How Income Taxes Work

Paying taxes is on everyone’s mind, rarely in a good way. Knowing some pithy facts about our tax system and how you fit in may not make you feel any better. But, it could even help you plan.

  1. The IRS receives over 140 million individual tax returns and collects over $950 billion in taxes.
  2. The biggest tax deductions are those for taxes paid to state and local governments. Next biggest are for interest, especially on home mortgages.
  3. The average tax refund is almost $3,000, $2,953 to be exact. In all, over $325 billion in tax refunds are paid out.
  4. Want to aim really high and try to crack the $10 million mark? More than 11,000 individual tax returns reported adjusted gross income above $10 million.
  5. As a percentage of adjusted gross income, people earning $100,000 to $200,000 pay an average federal tax rate of only 12%. Those earning $200,000 to $500,000 pay 19.6%. Don’t confuse marginal rates with average rates. The former is what you pay on your very last dollar.

 

The income tax process is fairly straight forward. The tax process starts with income & usually most income which is received is taxable. Income from work, interest, pensions, and investments as well as other sources are included in a taxpayer’s gross income. The income from all these sources are added together to arrive at the taxpayer’s gross income.

What is not considered as income?
Gifts, worker’s compensation benefits, child support payments, inheritances, cash rebate from a dealer or manufacture or inheritances?

Adjustments are subtracted from gross income. They might include retirement plan contribution, alimony, half of self-employment & moving expenses, among other items. This results to adjusted gross income.

Deductions are subtracted from adjusted gross income. Tax payers have two choices regarding deductions: The standard or itemized deductions, whichever is greater. The standard deductions vary based on filing status:

 

Filing status Married filing jointly Married filing separately Single filers Head of household
Standard deduction amounts  

$12,700

 

$6,350

 

$6,350

 

 

Itemized deductions could include state and local taxes, certain unreimbursed job expenses, charitable contributions, interest on a home mortgage & the cost of having your taxes prepared, among other things.

The personal exemption is subtracted once the deductions have been subtracted. For the tax year 2017, personal exemption amount is $4,050 regardless of filing status. The result here is taxable income which leads to gross tax liability.

The IRS reports that about 40% of the taxpayers use tax preparation software. Source: IRS, 2017

But, it’s not over yet.

The tax credits are subtracted from gross tax liability. Tax payers might receive credits from variety of items, including energy-saving improvements. This results to the taxpayers Net Tax.

Understanding tax process is one thing and the work is another. Remember this material is not intended as tax or legal advice. Please do consult a tax professional for information regarding your individual situation.

Estimated Tax Payments

If you earn income which is not subject to withholding, such as interest, dividends, income from self-employment, rent, alimony, investment gains, awards and prices then you may have to pay estimated tax payments.

You might also have to pay estimated taxes if your income tax withholding on pension, salary, or other income which is not enough, or if you had a tax liability for the prior year.

Please do consult a tax expertise regarding your individual situation.

 

HOW TO FIGURE ESTIMATED TAXES

You must include your expected adjusted gross income, taxable income, taxes, deductions, and credit for the year to calculate your estimated tax.
Consider using your prior year’s federal tax return as a guide.

HOW TO PAY ESTIMATED TAXES

You may pay estimated taxes online, by phone or even through the mail.
If you are filing as a partner, a sole proprietor, S corporation shareholder or a self-employed individual & expect to owe tax of $1.000 or more when you file a return, you should use Form 1040-ES, estimated tax for individuals, to calculate and pay your estimated tax

The year is divided into four payment periods for estimated tax purposes each with a specific payment due date. If at all you fail to pay taxes by the due date of each payment periods, you would be charged a penalty, even if you are due a refund when you file your income tax return.

Most tax payers would generally avoid the penalty if at all they owe less than $1,000 in taxes after subtracting their withholdings and credits, or if they at least paid 90% of tax for current year, or 1000% of tax shown on return for the prior year, whichever is smaller.

Accurate, up-to-date financial records and consultations with your tax guru can also help you make timely estimate.

 

Aadhar and Pan

Link Your PAN Card with Aadhar Card Now

It is mandatory to link your PAN Card with Aadhar Card on or before 1ST JULY,2017.

CONSEQUENCES OF NOT LINKING

If PAN Card is not linked to Aadhar Card then that may lead to invalidation of your PAN card. If that happens, your PAN card will cease to serve as an identity proof, debarring you from transactions that cannot be carried out without quoting PAN.

HOW TO LINK PAN CARD WITH AADHAR CARD

To know the steps to link your Pan Card with Aadhaar Card, you can check our blog for the same by following the link given below:

http://unicomply.com/blog/2017/06/12/financial-tasks-that-you-need-to-do-right-away/

MCA Update – Aadhaar Integration For Availing Various MCA21 Related Services

aadhaar

MCA is actively considering Aadhaar Integration for availing various MCA21 related services. As a preparatory step, all individual stakeholders viz. DIN holders / Directors / Key Managerial Personnel / Professionals of the Institute of Company Secretaries of India/Institute of Chartered Accountants of India/Institute of Cost Accountants of India (whether in employment or in practice) are requested to obtain Aadhaar as early as possible for integrating their details with MCA21 and also ensure that the information in Aadhaar is in harmony with PAN.

 

Note:

When implemented, all MCA21 services shall be available based on Aadhaar based authentication ONLY. The date of Aadhaar integration with MCA21 would be announced shortly.

 

gst tax

Reduced Liability Of Tax On Complex, Building, Flat etc. Under GST

According to complaints from buyers of flats and other buildings-under-construction recently, builders are demanding that they be paid the entire amount of cost of buying the flat before 1st July, 2017.

This is what the builders are claiming: pay now, or else pay higher amount of tax under new GST (Goods and Services Tax) system. They say this because the current service tax that you pay on goods would amount to a maximum of 6.5%, whereas under the GST scheme, you will pay 12% service tax on the cost of construction.

What they do not tell you, and what you may not have noticed before, is that the tax you would pay on your flat or office building before GST rolls out, is calculated even on the inputs (cement, steel, etc.) the builder uses to construct the building. So until the GST rolls out, you will have to pay for the service of construction as well as for the cost of acquiring the raw materials used for construction.

After the GST rolls out however, you will pay only for the service of construction in the form of tax calculated at 12% on the cost of construction (labour). This is because builders are provided with a facility called Input Tax Credit (ITC), wherein they can claim a reduction of taxes on total cost of construction. So if it cost them Rs. 1000/- to get raw materials and another Rs. 500/- for labour, they can get back Rs. 1000/- from the government as it comes under the definition of “Inputs”. So if you make the entire payment for your flat before 1st July 2017, you will pay tax on Rs. 1500/-, but if you pay the total amount after 1st July 2017, you will pay tax on Rs. 500/-

Therefore, you will not bear the cost of input (raw materials) after GST rollout. This means you will pay less after GST for your house/office overall, than you pay now. So any builders out there claiming you can pay less before GST rolls out, are only trying to profit from your lack of knowledge about the effect of cost of inputs, on the price you pay for the flat. Such builders can be deemed to be profiteering under section 171 of GST law. Hence, it is good to be advised on this matter before making a purchase of a new home or office.

 

For more information, visit the following page: http://pib.nic.in/newsite/PrintRelease.aspx?relid=165663


 

Financial tasks that you need to do right away

Here are some financial task that you need to deal with immediately:-

1. LINK YOUR AADHAAR CARD

It is mandatory to link your Aadhaar card to bank account, PAN card and mobile number. Here’s how you can do it:

(A) Bank Account

Step 1. Log on to the Net banking facility of your bank.
Step 2. Click on ‘Update Aadhaar card’ or ‘Aadhaar card seeding’ option.
Step 3. Enter Aadhaar card details and submit.
Step 4. After verification, the linking will be done and you will be informed via SMS or e-mail. You can also link it offline.

 

(B) Pan Card

Step 1. Log on to the government income tax website www.incometaxindiaefiling.gov.in and click the link ‘Link Aadhaar’ on the left under ‘Services’
Step 2. Give PAN and Aadhaar numbers, fill name and submit. After verification from UIDAI, the link will be confirmed.

OR

Step 1. If you are registered on the income tax portal, log on and go to ‘Profile Settings’. Pull it down, click on ‘Link Aadhaar’.
Step 2. Verify details like name, date of birth and gender with those in your Aadhaar card. If the details match, fill in the Aadhaar number and captcha code, and click on ‘Link now’.
Step 3. A pop-up message will inform you when the linking has been done.

 

c) Mobile Number

If you are linking for the first time, download the Aadhaar card correction application from the UIDAI website. Fill the details, attach copies of Aadhaar card and identity proof, and submit these to the enrolment centre. It will be updated in about 10 days. If you are updating a new number, go to the UIDAI site, fill the Aadhaar number and captcha code. On getting an OTP, update your number and it will be linked.

2. PREPARE TO FILE YOUR TAXES

To ready yourself for the online filing process, get the information and documents you will need at the time.

Step 1.Secure Form 16 from your employer.
Step 2. Check your TDS status so that you know if there is any tax due. Do so by logging on (if you are registered) to the income tax website (www.incometaxindiaefiling.gov.in). Under ‘My account’ click on ‘View Form 26AS’.
Step 3. Make sure you have other information and papers like interest income, charity contribution and details for exemptions (HRA, health insurance premium, etc.) that have not been take into account by your employer.
Step 4. Go through the latest tax slabs and exemption limits before starting with the calculations.

3. FATCA COMPLIANCE

 

The Foreign Account Tax Compliance Act enables exchange of information between India and the US.
Under a 2015 agreement, all individuals and entities who opened a bank account or invested in mutual funds, NPS and insurance schemes between 1 July 2015 and 31 August 2015, will have to get compliance by providing self-certification. Though the last date was 30 April, you can still do it to avoid your account being blocked.

Is Your Adhaar Card Ready?

aadhar-card

The Central boards of Direct Taxes vide its Press Release dated 05.04.2017 have made it mandatory to quote your Aadhaar card for PAN Applications & Filing Return of Income.

Section 139AA of the Income-tax Act, 1961 as introduced by the Finance Act, 2017 provides for mandatory quoting of Aadhaar / Enrolment ID of Aadhaar application form, for filing of return of income and for making an application for allotment of Permanent Account Number with effect from 1st July, 2017.

It is clarified that such mandatory quoting of Aadhaar or Enrolment ID shall apply only to a person who is eligible to obtain Aadhaar number. As per the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, only a resident individual is entitled to obtain Aadhaar. Resident as per the said Act means an individual who has resided in India for a period or periods amounting in all to one hundred and eighty-two days or more in the twelve months immediately preceding the date of application for enrolment.

Accordingly, the requirement to quote Aadhaar as per section 139AA of the Income-tax Act shall not apply to an individual who is not a resident as per the Aadhaar Act, 2016.

 

Why link Aadhaar and PAN?

  • The government can keep a tab on the taxable transactions of a particular individual or entity, whose identity and address will be verified by his Aadhaar Card.
  • By linking the two, entities will no longer have to submit their Income Tax acknowledgement to the I-T department.

 

How to Link Aadhaar and PAN?

  • The first step towards linking Aadhaar with PAN to register on Income tax e-filing portal.
  • On logging in to the site, a pop up window will appear prompting you to link your PAN card with Aadhaar card.
  • You can input your Aadhaar number enter ‘captcha’ code and click on ‘link now’.
  • In case you have decided to link Aadhaar with PAN later click on ‘later’ button.
  • On logging, if no pop up window appear, go to Profile setting and click on ‘link Aadhaar’.
  • Enter your Aadhaar number enter captcha code and click on ‘link Aadhaar’.
  • The system will match your name, date of birth and gender with PAN card and Aadhaar database, if detail matches, you will get the message “Aadhaar – PAN linking is completed successfully.”

 

Your name in Aadhaar and PAN doesn’t match ? Don’t worry !!

In case you are unable to link PAN with Aadhaar because of discrepancy in name, log in to the Aadhaar website (http://www.uidai.gov.in), request for a name change and upload a scanned copy of PAN card as supported proof. In this case, your registered mobile number has to be functional .

The tax department is also planning to introduce an option on the e-filing portal through which taxpayers can choose to link the Aadhaar without changing the name by opting for a One-Time Password (OTP), provided that the year of birth of the person matches in both documents.

 

www.unicomply.com , Contact No.: 080-40463170

 

 

No More Faking Of Rent Receipts To Claim HRA

rent

If you have been producing fake rent receipts to reduce the tax burden and escape up to 60% of HRA amount, there is a bad news for you. You may no longer be able to claim income tax deductions for house rent allowance (HRA) by fabricating fake bills.

The taxman may now insist on proof from you showing that you are a genuine tenant, staying in the property mentioned in the rent receipt.

According to a report in Economic Times, Dilip Lakhani, senior tax advisor, Deloitte Haskins & Sells LLP said, “The ITAT (Income Tax Appellate Tribunal) ruling has now laid down the criteria for the assessing officer to consider the claim of a salaried employee and if necessary question its justification. This will put the onus on the salaried class to follow the rules in availing the tax rebate.”

The assessing officer can now demand proof, such as leave and licence agreement, letter to the housing co-operative society informing about the tenancy, electricity bill or water bill if he suspects the rent receipts are fake, according to a recent tribunal ruling. Till now, to avail of the benefit, the PAN of the owner of the residence was needed in case the rent is above Rs 1 lakh per annum. But now the official can ask for proof even if it is below Rs 1 lakh and the burden of proof will be on the employee who submits the rent receipt. The ruling by the Mumbai tax tribunal is likely to set a precedent and the salaried class is likely to come under the scanner on this count, the report said.

www.unicomply.com Contact No.: 080-40463170

 

 

March End Tasks

What are some of the things one must keep in mind before it is 31st March?

The Business Owners must check the following before closing their books of accounts:

1. Provisional Profit and loss Account – Make this excel based and keep checking income and expenses on an ongoing basis. Take appropriate action such as;

  • a. Investment: The profit estimate helps in evaluating the money, which is available for Investment as this improves net worth.
  • b. Tax Planning
    • Collation of capital gains for tax planning must be done. Take advantage of short-term capital loss if any.
    • Advance Tax should be paid in installments on the profit estimated, as per the due dates provided by the IT department if your total tax liability is Rs.10,000 or more in a financial year. If not paid as per the schedule specified,interest u/s 234B and C has to be paid.
    • Tax deducted at source should be checked. The TDS statement can be accessed from the Income Tax website www.incometaxindiaefiling.gov.in through 26AS. The 26AS statement also helps in reconciling the total income, which we have arrived at with the Income reflecting in the TDS statement. The arrived Income should be equal to/more than the income reflecting in 26AS.
    • Check on contra entries to avoid unnecessary transactions and close off any open transactions in this year itself.
    • Check on loan entries if any and try to close off in the year itself.

2. Should one check on debtors and creditors position?

  • Debtor’s position should be checked at the end of the year. Any receivable you would like to be added to this year’s income?
  • If you have credit period built in for creditors then use the idle cash management strategy.

3. Should one prepay loans at this time? Would that be a good idea?

  • A review of the existing liabilities should be conducted. If there are surplus funds some repayment / prepayment may be considered. For
    instance housing loans can continue however car loans and personal loans can be considered for repayment.
  • Also check the status of the OD account and LAS account.
  • Compare interest rate prevailing and interest rate for a new loans for new clients – can you ask for a reduction?

4. What are some of the investment related actions to be undertaken by March?

  • Tax saving Investments also needs to be made for availing the tax benefits. There are many tax saving instruments available some of which are ELSS, PPF,NPS, NSC, etc.
  • If you have invested in bond funds and are planning to sell anything before March, estimate taxes before doing so. If you are using SWP (Systematic
    withdrawal plans) facility for earning monthly income then make sure you know the capital gain you have to pay.
  • Review your bank statement for any anomalies
  • Equity review – ideally in June but it is a good idea to study this in March too. Settle account with brokers.

E-Verification of Tax Return via Net Banking

After you have successfully filed your income tax return, the next step is to VERIFY it. The Income Tax Department starts processing your return when it is verified. Refunds, if any, are processed for returns, which have been submitted and verified.

We recommend it through Net banking as is the easiest and fastest way to verify your tax return.

Steps to e-verify your tax return via net banking

STEP 1:
Login to your net banking account and locate the income tax e-filing tab. This differs from bank to bank. You will be directed straight to the Department website from here.

STEP 2:
Select the ‘View Returns/Forms’ option to see e-filed tax returns.

STEP 3:
Select the option ‘Click here to view your returns pending for e-verification’

STEP 4:
Select the option ‘e-verify’.

STEP 5:
A new pop-up window appears. Click on ‘Continue’ to generate EVC and get your income
tax return verified.

STEP 6:
A confirmation message will be displayed with a transaction ID and EVC code. Click on the green button to download the attachment. This is for your record only. No further action is required.