US Tax

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 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).

Will a person be considered a Resident Alien as per US Tax Laws for 2016 if his days of stay in the US are as follows: 2016 - 170 days, 2015 - 30 days, 2014 - 24 days

Ans.

To determine residency under the Substantial Presence Test, the days are counted as follows:
2016 All days of stay       170
2015 1/3rd of Days of Stay 10
2014 1/6th of Days of Stay   4
Total 184 days
Therefore, total presence in the US is 184 days. Accordingly, the person shall be treated as a Resident Alien for 2016 for US Tax purposes.

What is the taxability of income for US tax purposes?

Ans. US persons are required to file a US federal tax return with the IRS no matter where they live, if their income (earned in the US and outside the US) exceeds prescribed thresholds. Accordingly, US persons will be liable to file tax returns in the US for any foreign sourced income, provided it is in excess of the prescribed thresholds. 

What is the due date for filing your US tax return?

Ans. The due date of filing federal tax returns is 15th April (maximum 6 month extension can be filed). Married individuals may file tax returns jointly or separately.

A Green Card Holder residing in India, has dividend from Indian shares which is exempt in India. What will be the taxability of the said income in the US?

Ans. A Green Card Holder shall be liable for tax on his worldwide income in the US. The fact that he resides in India shall not have any bearing on the taxability of the said dividend income. Dividend from Indian shares shall be taxed in the US irrespective of the said income being exempt in India. 

What is Foreign Earned Income Exclusion (FEIE)?

Ans.

If you are a US citizen or a resident alien of the US , you are taxed on your worldwide income. However, if you are a tax resident in a foreign country, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation ($92,900 for 2011, $95,100 for 2012, $97,600 for 2013, $99,200 for 2014, $100,800 for 2015,$101,300 for 2016 and $102,100 for 2017).

The said Foreign earned income exclusion is usually allowed only for current income such as salary income earned outside the US. If the individuals are married and both work abroad and meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion.

How should the amounts of interest and dividend income earned by US person in India be reported in USD while filing US tax returns?

Ans. Foreign Income may be converted at the Yearly Average Currency Exchange Rates available on the IRS website for reporting in US tax returns.

What are estimated taxes and who must pay them?

Ans. Estimated taxes refer to advance tax that is payable during the Calendar Year. Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments in the US as per the prescribed thresholds and mandated timelines.

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. However, 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 may be subject to gift tax in the US (depending on value of gift). The grandfather will be eligible to avail the benefit of annual exemption prescribed (USD 14,000 in 2016 and 2017) and be subject to gift tax only on the balance amount of gift (further subject to federal estate tax life-time exemption of USD 5.45 million in 2016 and USD 5.49 million in 2017). If the gift is above the prescribed annual exemption, then the grandfather may also be required to file prescribed form of gift tax with the IRS (irrespective of whether it is under the federal estate tax life-time exemption).

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 his son?

Ans. The US Citizen who has bequeathed a residential house to his son may 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 5.45 million (in 2016), USD 5.49 million (in 2017) and only the balance estate may be subject to estate duty. However, such life-time exemption shall also cover any gifts given by Mr. John during his lifetime in excess of the prescribed thresholds.

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. 

What details are to be reported in the FBAR?

Ans. The information to be reported includes all foreign financial assets such as bank accounts, Demat accounts, mutual funds, insurance policies, provident fund schemes, etc. A US person must report the maximum value (in USD) of each account during the tax year along with other details. Maximum value of an account in foreign currency must be converted into USD using the exchange rate on the last day of the calendar year (using Treasury Reporting Rates of Exchange).

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 is the threshold for filing Form 8938?

Ans.

• For Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

• For Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

• For Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

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.

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 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 person from filing the Form 8938. Depending on the person’s income/assets and reporting thresholds, 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 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.

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.


Key Points to be kept in mind:

i. US Citizens and Green Card Holders are liable for tax on their worldwide income irrespective of their residency (subject to allowable exemptions/deductions as well as DTAA benefits). 

ii. US persons are required to show all Income earned in India (or any other country in the world) while filing their US tax returns. They are also required to report the holding of financial assets outside the US in FinCen Form 114 (FBAR) and Form 8938 (FATCA Form) if their aggregate values exceed prescribed thresholds. 

iii. The tax year in the US is a Calendar Year (January – December) as opposed to the Financial Year (April – March) followed in India. 

iv. Filing of FBAR and Form 8938 (FATCA form) are independent requirements. Filing of one of the forms does not relieve a US person from filing the other.