-1, and other information forms later than filing your actual tax returns. You need to be aware of the factor that if you are receiving any rectified information returns ad you have already filed your tax returns then you would not have to amend your returns if the difference is not more than $100 in your income or not more than $25 in your withholding. In these cases, your information and filing both would be considered as correct and no penalty would be charged.
5.Expiry of your ITIN
If you are using your ITIN for tax returns filing, then you must be careful about your ITIN being expired. If your ITIN has not being used for filing federal tax returns once within three years then your ITIN must have been expired and it needs to be renewed. You can renew your ITIN by submission of Form W-7 and the necessary documents as well. If you are filing your tax returns without a valid ITIN or without submitting a renewal application for your ITIN then there might be adjustments made into your tax returns. Your income tax return would be processed but you would not receive the refunds and any exemptions claimed on the income tax return would be denied to you.
In case of any loss incurred in an area that has been federally declared disaster area, the losses can be claimed as an itemized deduction on your federal income tax returns. This loss must be related to your home, your vehicles, or any household items and the amount which you can deduct are reduced by any insurance payment which you have received or reduced by any salvage value of your property. These losses can be deducted on Schedule A of Form 1040 for the year in which the losses have occurred.
The tax season is the best season for identity thieves. You must be very vigilant and should try to keep your financial information secure. You should not send your financial information to a tax preparer by electronic medium if the medium is not encrypted. Moreover, you should be careful about phishing scams which can be in the form of fake email, text, or anonymous phone call.
8.Private debt collectors on the job
There has been a relative change in the IRS procedure i.e. the use of private debt collectors for certain federal bills that are overdue. If your tax debt is to be collected by debt collection agencies then you would be notified by a letter that confirms this. The collection agencies would send collectors who can be said as IRS contractors and any check you pay would be addressed to the IRS.
9.Query resolution with the IRS
Your queries on tax returns can be addressed by the Interactive Tax Assistant present on the IRS. This can be helpful for you in resolving your queries and thus, assisting you in filing your tax returns correctly.
10.Selection of your tax preparer
If you are planning to hire a tax preparer for preparation of your tax returns then you must obtain referrals, check the credentials of the tax preparers, interview them, and understand the method they use to bill, etc. These are the vital information that you must collect and you must check if they have a PTIN (IRS Preparer Tax Identification Number) or not which is mandated by the law.
Hence, you can follow these tips and file your tax returns successfully on time without facing any inconvenience or difficulties.
How can a qualified tax professional help you e-file your taxes amidst the pandemic to maximize your refunds?
By hiring qualified tax professionals for your tax preparation, you are free from the stress of preparing the tax returns alone. The expertise of qualified professionals would ensure that you obtain all the deductions and credits which you are eligible to receive. You can gain peace of mind, avoid making mistakes while filing tax returns, and also save your time by hiring qualified tax professionals.
Currently, the pandemic COVID-19 has created mayhem all around and has affected the economic condition of the entire country. Several businesses have been shut down and millions of Americans have lost their sources of livelihood. In such a deteriorating situation, obtaining a considerable amount of tax refund would be very helpful to ease the financial stress for some time.
If you are preparing your tax returns with the help of a qualified tax professional, your tax preparer would suggest you several methods to e-file by which you can obtain maximum tax refunds.
So, let us have a look at some of the methods to e-file suggested by your tax professionals for getting maximum tax refunds.
a.Claim all available tax deductions
Your tax preparer would suggest you to dig into all available tax deductions. There are many common deductions available such as charitable donations, medical costs, interest on mortgage and education expenses, etc. The deductions would be subtracted from your AGI (Adjusted Gross Income) thus, lowering your taxable income. As your taxable income would be low, you would have to pay fewer taxes and you can obtain higher refunds.
However, there are some deductions which you might not be aware of or are very easily overlooked such as State Sales Tax, Student loan interest, Out-of-the pocket charitable contributions, Certain jury duty fees, Child and dependent care, Reinvested dividends, State income tax paid on returns of last year, Earned Income Tax Credit (EITC), etc. You must keep good records of your deductions especially in case of charitable contributions. Moreover, your tax preparer would suggest you to ensure that you are claiming deductions for those organizations which have the status of “Tax-exempt” with the IRS.
b.Maximize your contributions made to IRA and HSA
Your tax preparer would suggest you maximize your contributions which you are making towards the IRA and the HSA. Traditional IRA contributions can help reduce your taxable income. The contributions made towards Roth IRA do not qualify for tax deductions but they can qualify for Saver’s credit if you can meet the income guidelines. In case, you are self-employed you can be able to contribute towards a certain self-employed retirement plan till 15th October 2020.
Your pre-tax contributions to an HSA can also help lower your taxable income. Your tax preparer would suggest you to contribute more towards your HSA before the timelines are closed. You should have enrolled in a health insurance plan which has high deductibles that either meet or exceed the required amounts of the IRS.
c.Use of best filing status
One of the major factors which can maximize your tax refunds is the choice of your filing status. You must inform your tax preparer about any of your major life changes before e-filing. Your relationship status on 31st December of a year determines your entire year’s filing status and you must use it while filing your tax returns. These options for filing status include Single, Married and filing jointly, Married and filing separately, Head of household or qualifying widower. If you could file your tax returns using two statuses such as “Single” and “Head of Household”, your tax preparer can calculate your taxes and find out which one would be beneficial for you in terms of more returns.
d.File your tax returns on time
Your tax professional would always suggest you to file your tax returns on time. This increases your chances of getting a maximum refund. The only exception to this is the case in which you have filed for an extension in the timeline to file your tax returns. The IRS charges penalties for not being able to file your income tax returns on time. Your penalty would be around 5% of your unpaid taxes for each month late up to 5 months from your tax filing deadline. Moreover, if you are not paying your taxes on time the IRS would charge penalties and interest on it. If there are penalties and interest levied by the IRS, then it is quite obvious for you to obtain low tax returns.
e.Report all your income
Many people do not report all income on their return. This can be intentional or unintentional but the IRS would charge penalties for this. If IRS uncovers your unreported income then it would charge penalties and interest on your unpaid taxes. Your tax professionals would suggest you to spend some extra time in reviewing your returns and make sure that you are not forgetting any source of income. Usually, the sources of income that are overlooked are the interest income, income from dividends, contract work, 529 contributions, charitable gifts, etc. You can maintain a spreadsheet and keep on updating your income sources every year to avoid mistakes while tax preparation.
Hence, with the help of these tips and methods, you are sure to maximize your refunds during these difficult times. If there is an error after filing your tax returns which would affect your refund amount, you can amend your return by filing Form 1040X.
All you need to know about Multiple State Tax filing
Multiple state tax filing As the pandemic COVID-19 continues to affect common people in the worst manner, many Americans who were residing in different states for work are gradually returning to their native states. People have now decided to return to their native States and work remotely. So, now you have quite a large number of tasks lined up for yourself.
You need to settle down, make yourself a part of the new community, and obtain a new driving license, register to vote in the new state, and many more. One more additional task is the filing of the tax return. Until now, you were filing only the Federal tax returns but now you would have other tax returns to file. These would include the need to file a tax return in the State you moved from to the State you have moved to.
Queries and confusions related to multiple state tax filing usually arise if you are earning income in different states during the same calendar year. These confusions can occur due to several reasons such as
If you are changing your residency in the mid of a calendar year to a new State.
If you are into a profession where your work makes you present in multiple states in a particular calendar year.
If you own investment property outside your home state.
Determination of State residency
For most the Americans, determination of resident state is quite simple. The complications and risk of being open for a State Audit might arise if your stay time is split between multiple states.
You will have to prove to the State about your residency by showing up things like where you had been living in most of the year, where you own property; your bank accounts are present in which State, where are you registered to vote, etc.
Determination of your State residency is the primary step in the calculation of your State tax as it will help in determining the State in which you would have to file a state tax return as a resident.
Non-resident State tax return
For those non-resident states where you have earned income, you will have to file a Non-resident state tax return. In this form, you will have to report only those incomes which were earned in the Non-resident states.
a. In case, you are the owner of an investment property in the Non-resident State then your tax return to be reported would be rental income minus the associated expenses.
b.If you are a consultant who is working in some project out of the resident state then the income to be reported would be the proportion of your salary earned while you are working on that project.
c.There are some states such as New Jersey and Pennsylvania which are into an agreement by which there is no obligation for the residents of the states to file a non-resident state tax return if they are earning in the non-resident state.
Resident State tax return
In case of your home state’s tax returns, you have to report all income that you have earned which even includes the income that has been earned in different states. This implies that all your income in that calendar year would be subject to resident state’s tax laws.
While you are completing your tax returns, you will have the opportunity to list down the taxes which you owe to pay to other states. This would be applied as a credit against the taxes which are owed to the resident state
and so,you are not in a bad state by making a part of your income outside your resident state.
Part-year resident State tax return
The part-year resident State tax return would be relevant for those Americans who have moved from one state to another in the middle of a calendar year. By this, you would have an opportunity to split your income between the two states and claim to be a resident of both the states.
For the calendar year in which you are moving from one state to another, you would file the Part-year resident State tax return. However, you do not have to worry about paying double of your State tax.
Mostly, states would tax only income earned within the state and not outside the state. When you know the exact income earned in each state, you can easily report the exact income for each state. This can be feasible if you had a savings account in your old state which you closed while moving and opened a new one in your new state.
Hence, filing of State tax returns is somewhat confusing and would take some more time. You must determine your state of residency carefully, understand your income allocation as you cannot take the numbers reported on your W-2, and review your state tax returns carefully.
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.