FAQs on US Tax Code

What is Tax Credit under US Tax Laws ?

A tax credit under Internal Revenue Credit is a credit allowed to be deducted from your tax payable. There are certain reasons , government allows you tax credit which you can use to reduce the tax liability of a tax year. Please do not confuse tax credit with tax deductions because the tax deductions are for reducing income whereas the tax credit directly reduces the tax you owe on the total income of a tax year.

 

Types of Tax Credits

Each of the following tax credit has different rules and condtions for earning tax credit

 

  1. Tax Credits for Families and Parents
  2. Tax Credits for Homeowners
  3. Tax Credits for Employees/Workers
  4. Medical Tax Credits
  5. Tax Credits for Education
  6. Retirement Tax Credits
  7. Green Energy Tax Credits
  8. Miscellaneous/Other Tax Credits

Does Married Filing Separately Status Brings Certain Special Rules ?

If you are considered married , you can file tax return either jointly or separately . If you choose married filing separately there are certain special rules that makes you pay higher tax than it would have if you and your spouse would have chosen to file jointly..

  1. The tax bracket is different for you . It prescribes higher tax rate for Married Filing Separately.
  2. Your get only 50% of the exemption amount for figuring the alternative minimum tax .
  3. No credit for child and dependent care expenses in most cases, and the amount you can exclude from income under an employer’s dependent care assistance program is limited to $2,500 (instead of $5,000).
  4. No earned income credit.
  5. You cannot take the exclusion or credit for adoption expenses in most cases.
  6. No  deduction for student loan interest or any education credits .
  7. No reduction of  any interest income from qualified U.S. savings bonds that was  used for higher education expenses.
  8. If you lived with your spouse at any time during the tax year:
  • You cannot claim the credit for the elderly or the disabled, and
  • You must include in income a greater percentage (up to 85%) of any social security or equivalent railroad retirement benefits you received.

9. The following credits and deductions are reduced at income levels half those for a joint return:

  • The child tax credit,
  • The retirement savings contributions credit,
  • The deduction for personal exemptions, and
  • Itemized deductions.

10 .You can deduct capital loss more than  $1,500 where as as joint filer you were eligible for combined limit of  $3,000 .

11. Your basic standard deduction is half the amount allowed on a joint return.

What gifts are not taxable under US Tax Law?

As a thumb rule, consider that all kind so gift is taxable under Internal Revenue Code unless the said gift actually is made exempt. Generally, the following gifts are not taxable gifts.

  1. Gifts that are not more than the annual exclusion for the calendar year. $ 14000 is for tax year 2015 . Please read Gift Tax Under Internal Revenue Code
  2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
  3. Gifts to your spouse are generally exempt , provided certain conditions are fulfilled.
  4. Gifts to a political organization for its use.
  5. Gifts to qualifying charities are also deductible from the value of the gift(s) made

What is Fair Market Value ?

Under Internal Revenue Code , there may be many circumstances where the valuation of an item will require knowing the Fair Market Value of the things. For example when one gifts , such gift is taxable . If it is in form of kinds and not money, a valuation of gift to find out the Fair Market Value or FMV shall be undertaken. Other situation in which the FMV is found out is valuation for the purpose of Estate Tax . (more…)

What is an ITIN ? How Can I Apply for it?

What is an ITIN is a very common question hovering a taxpayer especially a new one . An Individual Taxpayer Identification Number (ITIN) is a 9 digit unique number assigned by IRS to all individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA). A non-resident alien individual not eligible for a SSN who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty needs an ITIN. Other examples of individuals who need ITINs include:
• A nonresident alien required to file a U.S. tax return
• A U.S. resident alien (based on days present in the United States) filing a U.S. tax return
• A dependent or spouse of a U.S. citizen/resident alien
• A dependent or spouse of a nonresident alien visa holder

How do I apply for an ITIN?

Application for ITIN requires the new Form W-7-Application for IRS Individual Taxpayer Identification Number . You need to attach

  • a valid federal income tax return, unless you qualify for an exception,
  •  your original proof of identity or copies certified by issuing agency and
  • foreign status documents.

Send your return, Form W-7 and proof of identity and foreign status documents to:

Internal Revenue Service
Austin Service Center
ITIN Operation
P.O. Box 149342
Austin, TX 78714-9342

You may also apply using the services of an IRS-authorized Acceptance Agent or visit some key IRS Taxpayer Assistance Center in lieu of mailing your information to the IRS in Austin.

It must be noted that since you are applying for ITIN, the federal tax return filing first time must be attached and go the address above and not the address given in the Form 1040, 1040A or 1040EZ instructions.

If any confusion persist, you can call the IRS toll-free at 1-800-829-1040 if you are in the United States. If you are outside the United States, call 267-941-1000 (not a toll-free number) for information and help in completing your Form W-7 and your tax return or to check on the status of your application six weeks after submitting Form W-7.

If everything is okay ,you will receive a letter from the IRS assigning your tax identification number usually within seven weeks.

What is a Qualifying child ?

Under Internal Revenue Code , the deduction for dependents can be claimed. So, your children can be claimed as depended provided they fit in the definition of the term ” Qualifying Child “. So , a qualifying child is one who fulfills the criteria for being declared as dependent .

What is Standard Deduction ?

Standard deduction is a flat deduction i,e an amount which you are allowed to deduct from your gross income in order to arrive taxable income . In other words, if you earn in gross only to the extent of the standard deduction, your taxable income will be nil .

The standard deduction is allowed to be reduced only if you have not claimed any itemized deduction.

Tax Year 2015 Standard Deduction

Filing Status Standard Deduction
Single $6,300
Head of Household $9,250
Married Filing Separately $6,300
Married Filing Jointly $12,600
Qualifying Widow(er) $12,600

Additional Standard Deduction for 65 Years & Older

(Tax Year 2015)

  1. 65 or older ,Single Filing status                                          $1,550 more
  2. 65 or older, Head of Household filing status                   $ 1550 more
  3. 65 or older,Married or Widowed filing status                $ 1250
  4. Both 65 Yrs & more , filing jointly                                    $ 2400

Additional Standard Deduction for Blind person

(Tax Year 2015)

  1. Single Filing status                                          $1,550 more
  2. Head of Household filing status                   $ 1550 more
  3. Married or Widowed filing status                $ 1250
  4. Both are blind , filing jointly                         $ 2400

A blind person is eligible for extra standard deduction , if you have been certified from an eye doctor (or optometrist) having correctable 20/200 vision in your best eye or that your field of vision is restricted to 20 degrees or less.

What is Above the Line Deduction ?

The “Above the line” deductions are  deductions which are reduced from gross income first to determine Adjusted Gross . The other types of deductions- standard deduction or below the line deductions are reduced only when you find out the Adjusted Gross Income.Thus , the Above the Line deductions are deducted irrespective of the fact that you also claim standard deduction. But Below the Line deduction can not be claimed if you opt for the standard deduction

“Above the line” deduction examples are expense on :

Internal Revenue Code Sections 62 states that the following items are allowable as above-the-line deductions:

  • Contribution to Traditional IRA (Form 1040 Line 32)
  • Certain expenses of performing artists (Form 1040 Line 24)
  • Certain expenses of state officials (162) (Form 1040 Line 24)
  • Certain expenses for books and supplies incurred by teachers (162) (Form 1040 Line 23)
  • Certain expenses for Army Reserve members (Form 1040 Line 24)
  • Certain deductions of life tenants and income beneficiaries of property
  • Retirement plan savings for the self-employed (219) (Form 1040 Line28)
  • Penalties forfeited because of premature withdrawal of funds (Form 1040 Line 30)
  • Alimony payments (215) (Form 1040 Line 31a)
  • Reforestation expenses
  • Required repayments of supplemental unemployment compensation
  • Jury duty pay given to the employer (Form 1040 Line 36)
  • Clean fuel vehicles
  • Moving expenses (217) (Form 1040 Line 26)
  • Archer Medical Savings Accounts
  • Interest on student loans (221) (Form 1040 Line 33)
  • Higher Education expenses (222) (Form 1040 Line 34)
  • Health savings accounts (223) (Form 1040 Line 25)
  • Costs involving discrimination suits

“Above the line” deductions are claimed on Page 1 of Form 1040 and reduce Adjusted Gross Income. “Below the line” deductions are claimed on Page 2 of the 1040 and reduce Taxable Income.

What is Tax Exemption Under US Tax Law ?

Tax exemptions are amounts that are allowed to be deducted from Gross Adjusted Income . The tax exemptions are allowed as  personal exemption and exemptions for dependents declared for you . For tax year , tax exemption of $ 4000 is allowed .

What Are Rules for Claiming Tax Exemptions?

  1. For filing status as Single , one exemption can be claimed.You may generally claim one tax exemption for yourself if you are a single taxpayer.
  2. For Married Filing Jointly , two exemptions -one for you and one for your spouse can be claimed.
  3. Married but filing separate return – the tax exemption for spouse can be claimed only if  your spouse is not filing a tax return, has no gross income, and was not claimed as the dependent of another taxpayer.
  4. Married during tax year or demise of  your spouse  during the tax year, will not debar you from claiming tax exemption.
  5. You can claim tax exemptions for dependents only if all of the following statements are satisfied:
  • You or your spouse (if filing jointly) are not claimed as a dependent on another person’s tax return.
  • The  dependent is not filing tax return as Married Filing Jointly. The only exception is that the joint return is only a claim for a refund and there would be no taxes owed by either spouse if their returns were filed separately.
  • The dependent must be either United States citizen or resident alien, or resident of Canada or Mexico . The exception to this rule is that if dependent is a legally adopted child , exemption can be claimed without adhering to these rules.
  • The dependent must be either Qualifying Child or your Qualifying Relative.

Readers should also know about the Personal Exemption Phase Out which  means that the exemption may not be allowed to certain people who have very high Adjusted Gross Income . Please read what is personal exemption phaseout ?

 

What is Personal Exemption Phaseout ?

exemption phaseout calculatorThe personal  exemption phaseout means as your income grows, you will get less of standard exemption for tax year i.e  $ 4000 ( Year 2015)  . But ,the government desires that as the income of a tax payer increase , he/she should not claim personal tax exemption to the same extent which a taxpayer of low income is entitled to . SO , a formula has been devised by which as the Adjusted Gross Income goes up, the claimable personal exemption starts diminishing or phasing out. (more…)

What are Tax Credits ?

Tax credits under Internal Revenue Code are amounts of expenses which entitles you credit against the tax payable . In other words, if for any reason you get tax credit, you will have to pay the tax after reducing the tax credit available to you. There are basically two types of tax credit available to you-refundable tax credit and non-refundable tax credit. (more…)

What is Earned Income & Unearned Income ?

Internal Revenue Code uses the terms earned income and unearned income at many places for deciding the credits , filing of return criteria etc. Basically , Earned Income means income which you have earned by making efforts at least to some extent by physical labour maybe associated with your intellect like   salaries, wages, tips, and professional fees. It also includes taxable scholarship and fellowship grants which you get as student of some course .

Unearned income mean income from  investments like  income such as taxable interest, ordinary dividends, and capital gain distributions.Other income which are covered under the Unearned Income are unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust. Gross income is the total of your earned and unearned income

What is Modified Adjusted Gross Income for Child Tax Credit Purpose ?

While computing the quantum of child tax credit , one of the rule says that the Modified Adjusted Gross Income (MAGI) must be  more than the income shown below against certain limits fixed for each filing status. AT that point , you need to know what does the MAGI mean.

You can find out  modified AGI  by adding to your Adjusted Gross Income (the amount on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37.) any of the following amounts that may apply to you.

  • Any amount excluded from income because of the exclusion of income from Puerto Rico. On the dotted line next to Form 1040, line 38, enter the amount excluded and identify it as “EPRI.” Also attach a copy of any Form(s) 499R-2/W-2PR to your return.
  • Any amount on line 45 or line 50 of Form 2555, Foreign Earned Income.
  • Any amount on line 18 of Form 2555-EZ, Foreign Earned Income Exclusion.
  • Any amount on line 15 of Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa.

What if you do not have any of the above? Simple , your AGI is  your modified AGI .

What is additional child tax credit ?

When computation of the child tax credit is done, it may happen that some amount is reduced because of the rules of computation of allowable child tax credit . In those cases, you can claim additional child tax credit .The additional child tax credit may give you a refund even if you do not owe any tax. If you have foreign earned income and for that reason filed Form 2555 or 2555-EZ ,you cannot claim the additional child tax credit.

How to claim the additional child tax credit.

To claim the additional child tax credit, follow the steps below.

  1. Make sure you figured the amount, if any, of your child tax credit.
  2. If you answered “Yes” on line 9 or line 10 of the Child Tax Credit Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions (or on line 13 of the Child Tax Credit Worksheet in this publication), use Parts II–IV of Schedule 8812 to see if you can take the additional child tax credit.
  3. If you have an additional child tax credit on line 13 of Schedule 8812, carry it to Form 1040, line 67; Form 1040A, line 43; or Form 1040NR, line 64.

What is Earned & Unearned Income ?

At many place , you will have to deal the the term unearned income and earned income. In fact many releifs and legal obligation under Internal Revenue Code is fixed on the basis of these income or gross income which is basically aggregate of earned income and unearned income. So knowing the meaning of these are important

Earned Income

Under Internal Revenue Code the term Earned income includes salaries, wages, tips, and professional fees. It also includes taxable scholarship and fellowship grants .

Unearned Income ?

The unearned income means investment-type income such as taxable interest, ordinary dividends, and capital gain distribution unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust.

What is an Eligible Educational Institute for Education Credit Purpose ?

Education credit is available to an indiviudual only if he /she is studying in an eligible educational institute that is defined as  a school offering higher education beyond high school. So, it can be  any college, university, vocational school, or other post secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education. An eligible educational institute  includes most accredited public, nonprofit and privately-owned–for-profit postsecondary institutions.

What is Modified Adjusted Gross Income ?