US Tax

Who is a United States (US) person and what is his tax liability in US?

Ans. A US Citizen, Green Card Holder and any person who is a resident in US as per the prescribed stay of number of days in US is liable taxation on his/her world-wide income in the US.

What is a foreign country for US tax purposes?

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 will be the Residential Status of a person in the US in the following case (see the table below)

Ans. Table for the above question:


Calendar Year

Days of Stay in the US

2018

170

2017

30

2016

24

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. 1/3rd of the days present in the 1st year before Current year
iii. 1/6th of the days present in the 2nd year before Current year

Accordingly, in order to determine residency under the Substantial Presence Test, the number of days in the present case shall be calculated as under: 

Calendar Year

Number of days to be counted

Number of Days for Substantial Presence Test

2018

All days of stay

170

2017

1/3rd of Days of Stay

10

2016

1/6th of Days of Stay

4

Total

184 days

Therefore, total presence in the US is 184 days. Also, the number of days of stay in 2018 is greater than 31 days. Accordingly, the person may be treated as a Resident for 2018 for US Tax purposes.

When is the US person liable to file his / her US Annual Federal Tax Return?

Ans. 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.

What is the due date for filing US tax return?

Ans.

The due date of filing annual US federal tax return is April 15 (maximum 6 month extension can be filed). 

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

Is there a requirement to file Tax Return in the US, just for the sake of disclosure?

Ans. 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.

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 (subject to exemptions/ limits prescribed). The fact that he /she resides in India shall not have any bearing on taxability of the said dividend income. Dividend from Indian shares shall be taxed in the US as per US tax laws 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 (USD 95,100 for 2012, USD 97,600 for 2013, USD 99,200 for 2014, USD 100,800 for 2015, USD 101,300 for 2016 and USD 102,100 for 2017, USD 103,900 for 2018).


*Foreign earned income exclusion is usually allowed only for current income such as salary income earned outside the US.

Which Incomes are eligible for FEIE?

Ans. • 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 Fellowships

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. Any foreign income is to be converted at Yearly Average Currency Exchange Rates available on the IRS website.

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.

What is the Tax Cuts and Jobs Act (TCJA)?

Ans. In US, major tax reforms were approved by the Congress on December 22, 2017. This tax legislative reform, effective from Calendar Year 2018, is referred to as the ‘Tax Cuts and Jobs Act of 2017’. The IRS is working on implementing this reform that will affect both individuals and businesses.

What is the impact on the estate tax life-time exemption under the TCJA?

Ans. The federal estate tax life-time exemption has more than doubled from USD 5.49 million in 2017 to USD 11.2 million in 2018 until 2025.

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

Ans. Such amount of cash gift received by Mr. A will not be liable to tax in the US. However, Mr. A will have to report the receipt of such foreign gift to the IRS in the prescribed form for foreign gifts subject to thresholds.

If Mr. A 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 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 prescribed (USD 15,000 in 2018) and be subject to gift tax only on the balance amount of gift (further subject to federal estate tax life-time exemption of USD 5.49 million in 2017 and USD 11.2 million in 2018). 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), USD 11.2 million (in 2018) and only the balance estate may be subject to estate duty. However, such life-time exemption shall also cover any gifts given 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 each Calendar Year. The report is in prescribed format FinCEN Form 114 by the US Treasury.

Who must file 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 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.

What details are to be reported in the FBAR?

Ans. All foreign financial assets such as bank accounts, Demat accounts, mutual funds, insurance policies, provident fund schemes, etc must be reported. A US person must 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).

What Indian Americans should know about FATCA?

Ans.

The US Department of Treasury and IRS issued comprehensive final regulations implementing FATCA. 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.

What is the threshold for filing Form 8938?

Ans.

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.

A US person owns a house (real estate) in Mumbai. Whether the 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 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.

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. Is he also required to file Form 8938 for the said year?

Ans. 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.

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

Ans. 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.

Mr. A and Mrs. A are joint holders of assets in India. Mr. A being the 1st holder discharges tax liability on any income earned on such asset. Whether Mrs. A needs to disclose the said asset in FBAR and Form 8938?

Ans. Yes.

Is a US person, Nominee in the financial accounts outside the US required to report the highest balance in such accounts in FBAR and Form 8938?

Ans. No.

What shall be the Highest Value of a share of an Indian Company not listed on the Recognized Stock Exchange during the entire Calendar Year under consideration?

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

How will Indian ESOPs received by US citizen be taxed in India and US?

Ans.

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.

What shall be the Cost of Acquisition in the case of following assets for computing capital gains as per US Tax Laws?

Ans.
•  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

What are the tax rates under the US Tax Law (both before and after TCJA)?

Ans.

Ø  Before TCJA:

Tax Year 2017

Taxable Income

Ordinary Income Tax Rates

Single

Married Filing Jointly

Head of Household

 $ -

 $ -

 $ -

10%

 $ 9,325

 $ 18,650             

 $ 13,350

15%

 $ 37,950

 $ 75,900             

 $ 50,800

25%

 $ 91,900

 $ 153,100           

 $ 131,200

28%

 $ 191,650

 $ 233,350           

 $ 212,500

33%

 $ 416,700

 $ 416,700           

 $ 416,700

35%

 $ 418,400

 $ 470,700            

 $ 444,500

39.6%

Ø  After TCJA:

Tax Years 2018 – 2025

Taxable Income

Ordinary Income Tax Rates

Single

Married Filing Jointly

Head of Household

 $ -

 $ -

 $ -

10%

 $ 9,525

 $ 19,050

 $ 13,600

12%

 $ 38,700

 $ 77,400

 $ 51,800

22%

 $ 82,500

 $ 165,000

 $ 82,500

24%

 $ 157,500

 $ 315,000

 $ 157,500

32%

 $ 200,000

 $ 400,000

 $ 200,000

35%

 $ 500,000

 $ 600,000

 $ 500,000

37%

What is the revision in standard deduction available to individual tax payers under TCJA?

Ans.

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


Filing Status

2017

2018 – 2025

Single

$6,350

$12,000

Married Joint/ Surviving Spouse

$12,700

$24,000

Married Separate

$6,350

$12,000

Head of Household

$9,350

$18,000

Personal Exemption

$4,050

Repealed

Is there any revision in itemized deduction available for State and Local taxes paid under TCJA?

Ans.

State and local tax deductions will now be limited to a maximum of USD 10,000 under TCJA:

  1. state and local real / personal property taxes,
  2. state and local income taxes (or sales tax, if elected). 


What is the change in limit for itemized deduction of Mortgage Interest under TCJA for individuals?

Ans.

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 fromUSD 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.