US Tax

Mr. Jim is a US citizen receiving gift of cash from his grandfather who is an Indian citizen. What will be Mr. Jim’s obligations in the US on receipt of such cash gift?

Ans. Such amount of cash gift received from his grandfather by Mr. Jim will not be liable to tax in the US. But Mr. Jim will have to report the receipt of such foreign gift to the IRS in the prescribed form subject to thresholds.

If Mr. Jim is an Indian citizen and his grandfather is a US citizen, will there be any consequence as per the US laws?

Ans. Yes, there will be a change in treatment and his grandfather will be subject to gift tax in the US. The grandfather will be eligible to avail the benefit of annual exemption prescribed (USD 14,000 in 2015) and be subject to gift tax only on the balance amount of gift (further subject to federal estate tax life-time exemption of USD 5.43million). If the giftis above the prescribed annual exemptionthen the grandfather is also required to file prescribed form of gift tax with the IRS (irrespective of whether it is under the federal estate tax life-time exemption).

Mr. John, a US citizen has bequeathed a residential house to his son who is an Indian resident and citizen. Will there be any estate tax consequences on receipt of such inheritance in the hands of Mr. John’s son?

Ans. Being a US citizen, Mr. John’s estate will be subject to estate tax in the US and the applicable estate duty will be recovered out of his estate. He will be allowed a life-time exemption of USD 5.43 million (in 2015) and only the balance estate will be subject to estate duty. However, such life-time exemption shall also cover any gifts given by Mr. John during his lifetime to his son.

What is FBAR?

Ans. FBAR is a report of Foreign Bank and Financial Accounts that must be filed by all US persons. The report is in prescribed format FinCEN Form 114 by the US Treasury.

Who must file an FBAR?

Ans. Any US person who has financial interest in or signature authority or other prescribed authority over any financial accounts in a foreign country, if the aggregate value of such accounts exceeds USD 10,000 at any time in a particular calendar year. The report must be filed by June 30th of each year.

What is a foreign country?

Ans. A ‘foreign country’ includes all geographical areas outside the US, the commonwealth of Puerto Rico, the commonwealth of the Northern Mariana Islands, and the territories and possessions of the US (including Guam, American Samoa, and the United States Virgin Islands).

What is a United States person?

Ans. ‘United States person’ or ‘US person’ includes a citizen, green card holder or resident of the United States, a domestic partnership, a domestic corporation, and a domestic estate or trust.

What Indian Americans should know about Foreign Account Tax Compliance Act (FATCA)?

Ans. The US Department of Treasury and the Internal Revenue Service (IRS) issued comprehensive final regulations implementing the Foreign Account Tax Compliance Act (FATCA). The issuance of these final regulations marks a key step in establishing the IRS approach to combating tax evasion. And for Indian Americans, this only means more compliance and complication. An individual needs to report his foreign financial assets in the specified form to the IRS on a yearly basis. The report shall be in Form 8938 and collects details that are similar to the FBAR except for a few differences such as threshold limits.

What foreign assets need to be reported by individuals and in which form?

Ans. The US taxpayers holding financial assets outside the US need to report those assets to the IRS. This reporting requirement in Form 8938 - Statement of Specified Foreign Financial Assets requires US taxpayers with specified foreign financial assets that exceed certain thresholds to file this form along with their federal income tax returns.

Examples of financial accounts include (list not exhaustive):
Savings, deposit, checking, and brokerage accounts held with a bank or broker;
Stock or securities issued by a foreign corporation;
A note, bond or debenture issued by a foreign person;
An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor,
commodity swap, equity swap, equity index swap, credit default swap or similar agreement with
a foreign counterparty;
An option or other derivative instrument with respect to any of these examples or with respect to
any currency or commodity that is entered into with a foreign counterparty or issuer;
A partnership interest in a foreign partnership;
An interest in a foreign retirement plan or deferred compensation plan;
An interest in a foreign estate;
Any interest in a foreign-issued insurance contract or annuity with a cash-surrender value.

A US person has already filed his FBAR form in the relevant calendar year. Does he also need to file Form 8938?

Ans. Filing of FBAR does not relieve a US resident to file the Form 8938. Depending on the person’s situation, he may need to file Form 8938 and/or FBAR forms, and certain foreign accounts may be required to be reported on both forms.

A US person holds a safe deposit box at an Indian Bank. Is the safe deposit box considered a financial account to be reported in Form 8938?

Ans. No, a safe deposit box is not a financial account.

A US citizen owns 51% of the shares of an Indian company. What are the related reporting requirements in the US?

Ans. The US citizen will be required to report his interest in such Indian company in Form 5471 to the IRS.

A US citizen has three properties in India, one of which is self-occupied. What will be the tax implications in respect of the other two properties which the individual has not let-out?

Ans. The US citizen will be subject to tax in India in respect of these two properties as properties ‘Deemed to be let out’ under the head ‘Income from House Property’. Hence, although he has not let-out these properties, the same will be assessable under the Act and notional rent will be computed and brought to tax in the hands of the assessee. However, he is eligible to standard deduction of 30% available the Act.

A US person owns a house (real estate) in Mumbai. Do details of the house need to be reported on Form 8938?

Ans. Real estate is not a specified foreign financial asset that is required to be reported on Form 8938.  If the house is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity is a specified foreign financial asset that is reported on Form 8938, if the total value of all specified foreign financial assets is greater than the reporting threshold that applies to the US citizen. The value of the house held by the entity is taken into account in determining the value of the interest in the entity to be reported on Form 8938, but the house itself is not separately reported on Form 8938.

How are Indian ESOPs received by US citizens taxed in India and US?

Ans. ESOPs will be taxed on two instances:

(a) At the time of exercising the option

(b) At the time of selling the exercised shares

At the time of exercising options:

Tax in India: The difference between the exerciseprice and the fair market value as on the date of exercising the option will be taxed as perquisite under the head ‘Income from Salaries’ in the hands of the employee.

Tax in the US: As per the US tax code, any US person who is a resident or a citizen of the US must pay taxes in the US on his global income. In the US too, like in India, the value of ESOPs granted is taxed at the time when the employee exercises the option.

At the time of selling the exercised options:

Tax in India: In India, capital gain on ESOPs is calculated by arriving at the difference between the sale value and the market value as on the date of exercising the ESOP. The logic being that the employee has already paid the tax on the difference between the exercise price and the market value as on date of exercise so he must now pay tax only on the excess.

Tax in the US: The method of calculating capital gains is the same in the US as in India. However, the key difference is that long term capital gains are not exempt from tax in the US.

The employee will be eligible to claim credit of taxes paid in the source country against taxes payable in the country of residence by resorting to the DTAA between the two countries.