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A US Citizen, Green Card Holder and any person who is a resident in US as per the substantial presence test is liable to pay tax on his/her world-wide income in the US.

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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).

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Substantial Presence Test for the purpose of US tax purposes is as under:

Any person shall be considered as a Resident in the US, if his days of stay in US are at least:

a.    31 days in the Current year AND

b.    183 days during 3-year period, calculated as under:

     i.        All days of Current Year

    ii.       1/3^rd of the days present in the 1^st year before Current year

  iii.   1/6^th of the days present in the 2^nd year before Current year

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Residential status of Mr. A under the Substantial Presence Test, shall be calculated as under:

Therefore, total presence in the US is 184 days. Also, the number of days of stay in 2023 is greater than 31 days. Accordingly, Mr. A may be treated as a Resident for 2023 for US Tax purposes.

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US persons are required to file a US federal tax return irrespective of their place of residence, if their income (earned in the US and outside the US) exceeds prescribed thresholds.

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The due date of filing annual US federal tax return is April 15 (maximum 6 months extension can be filed under Form 4868, i.e. upto October 15).

In addition, US Persons residing outside the US are allowed an automatic 2-months extension to file their annual US federal tax return. The automatic 2-months extends the above due date to June 15.

Any tax due should be paid before April 15 (even if extension taken) in order to avoid levy of interest.

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No. As long as there is no taxable income or taxable income does not exceed the threshold limit, a US Person is not required to file US Tax Return.

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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 (USD 107,600 for 2020, USD 108,700 for 2021, USD 112,000 for 2022 and USD 120,000 for 2023).

*Foreign earned income exclusion is usually allowed only for current income such as salary income earned outside the US. Refer to FAQ 9 for further details.

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·        The following incomes are Earned Incomes and are eligible for FEIE:

Salaries and Wages / Commissions / Bonuses / Professional Fees / Tips.

·         The following incomes are Unearned Incomes and are not eligible for FEIE:

Dividends / Interest / Capital Gains / Gambling Winnings / Alimony / Social Security Benefits / Pensions / Annuities

·        The following is the list of Variable Incomes which may fall into either of the earned or unearned Income Category, or partly into both:

Business Profits / Royalties / Rents / Scholarships and Fellowship

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Any foreign income earned outside US is to be divided by Yearly Average Currency Exchange Rates Table available on the IRS website to convert in USD.

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Estimated taxes refer to “advance tax” payable during the Calendar Year. One may have to pay estimated tax for current year if your tax was more than zero in prior year. You may need to check if the amount of tax withheld from your income is enough or not. Accordingly, you may need to pay estimated taxes.

Further, one have to make estimated tax payments as per prescribed thresholds and mandated timelines in order to avoid penalty or late fee if estimated tax payments are late.

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In US, major tax reforms were approved by the Congress on December 22, 2017. This tax legislative reform, effective from Calendar Year 2018 till 2025, is referred to as the ‘Tax Cuts and Jobs Act of 2017’.

The TCJA changed deductions, depreciation, expensing, tax credits and other items that affected businesses and individuals.

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The federal estate tax life-time exemption has more than doubled from USD 5.49 million in 2017 to USD 11.18 million in 2018, USD 11.4 million in 2019, USD 11.58 million in 2020, USD 11.7 million in 2021, USD 12.06 million in 2022 and USD 12.92 million in 2023.

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As per US tax laws, Donor, being a US person is liable to pay gift tax in US irrespective of the citizenship of gift recipient. 

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Annual exemptions of $17,000 for 2023 per recipient is available to US person. Gift in excess of the annual exemption may be liable to tax in the hands of donor subject to the overall lifetime exemption prescribed ($ 11.7 million for 2021, $ 12.06 million for 2022 and $12.92 million for 2023).

Gift Return under Form 709 is to be filed if gift exceeds annual exemption as mentioned above in addition to his/her annual federal tax returns and such gift is taxable at the rate of 40% approx.

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Yes, a US person’s gift to a US Citizen spouse is fully exempt from tax.

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Mr. A will have to report receipt of such foreign gift (cash from grandfather) to the IRS in prescribed Form 3520 for foreign gifts subject to thresholds (currently at $100,000 per CY). Further, for the purpose of determining the threshold, Mr. A must aggregate gifts received from related parties.

Such amount of cash gift received by Mr. A however will not be liable to tax in the US as this is only a reporting requirement.

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Yes, there will be a change in treatment as in the US the donor is liable to Gift Tax. Accordingly, in the given case, his grandfather may be subject to gift tax (depending on value of gift). The grandfather will be eligible to avail the benefit of annual exemption as mentioned in FAQ 15 above and be subject to gift tax only on the balance amount of gift (further subject to federal estate tax life-time exemption as mentioned in FAQ 13).

If the gift is above the prescribed annual exemption then the grandfather may also be required to file Form 709 of gift tax with the IRS (irrespective of whether it is under the federal estate tax life-time exemption).

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Mr. A, a US Citizen who has bequeathed a residential house to his son Mr. B may be subject to estate tax in the US and the applicable estate tax will be recovered out of his estate. He will be allowed a life-time exemption as mentioned in FAQ 13 and only the balance estate may be subject to estate tax. However, such life-time exemption shall also cover any gifts given by Mr. A during his lifetime in excess of the prescribed thresholds. It is to note that even though Mr. B is Indian resident and citizen he may be subject to Estate Tax as above since the Mr. A, his father was US citizen.

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Estate-tax return under Form 706 is to be filed by Mr. B within 9 months of death of Mr. A. Extension upto 6 months is allowed to file tax returns if requested by filing Form 4768 prior to due date and estimated taxes are paid before due date.

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

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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 same needs to be filed by April 15 each year. However, in order to ensure minimal burden to the public, there is an automatic extension to October 15 each year for filers failing to meet the FBAR annual due date of April 15.

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• Foreign financial assets such as bank accounts, Demat accounts, mutual funds, insurance policies, provident fund schemes, etc

• Report the maximum value (in USD) of each account during the tax year along with other applicable 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).

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The US Department of Treasury and IRS issued comprehensive final regulations implementing FATCA (Foreign Account Tax Compliance Act). The issuance of these 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 IRS on a yearly basis. The report shall be in Form 8938 and collects details that are similar to FBAR except for a few differences such as threshold limits.

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

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

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

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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 applicable reporting threshold. 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.

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

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Filing of FBAR does not relieve a US person from file 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.

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US citizen will be required to report his interest in such Indian company in Form 5471 to IRS or other relevant forms as updated from time to time.

Ans. Yes.

Ans. No.

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‘Face Value’ or ‘Actual Cost Price’ of the Share can be considered as Highest Value.

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ESOPs will be taxed on two instances:

  i.     At time of exercising the option

 ii.     At time of selling the exercised shares

At the time of exercising options:

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

Tax in the US: In the US too, like in India, value of ESOPs granted being the difference between the fair market value and exercise price on the date of exercising the option 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 sale value and market value as on the date of exercising 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.

Further, the employee will be eligible to claim credit of taxes paid in India against taxes payable in the US by resorting to the DTAA between the two countries.

However, the above may have to be evaluated on case to case basis under Indian tax laws, US tax laws and DTAA between India and US.

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·         Inherited Asset:

Fair Market Value (FMV) as on the date of death of the deceased.

·         Bonus Shares of an Indian Company (Actual Cost of Acquisition is ‘NIL’):

Consider a scenario of Bonus Issue where Mr. A is holding 1000 original equity shares of an Indian Company purchased for Rs. 100 each and he receives another 1000 shares of the same company by way of bonus (without any consideration). Mr. A intends to hold the said shares at least for a period of 1 Year. In this regard, for US Tax Compliances, the cost of acquisition of the said shares for computing Capital Gains on sale shall be considered on a pro-rata basis i.e.:

(1000 Original Shares X Rs. 100 per share) + (1000 Bonus Shares X NIL)

2000 Shares           

          = Rs. 50/- per share

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Indian Mutual Funds may fall under the category of Passive Foreign Investment Company (PFIC) in the US. As per PFIC rule, investments falling under the said category are taxed in US on notional basis as ordinary income irrespective of whether the same is actually sold or not.

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Indian Mutual Funds are generally reported in Form 8621 in the US wherein several options are given to declare the notional appreciation.

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There are 3 options provided under Form 8621 to declare notional appreciation Indian Mutual Funds in US:

Option 1: Election to mark-to-market (this is the most common option elected)

Declare as income the notional gains in the market value of fund holdings during the year. In simple words,

·         In Year of Purchase: Gains will be difference between Market value at the end of year and cost of purchase.

·         In subsequent years: Gains are difference between market value at the end of the year and 'adjusted basis'. Adjusted basis is usually the market value in the beginning of the year. In case there is a loss, the loss can be set off against notional gains of only the previous years. Any loss that is not set off is added back to the adjusted basis of the next year. So for instance, if in year 1 you incurred a notional gain of $100 on your PFIC, $100 would be taxed as ordinary income in year 1. Suppose your loss in year 2 was $150. In year 2, you would be allowed to deduct a loss of $100 from your total income (loss to the extent of gains taxed earlier).

·         In year of sale: When the units are actually sold, one will be taxed on long term capital gains only on the portion of gains that has not been taxed in previous years as ordinary income.

Further, in case where Indian Mutual Funds are before one becomes a US person, in the first year of tax returns, the value of PFIC income will be the appreciation in market value of the fund holdings during the tax year.

Eg:  "X, a nonresident of the US, buys marketable stock in a PFIC for $50 in 2005. On Jan. 1, 2023, X becomes a US resident. The fair market value of the stock on Jan. 1, 2023, is $100. The fair market value of the stock on Dec. 31, 2023, is $110. X computes the amount of mark-to- market gain or loss in 2023 using a $100 adjusted basis. Therefore, X includes $10 in gross income as mark- to-market gain and increases its adjusted basis in the stock to $110. X sells the stock in 2024 for $120. X must use its original basis of $50 plus the $10 mark-to-market basis adjustment. Therefore X recognizes $60 of gain, of which $10 would be ordinary income and $50 long-term capital gain."

Option 2: Election to treat as Qualified Electing Fund (QEF)

A QEF is taxed like a partnership wherein each investor is considered to have a share in the total profits of the fund. This option can be exercised only if the Indian Mutual fund house agrees to share information about one’s share of profits.

Option 3: Excessive Distribution Method (default option and most taxing option)

As per this option the distribution from Indian Mutual Funds during current year should be at least 125% of the average distributions of last 3 years.

If the above condition is not met and one has not elected any of the above mentioned options, the total distributions are allocated over the period of holding of such Mutual Funds and taxed in each year at the highest tax rate of such year alongwith interest for delayed payment of taxes.

Eg: Mr. X holds Indian Mutual Fund for 10 years and has not received any distributions during such period. In the year of sale, Mr. X made a gain of $ 100. The said gain of $100 will be distributed over the past 10 years i.e. $10 per year and it will be treated as no tax has been paid on said $10 per year. Accordingly, in year 10 Mr. X has to pay tax for each of these years plus interest on delay.

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Ø  Before TCJA:

Ø  After TCJA:

Ans.

The standard deductions for individual tax payers as revised by TCJA are as under:

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State and local tax deductions will now be limited to a maximum of USD 10,000 (USD 5,000 if married filing separately) under TCJA:

(i)   state and local real / personal property taxes,

(ii)  state and local income taxes (or sales tax, if elected). 

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There are 2 major changes as per the new legislation with regard to deductibility of Mortgage Interest:

  i.   Reduction of amount of acquisition indebtedness* that qualifies for deductibility of interest from USD 1 million (from USD 5,00,000 in case of individuals/ married filing separately) to USD 7,50,000 (to USD 3,75,000 in case of individuals/ married filing separately) for mortgages incurred after December 15, 2017.

 ii.   Suspension of deduction on home equity indebtedness** from Calendar Year 2018. Previously it was allowed to the extent of USD 1,00,000.

*Acquisition indebtedness is defined as being incurred in acquiring, constructing or substantially improving any qualified residence and is secured by such residence. A qualified residence is defined as the principal residence of the taxpayer and one other residence.

**Home equity indebtedness is any indebtedness (other than acquisition indebtedness) secured by a qualified residence.

                                                                                                    Updated 09/2023