IRS Plans Jan. 30 Tax Season Opening For 1040 Filers

Posted by Sanket Shah | International Tax | Friday 11 January 2013 11:40 am

Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.

The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers — more than 120 million households — should be able to start filing tax returns starting Jan 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.

“We have worked hard to open tax season as soon as possible,” IRS Acting Commissioner Steven T. Miller said. “This date ensures we have the time we need to update and test our processing systems.”

The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.

“The best option for taxpayers is to file electronically,” Miller said.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. ‬While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.
The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.

Who Can File Starting Jan. 30?

The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major “extender” provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Who Can’t File Until Later?

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.
The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won’t be accepted until later is available on IRS.gov.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.

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Form 8938

Posted by Sanket Shah | General | Wednesday 1 February 2012 12:01 pm

 

For tax years beginning after March 18, 2010, certain individuals must file new Form 8938 to report the ownership of specified foreign financial assets if the total value of those assets exceeds the reporting threshold amount.

Who Must File: Unless an exception applies, you must file Form 8938 if you are a specified person that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

Exception: If you do not have to file an income tax return for the tax year, you do not have to file Form 8938, even if the value of your specified foreign financial assets is more than the appropriate reporting threshold.

Specified individual: You are a specified individual if you are one of the following:

1. A U.S. citizen

2. A resident alien of the United States for any part of the tax year

3. A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return

Specified foreign financial assets: Generally include the following assets:

1. Any financial account maintained by a foreign financial institution.

2. To the extent held for investment and not held in a financial account, any stock or securities issued by someone that is not a U.S. person, any interest in a foreign entity, and any financial instrument or contract with an issuer or counterparty that is not a U.S. person.

Reporting threshold: If the total value of your specified financial assets is more than the following:

Taxpayer living in United States

Taxpayer living abroad

On the last day of the tax year

Anytime during the tax year

On the last day of the tax year

Anytime during the tax year

Unmarried $50,000 $75,000 $200,000 $300,000
Married filing jointly $100,000 $150,000 $400,000 $600,000
Married filing separately $50,000 $75,000 $200,000 $300,000

Form 8938 does not relieve you of the requirement to file FBAR form TD F 90-22.1

 

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USA Tax Amnesty Program OVPD Reopens

Posted by Sanket Shah | General | Tuesday 10 January 2012 3:03 pm

The Internal Revenue Service on January 9th, 2012 reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures.  Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS is currently developing procedures by which dual citizens and others who may be delinquent in filing, but owe no U.S. tax may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be posted on our blog, as it becomes available.

Official announcement can be read here http://www.irs.gov/newsroom/article/0,,id=252162,00.html?portlet=108

 

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US Foreign Tax Credit for Taxes paid in India

Posted by Sanket Shah | General | Monday 26 December 2011 6:17 pm

Let me first give you all a brief background of tax system in both countries (i.e. India and USA).

In India, the income tax is levied on the income that is generated during a fiscal year which commences on 1st April and ends on 31st March of each year. The due date of filing the Individual tax return is 31st July.

In USA, the income tax is levied on the income that is generated during a calendar year which commences on 1st January and ends on 31st December of each year. The due date of filing the Individual tax return is 15th April.

Firstly, a taxpayer who pays or accrues a foreign income tax may not take the tax into account in calculating the foreign tax credit or deduction until the related income is taken into account for USA income tax purposes.

So let us assume that you have disclosed all your income generated in India in your USA Tax Return. This includes income that is tax free in India e.g. Dividend Income, PPF (Public Provident Fund) interest, Long Term Capital Gain (on listed Companies), etc.

Now the question, how can you claim the benefit of taxes paid in India on your USA Tax Return.

USA tax payer is allowed a credit or deduction against USA income liability for foreign taxes paid or accrued to a foreign country. Qualified foreign taxes do not include taxes that are refundable to you or used to provide a subsidy to you.

You can choose to take the amount of any qualified foreign income taxes paid or accrued during the year as a foreign tax credit or as a deduction.

To choose the deduction, you must itemize deductions on Form 1040, Schedule A.

To choose the foreign tax credit you generally must complete Form 1116 and attach it to your Form 1040.

If you use Form 1116 to figure the credit, your foreign tax credit will be the smaller of the amount of foreign tax paid or accrued, or the amount of United States tax attributable to your foreign source income. Penalties, interest, fines and similar obligations are not creditable foreign taxes.

Generally, it is more advantageous for a USA tax payer to claim the tax credit because it is taken against the tax payers USA liability on a dollar-for-dollar basis. In contrast, a deduction for foreign taxes merely reduces a taxpayers income subject to tax.

Credit or Deduction shall be taken as follows:

  1. Interest Income: In India on the interest income the payer is required to deduct TDS (Tax deducted at source) and pay only the net amount to the payee. At the end of the year (i.e. 31st March ) the payee receives a statement referred to as Annual TDS Certificate. This TDS Certificate shall reflect the amount of TDS deducted from payee on a quarterly basis. So, if a USA person has included the Income for the three quarters say April to December, then he should take TDS amount paid as foreign tax credit or deduction for only period April to December.
  2. Capital Gains and Other Income: Take the income that is generated in your Calendar Year as Income and take TDS paid on that income as a credit or deduction.
  3. Advance Tax: The Term Advance tax in India is similar to Estimate Tax in USA. Now here I have couple of examples for everyone:
    1. For income such as interest, let us assume that you have earned income of Indian Rupees (“INR”) 5,00,000 in a fiscal year and total tax you paid on your Indian income is INR 25,000. Average rate of tax thus comes to 5%. If in the calendar year, you have earned income of INR 3,50,000 then you need to show this income in your US tax return and claim foreign tax credit of Rs. 17,500.
    2. Let us take another scenario, say you sold a property on 15th October 2011 and tax liability on the sale of the property came to INR 100,000. In India, you would pay Advance Tax on 15th December of INR 60,000 and on 15th March of INR 40,000. Now for USA point of view, as you would have disclosed the entire income of Capital Gain in calendar year 2011. You would able to take the entire tax paid or accrued as credit or deduction. In this case the INR 60,000 would be regarded as Paid and INR 40,000 would be regarded as Accrued.
  4. Self Assessment Tax: The Term Self Assessment tax in India is similar to Amount you Owe on your line 76 of Form 1040 in USA. You can take proportionate credit of the taxes paid, for the income that you have disclosed in your USA tax return.

Now someone may ask after reading 1 to 4 above, what if I had a refund in the foreign country. Well then you need to find out what is your Average Rate of Tax and take credit only to that extent.

So what is Average Rate of Tax:

Let us take an example: You have following Income:

Interest INR 300,000

Other Income INR 200,000

Short Term Capital Gain INR 500,000

Total Income INR 1,000,000

Tax on the Above Income INR 150,000

Less: TDS on Interest INR 60,000

Less: TDS on Other Income INR 40,000

Less: Advance Tax paid INR 200,000

Refund Due INR 50,000

Now you cannot claim the entire TDS and Advance Paid as your credit as you got a refund of INR 50,000. Your Average Rate of Tax would be 15% and not 20%. You can claim credit to the extent of 15%.

The bottom line is that you can take credit or deduction of taxes paid in the foreign country towards the foreign income disclosed in your USA tax return. The credit or deduction should not be more that the Average Rate of Tax that you paid in the foreign county.

As you would only come to know about your Average Rate when you file the return in the foreign country (in India by July 31st ), you have two alternatives: Either file for an automatic extension of six months in USA or estimate what your Average Rate of Tax is going to be in the foreign county (if it turns out that your estimate was incorrect then the final arrived percentage, then you will have to revise your return).

Foreign Tax Credit involves complex analysis of each transaction. There are special rules for allow credit only of fulfillment of certain criteria’s. Please consult knowledgeable USA – India Tax advisor for proper tax disclosure and maximum tax benefits. 

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Who must file a US Individual Tax return?

Posted by Sanket Shah | General | Wednesday 14 December 2011 6:51 pm

We are often asked as to who must file an Individual Tax Return in US.

Generally, all US Citizens and resident aliens (refer to our blog in October 2011 as to who is regarded as resident alien) are liable for federal income tax on their world wide income, without regard to whether the income arose from sources within or outside of United States. For each tax year, a return must be filed by them who has at least a specified minimum amount of gross income.

The filing threshold for most individuals is the sum of the applicable exemption amount plus the applicable standard deduction amount for the tax year.

 

Generally, the gross income levels at which individuals must file income tax returns for 2011 are:

If the applicable gross income test is met, then a return must be filed even though the individuals exemptions and deductions are such that no tax is due.

If the applicable gross income test is not met, then a return is required to filed whenever a refund of tax or refundable credit such as earned income credit is available.

A return is also required to be filed if:

  1. Net earnings from self-employment are at least $400.
  2. Liability for Alternative Minimum tax is incurred, etc.
  3. You received advance earned income credit payments from your employer. These payments are shown in Form W-2, box 9
  4. Recapture of first time home buyers tax credit.
  5. Social security and Medicare tax on tips you did not report to your employer or on wages you received from an employer who did not withhold these taxes. etc.
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Individual Tax Return, Due Date and Forms

Posted by Sanket Shah | General | Wednesday 7 December 2011 5:22 pm

Income tax returns for individual calendar year taxpayers are due by April 15 of the next year. Should April 15 fall on a Saturday, Sunday, or a legal holiday in Washington D.C. or in the state to which the return is required to be filed, the returns are due on the next business day. For example, in 2012, April 15 is on a Sunday. April 16 is a legal holiday, Emancipation Day, in Washington D.C. Because Monday, April 16, 2012 is a legal holiday in Washington D.C., Form 1040 income tax returns filed on Tuesday, April 17, 2012, will be treated as timely filed on Sunday, April 15, 2012.

Regular Form

The Form 1040 – U.S. Individual Income Tax Return:

It is the starting form for individual federal income tax returns filed with the IRS. It consists of two full pages not counting attachments. It has 11 attachments, called “schedules”, which may need to be filed depending on the taxpayer. The most commonly used schedules are:

  • Schedule A – It is used to claim itemizes deductions which are allowable against income. Taxpayers may choose to take a standard deduction instead of an itemize deduction. Basic standard deductions range between $5,800 and $11,600 (for tax year 2011), depending on filing status.
  • Schedule B – Enumerates interest and/or dividend income. It is required if either interest or dividends received during the tax year exceed $1,500 from all sources or if the filer had certain foreign accounts.
  • Schedule C – Lists income and expenses related to self-employment, and is used by sole proprietors.
  • Schedule D – It is used to compute capital gains and losses incurred during the tax year.
  • Schedule E  - It is used to report income and expenses arising from the rental of real property, royalties, or from pass-through entities (like trusts, estates, partnerships, or S corporations).
  • Schedule SE – It is used to calculate the self-employment tax owed on income from self-employment (such as on a Schedule C, etc.).

There are other, specialized forms that may need to be completed along with Schedules and the Form 1040.

Short forms

The Form 1040A called “short form” – U.S. individual income tax return, is a shorter version of the Form 1040. Use of Form 1040A is limited to taxpayers with taxable income below $100,000 and who take the standard deduction instead of itemizing deductions.

The Form 1040EZ called “easy form” – Income Tax Return for Single and Joint Filers With No Dependents, is the simplest, six-section Federal income tax return. It is used by taxpayers with taxable income below $100,000 (as of tax year 2011) and who take the standard deduction instead of itemizing deductions.

Other

The Form 1040NR – U.S. Nonresident Alien Income Tax Return.

The Form 1040NR-EZ called “easy” – U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents. It is used by nonresident aliens who have U.S. source income and therefore have to file a U.S. tax return. Joint returns are not permitted, so that husband and wife must each file a separate return.

The Form 1040X – Amended U.S. Individual Tax Return. It is used to make corrections to Form 1040, Form 1040A, and Form 1040EZ tax returns that have been previously filed.

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Resident and Non-Resident Alien

Posted by Sanket Shah | International Tax | Tuesday 18 October 2011 2:00 pm

Very often we are asked, why a person who is residing in U.S and is on an H1 or L1 visa, required to disclose his world wide income in his U.S Tax return.

Our first suggestion, please do not confuse your Immigration status with your Tax status. They are two independent bodies and have different set of rules. Having said that, let us brief you the U.S Tax requirement.

A resident alien’s income is generally subject to tax in the same manner as a U.S citizen. If you are a resident alien, you must report all interest, dividends, wages or other compensation for services, income from rental property or royalties and other types of income on your U.S tax return. You must report these amounts whether from sources within or outside  the United States.

(more…)

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