How to Receive the Most Benefit From Personal Income Tax

department of finance
 There are a few main tips for receiving the most out of your tax return. By understanding all of your options, you can benefit as much as possible from personal income tax.

 

First and foremost, make sure to use all of your FSA dollars. FSA dollars are known as Flexible Spending Account dollars. These are funds that can be used for your retirement or 529 accounts. Certain states in the United States allow deductions for contributions to 529 accounts. There are certain limits placed upon the amount you can contribute to your retirement account. Each limit depends upon your age. The limits differ for each tax filing year. 

 

Another common way individuals leave money unclaimed is by not filling at all. If an individual is not required to file, they should still file regardless. If an employee makes less than a certain amount, they do not have to file. However, if they do file they are usually eligible for some type of return. The IRS estimated a total of 1.1 billion dollars go unclaimed from tax return annually from individuals who chose not to file. 

  

The next tip is to claim all deductions possible. This also includes charitable contributions. If you contributed to charity, you are edible for a refund. Some of the most common deductions are medical, charity, prepaid interest for homeowners (mortgages) and educational expenses. The deductions you claim are then deducted from your taxable income. Charitable donations in the form of both goods and cash are eligible for a deduction. It is important to keep organized records for all the donations you made. These will be needed when it comes to filing your taxes. Lastly, make sure that you are claiming a deduction from an organization that currently has a tax-exempt status

 

Lastly, nonrefundable tax credits can reduce the amount of tax you owe. Nonrefundable tax credits can help you ultimately owe less on your bill. For example, if you owe the government $1,000 and only paid $950, the nonrefundable tax credit will be applied to the bill. However, any remainder of your nonrefundable tax credit will not be given back to you, it will only be used to make up for the difference. Knowing the difference between nonrefundable tax credits and refundable tax credits is very important for maximizing your annual return. 

  

It is always important to adhere to all rules and regulations regarding taxes. It is not permissible to be misleading on your tax returns or use aggressive accounting. It is always better to stay on the safe side than take a risk with the IRS.

 

  •  Always report all income

It is very important to report all of your income to the IRS. In many cases failing to report all of your income is an honest mistake, however, the consequences are the same. You are responsible for reporting all of your income and checking it for accuracy. 

 

  •  File by the deadline

 It is also very important to file by the specified deadline. 

 

  •  Review your tax return for errors and mistakes

Reviewing your tax return for errors or spelling mistakes is important as it ensures your return is processed as quickly as possible. Errors will slow down the process for the IRS. 

The Ultimate Tax Guide: Personal Income Tax

The Dos and Don’ts of Personal Income Tax

personal income tax discussion
 
Personal income tax is a tax that is paid from an individual’s income. When an individual receives their paycheck, a certain amount of the paycheck is withheld for federal, state, local, Medicare and Social Security tax.

 

These are several types of taxes that are typically withheld. It is also important to remember that with each type of tax, the employee pays one half and the employer pays the over half to the government.

 

Federal Tax

Withheld federal tax is sent directly to the IRS on behalf of the employee. An employer will withhold this amount from the paycheck for each pay period. Federal tax can differ depending upon each individual. The main reason for this is due to the W-4 form. When employees are hired, they fill out a W-4 form. The W-4 form specifies information such as an employee’s filing status, the number of dependents they have, as well as other adjustments.

 
State Tax

Some states have a state income tax. Not every state in the United States has an income tax, however, some do. In the event the state you work in has an income tax, it is important to understand how it works. State income tax will also be based upon your state W-4 form. The W-4 form will indicate to your employer how much to withhold from your paycheck. If you happen to work in one state, and reside in another, there are a few options. In this scenario, the employee would owe taxes in two separate states. If this is the case, the employee should ask their employer to withhold taxes for the state they reside in as well as additional taxes for the state the work in.

 

Local Tax

Similar to state tax, local tax applies to a specific city. Not all cities have a local income tax. For example, local tax can apply to a certain school district. If you reside in a specific school district, you may have to pay local tax, even if you don’t work within the district.

 

Medicare Tax

Medicare tax is a type of tax that is withheld from every employee’s paycheck for current Medicare beneficiaries. Medicare tax is withheld at a rate of 1.45% of an employee’s gross income. Medicare tax does not have a limit, therefore all wages are subject to the tax, regardless of how much gross income is generated. Employers are required to withhold an additional 0.9% of Medicare tax on income greater than 200,000 annually.

 

Social Security Tax

Social security tax is a type of tax that applies to all employee’s paychecks. Social security tax benefits retired employees that earned a specific amount over 40 quarters. This allows employees to be eligible for social security benefits when they retire. Every employer is required to withhold 6.2% of an employee’s income for social security tax. The limit for this is $137,700 as of 2020. Employers also pay 6.2% of the social security tax.

How a Non-Resident Can Open a US LLC

LLC in the USThe United States is one of the largest economies in the world, and companies based in the US are usually trusted worldwide. This makes it is easier for the business to collect payments from customers.

Hence many people who are not residing in the United States would like to set up a business in the U.S, since it will have a good reputation. It is possible for a person who is not residing in the US to set up a Limited Liability Company (LLC) and also avoid paying taxes in the country. Information on forming a US LLC for non-residents is provided below.

Advantages

There are many advantages of forming a US LLC compared to a business in other countries. In addition to the excellent reputation which a US LLC will have worldwide, the setup and maintenance costs of a business established in the United States are far lower than in other countries. It is usually possible to set up a business in the US in one week, spending approximately $500, while in other countries like Canada, business owners will have to spend $2000 for business formation. The business owner will not have to provide much business information for Know Your Customer (KYC) purposes. A US-based business will also have access to excellent banking and payment processing facilities.

Tax benefits

One of the major advantages of opening a US LLC for a non-resident or non-citizen is that the business will not have to pay any tax in the US if it meets some criteria. These criteria are that the business should be 100% owned by a non-US resident, does not have any local presence in the US and income is not effectively connected. This makes it ideal for a variety of online business and service providers. Companies offering consulting, dropshipping services, selling digital products, selling through Amazon (FBA) and freelancing are often organizing their business as a US LLC and do not pay any taxes in the country.

Procedure

A business can open its LLC in any of the 50 states in the United States. Some of the factors which should be considered for choosing a state, are the cost of formation, annual fees, anonymity and other laws. Only four states Delaware, New Mexico, Nevada and Wyoming allow the business owner to keep their information anonymous. Additionally Wyoming makes it difficult to sue the LLC owner. After deciding the state, the business owner should choose a name for the business after ensuring that the name is not already registered in the database of the state. The business owner should then choose a service provider who will be the registered Agent and open the LLC on his behalf. On this specific point the best information are found on this website.

Employer Identification Number (EIN)

For opening a US LLC, the business owner will have to apply for an EIN with the Internal Revenue Service (IRS). The EIN is a tax identification number. To get a nine-digit EIN, the business owner, will have to fill the application form SS-4, with a business name, US business address, and a brief description of the activities of the business. This EIN is required for opening a bank account or applying for accounts with payment processors like Paypal.

Bank account

A US LLC owned by a non-resident will require a bank account to receive payments, pay their vendors and for reporting purposes. The bank account can be opened with traditional banks like Chase, Bank of America. However, to open a bank account in these banks, the business owner should be physically present in the United States. The alternate option is opening an account with neobanks which allow the bank account to be opened remotely. Some of the neobank options for US LLC owners are Transferwise, Payoneer, and Mercury.io

Filing requirements

All US LLCs have to submit the form 5472 with form 1120 annually by April 15. In this form, the business owner will have to provide some financial information of the business, like the LLC value on 31st December of the tax year, the amount of money moved from the non-US owner to the LLC, and the money moved from the LLC to the owner in the tax year. This form has to be mailed or faxed to the IRS, Ogden, Utah, Failure to file this form can result in a penalty. The owner is also expected to compile a profit and loss statement, based on the payment received, and expenses of the business.