- 1 US/India Tax Filing, Reporting & Compliance
- 2 Who is a US Person
- 3 US Worldwide Income Tax & Reporting
- 4 Foreign Tax Credits
- 5 Form 8938 Foreign Assets
- 6 Form 8621 for Passive Income
- 7 FBAR Foreign Bank & Financial Accounts
- 8 Common Indian Investments Subject to U.S. Tax & Reporting
- 9 Fixed Deposits
- 10 U.S. Taxation of India Provident Funds
- 11 Stock Certificates/Demat
- 12 Mutual Funds
- 13 Bank Interest
- 14 Dividends
- 15 Capital Gains
- 16 Rental Income in India
- 17 Interest Earned on Future Property Development
- 18 Retirement Contributions
- 19 India Asset and Income Tax Tips (and Misconceptions):
- 20 Foreign Tax Credit
- 21 Foreign Tax Credit Refund
- 22 Income/Gifts
- 23 EPF
- 24 FATCA
- 25 FBAR
- 26 Foreign Earned Income Exclusion
- 27 Transferring Account Ownership
- 28 Calling the IRS Before Getting Into Compliance (Place Holder)
- 29 Be Cautions of Inexperienced Counsel
- 30 Late Filing Penalties May be Reduced or Avoided
- 31 Current Year vs Prior Year Non-Compliance
- 32 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 33 Need Help Finding an Experienced Offshore Tax Attorney?
US/India Tax Filing, Reporting & Compliance
US/India Tax Filing, Reporting & Compliance: Each year, Taxpayers from India who are considered US Persons and have assets and/or income in India — and possibly other foreign countries as well — have a complicated IRS tax labyrinth to work through in order to successfully report their foreign income, accounts, assets, and investments to the US Government. While it may benefit a Taxpayer to prepare and implement pre-tax planning strategies to avoid reporting issues before they arise — tax traps can (and will) still appear — even after planning strategies have been utilized. Whether it is reporting for FATCA (Foreign Account Tax Compliance Act), FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114), and/or passive income issues involving tax and reporting on Form 8621, rental property income, or other investments — international tax compliance is an important aspect of every US tax return for US Persons from India who still have money earned or invested abroad. Let’s go through some of the basics of the India and US passive income tax rules; how to plan for US Tax Compliance — and how to stay in reporting compliance or get into compliance if reporting was missed.
Who is a US Person
A US person individual generally includes the following categories: U.S. Citizens, Lawful Permanent Residents, and Foreign National non-permanent residents who meet the Substantial Presence Test. It does not matter that a Taxpayer is a citizen of another country.
Common examples of US Persons include:
Lawful Permanent Residents
Work Visas: H-1B; L-1, and O
Travel Visas: B1/B2
Investment Visas: E-2/EB-5
Student Visas Post-5 Years: F-1
US Worldwide Income Tax & Reporting
US Persons are taxed on their worldwide income — and must report their global assets each year when they meet the threshold reporting requirements for a specific category(s). The United States taxes US Person individuals on their worldwide income. That means that whether or not the individual resides in the United States or abroad — and whether or not their income is generated from US sources or foreign sources — it is all taxable by the IRS (exceptions, exclusions, and limitations may apply). It also means a Taxpayer has to report their foreign assets and accounts to the US Government as well (see below).
Foreign Tax Credits
Depending on the amount of income the Taxpayer earns in India on passive income — along with whether or not the Indian government identifies the Taxpayer as a resident or nonresident of India, will impact the tax rules abroad — which in turn impact the ability to apply for Foreign Tax Credits in the US. In general, if the Taxpayer already had taxes deducted at source (TDS) in India or otherwise paid foreign tax on the income they earned — then the Taxpayer can apply for foreign tax credits against taxes they would have to pay in the US on the same income. The Taxpayer prepares a form 1116 to accompany their U.S. tax return in order to claim foreign tax credits paid on income earned in India. The foreign tax credit is not always a dollar-per-dollar — and if the taxes paid were already refunded in India (usually because it was below the threshold of having to pay tax under Indian Tax Law), then typically the Taxpayer cannot claim the foreign tax credit in the United States on that same dollar of income earned.
Form 8938 Foreign Assets
A Form 8938 (aka FATCA) is required when the value of specified foreign financial assets exceeds the threshold requirements for a single person who resides in the United States. The threshold for filing Form 8938 (unlike the FBAR) varies depending on whether the Taxpayer resides in the United States or abroad — and whether or not he files married or single/separate.
Form 8621 for Passive Income
If there are also some Indian Mutual Funds, such as HDFC, L&T Tax, and others (and the total value exceeds $25,000/$50,000 per year) the Taxpayer may also have to file a Form 8621. If there were some distributions as well, the Taxpayer will have to conduct a detailed tax analysis of the funds to determine whether or not he has any excess distributions.
FBAR Foreign Bank & Financial Accounts
The FBAR (aka FinCEN Form 114) is used to report Foreign Bank and Financial Accounts directly to FinCEN in each year the threshold requirement for reporting is met. The FBAR is filed separately from the tax return — and is currently due at the time the tax return is filed — although it is currently on an automatic extension through October. The Taxpayer must file the FBAR timely as to avoid any fines and penalties.
Common Indian Investments Subject to U.S. Tax & Reporting
Even though the FD does not distribute income during the growth period, it is earning income. While you may not touch or access the money during the growth phase (without being penalized), the income is still taxable and reportable in the U.S as it accrues.
U.S. Taxation of India Provident Funds
Just as with the FDs, if your PPF is accruing income, which is not being distributed, it is still “earning income” and is still taxable and reportable in the U.S.
Whether or not you have actual stock certificates or Demat, the values have to be reported. Since Demat is an “Account” and the actual stock certificates are not in an account, the reporting requirements are different. Generally, the account is reported on the FBAR, and usually the Form 8938 “FATCA.” The certificates are reported on the 8938 but not the FBAR (since it is not in an “account.”) The thresholds for the 8938 vary extensively based on your U.S. Residence and marital status. You may have to file one form and not another form — it all depends. * The stock earnings such as dividends and capital gains are also taxed and reported in the U.S. but Foreign Tax Credits may apply.
Mutual Funds are reported on the FBAR. The Mutual Fund is considered a PFIC which you may need to file on Form 8621. The rules for PFIC are very, very complex. You may have additional reporting (unless you qualify for an exclusion/exception) and you may have additional tax (unless you made an election).
Even if your bank interest is not in an FD, the interest is still taxable and reportable, since income is being earned on the money. This is also true of your NRE account growing tax-free in India.
Dividends are taxable in the U.S., even if they qualify for tax-exempt treatment in India. Whether or not they are taxed now, or in the future will depend on whether the income is also PFIC income or not, and if so – if any elections have been made.
Capital Gains are taxable in the U.S. Certain exclusions for primary residence and other exceptions may apply to limit, reduce or avoid tax. The Long-Term Capital Gain (LTCG) rules in the U.S. are different than in India, so even though a sale may not qualify for LTCG in India, it may qualify for LTCG under U.S. investment tax rules.
Rental Income in India
This is a common misconception. Let’s say you earned $10,000 in rental income, but had $11,000 in expenses and taxes – no income to report, right? Yes and No. Yes, you earned gross rent income, but no, you will have no net income. Nevertheless, the income and expenses have to be parsed out and reported annually on a 1040 Schedule E.
Interest Earned on Future Property Development
This is very common in India. A client will have paid an up-front fee to a developer for a property(s) in India. During the time the property is being constructed, the investor (you) receives interest on the money you invested. This ROI interest income must be included with your taxes.
There is a Tax Treaty between the U.S. and India. Therefore, while the growth within a retirement fund may escape U.S. Tax (until distributed unless exceptions apply), income contributions being diverted to retirement do not usually escape U.S. tax.
India Asset and Income Tax Tips (and Misconceptions):
Foreign Tax Credit
If you already paid tax on your income in India, you may be able to receive a Foreign Tax Credit in the U.S.
Foreign Tax Credit Refund
If the tax money you paid in India was refunded to you, it may not be worth the headache to claim the credit, since you will have to adjust your tax returns in the future.
If your parents are managing your accounts, and you let them keep the income (what a nice son/daughter you are), that does not default to income assignment. Rather, it generally means you report the income and you give them a gift.
EPFs are through employment, and you may be able to defer tax on the growth, per the India-U.S. Tax Treaty
Just because the FATCA Agreement may exempt certain foreign institutions from having to report accounts, does not mean you (as the individual investor) are exempt.
If you have to file an FBAR you may also have to file a Form 8938 (or vice versa) – in other words, just because you file, does not mean you can avoid filing the other if you meet the requirements for having to file both.
Foreign Earned Income Exclusion
You may be able to exclude certain earned (not investment) income if you meet either the Physical Presence Test or Bond-Fide Residence Test.
Transferring Account Ownership
Once you learn about reporting, the knee-jerk reaction is to consider transferring the accounts to another person. This only makes matters worse, because not only will you be out of compliance – but it will look bad to the IRS.
Calling the IRS Before Getting Into Compliance (Place Holder)
If you are considering getting into compliance, another knee-jerk reaction is to call the IRS to let them know you plan on getting into compliance. The problem is you may not even be on their radar. By calling them, you have now put yourself on their radar.
Be Cautions of Inexperienced Counsel
Be sure to properly vet your attorney before retaining a firm.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
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