10 Things you should know about College tax Savings Plan for?

by Mounica Kota | Feb 26, 2019 | Education, tax deductions, tax filing, Tax Planning, tax return

10 Things you should know about College tax Savings Plan for?

College Tax Savings Plan Let’s face it. College and education, in general, are getting expensive. This means that saving for your children’s future can be a daunting task. It is only natural that one looks for as much help as possible.

Should you look at investing in a 529 college savings plan? American parents who have kids, save on an average $18,135 for college. And about 30% of these savings go into a college savings plan. While the average savings in the plan was $2,280 in 2016, it has nearly doubled to $5,441.

General savings account for another 22% for college-related funds. While 14% are investment related savings. More parents are opting to invest in a college savings plan and here are some important facts that you should be aware of.

Anyone can open a 529 college savings plan and invest in one of the instruments.
Though people usually associate a 529 plan with college tuition, it does much more than that.
Amendments to the tax laws recently, allow individuals to withdraw up to $10,000 from a 529 for the purpose of K-12 tuition expenses.
The plan is not limited only for kids or teenagers. You can open an account and start saving for graduation or higher studies.
A single tax filer can contribute as much as $15,000 for a year as tax-free in a 529 plan. For married couples filing jointly, the amount is $30,000.
You also have the option to contribute $75,000 into a 529 plan up front for 5 years. For married couples filing jointly, the amount is $150,000.
529 plan is similar to mutual funds in some ways, as you have the option to purchase them on your own or take the help of a financial advisor.
You can buy a 529 plan depending on the age of your kid, however, you should also look at the past returns and volatility. Some plans can be very aggressive for you, while others can be quite conservative.
Before you start saving into a 529 plan, it is essential to go through all the terms and conditions. You should be aware of the plan’s ins and outs along with any limits that the provider imposes.
Another crucial aspect that you should not miss at any cost is the enrolment fees of the plan along with any annual fees.

Since there are different 529 plans that you can choose from, it is important to delve into the details. Try to look for a plan that offers state-level tax breaks. You should also look at the expense ratio of the plan. A higher ratio would eat into your profits.

There are some cases where your kids might not need to use the 529 plan. What happens to the fund in such cases? Well, you can always transfer the fund to someone in the family. If that is also not possible, you can withdraw the fund yourself. But keep in mind, that you will have to pay a 10% penalty for not using it for educational purposes.

A fundamental of any investment is the minor fluctuation with the market. And 529 plans aren’t immune to that. Thus, it is important that you look into the assets that a fund is investing it.

If you have a short term in your hands, take four or five years for an example, and you invest it entirely in stocks, that might be a bad idea. A big swing in the market can nullify your funds. Thus, take the duration and risk appetite into consideration before investing.

Is NRO/ NRE/ FCNR Interest taxable in the US

by Mounica Kota | Feb 19, 2019 | income tax, NRO, tax deductions, tax filing

Is NRO/ NRE/ FCNR Interest taxable in the US?

NRO/NRE/FCNR ,With more and more people shifting to the US for a better future, the above question becomes even more pertinent. Are the interests earned from NRO/NRE/FCNR accounts taxable in the USA?

The simple answer to the question is Yes. The interests that you earn from such accounts is taxable in the USA. However, it is not as simple as it might sound and it as a complete process that you must follow.

The following steps will help you ensure that you are able to determine the income from other sources such as NRO/NRE/FCNR accounts earning interest. And that the income is taxed appropriately so that it doesn’t come to bite you at a later date.

Determining Status

Any income generated from the above means is taxable in the USA if you are a US person. Thus, the first step involves determining whether or not you are a US person. You must meet any of the following conditions for the same.

Are a citizen of the USA.
Are a former legal permanent resident but due to some reasons wasn’t properly expatriated.
Are a legal permanent resident.
Are a national of another country but have cleared the Substantial Presence Test.

In short, if you are a Green Card holder, OCI, PIO or a legal resident of the USA (holding L1B, H1B, H4 EAD or other work visas of the USA)you must pay taxes on the above-mentioned income.

Dollar Amount

Every year the IRS publishes the year-end treasure rates for various currencies. These can hold as a good starting point to consider the conversion rate. You can use this rate to convert your Indian income from NRO/NRE accounts into the US Dollar.

For example, if you have earned about INR 15,000 as interest from your NRO/NRE account, and consider an exchange rate of 75, the dollar equivalent would be $200. INR 150,000/72 = $200.

You can then use this amount for tax purposes.

Taxes in India

Any interests that you earn on NRE accounts is not taxable in India. This means that banks will not deduct any amount from your earnings directly.

Similarly, any interests that you earn on your FCNR account is not taxable in India.

However, things change a little bit when it comes to NRO accounts. Any interests that you earn on NRO accounts are charged at 30% plus applicable taxes.

Depending on how your bank operates, it can either be deducted from your account directly, or you might have to file at the end of the year.

Taxes in the USA

Once you are a US person, you are expected to file your taxes and returns. In other words, you will have to file Form 1040 using any of the tax filing services or directly with the IRS.

Irrespective of which method you use, it is important that you fill the Schedule B in the Form 1040. Schedule B includes the income generated from your Indian assets or accounts.

In case you have paid taxes in India, you would need to mention that in your tax returns. This is applicable for NRO accounts. As far as NRE and FCNR accounts go, you will have to mention the income from the accounts and that will be added to your annual income in the USA for the fiscal year.

For the year 2016, as many as 21,428,230 filings were there for Schedule B out of which 18,781,052 were electronically filed.

Depending on the tax bracket that you are a part of, you will have to pay appropriate taxes. And for the taxes that you have paid in India, the DTAA will ensure that you do not pay taxes twice.