REPORTING REQUIREMENTS IN THE UNITED STATES FOR INDIAN TAX RESIDENTS BEING U.S. CITIZENS

 

KEY TAX REPORTING REQUIREMENTS IN THE UNITED STATES FOR INDIAN TAX REISDENTS BEING U.S. CITIZENS

The United States of America (US) taxes its non-resident citizens on their worldwide income in the same manner and rates as residents with a very few exceptions. Therefore, US citizens have to carry out US tax compliances and reporting requirements irrespective of whether they are staying in the US or earning any income from the US or not. Likewise, US citizens living in India are not exempted from filing their US tax return in case their GLOBAL income is above limits specified by the US Internal Revenue Services (IRS). Further, such people also need to file various forms to US revenue and treasury departments in case their investments outside India are above specified limits and in case any benefit is obtained under India-US tax treaty. It is interesting to note that monetary limits for these compliances are basis GLOBAL income earned /assets held and not just income earned / sourced in the US. This article will help US citizens staying abroad (especially in India) understand key US reporting requirements.

• Dual Tax System:The US tax system is set up on two levels – Federal taxes and State taxes. Federal taxes are applicable across the country whereas each state has its own authority to charge taxes in a mechanism suitable to them (income tax/ municipal tax / etc.)
• Tax residency:A US citizen automatically becomes a tax resident of US due to his/her citizenship and their global income gets taxable in the US. At the same time, such person could also be considered as a tax resident in India considering his/her number of days stay in India as per the Indian tax laws, due to which, their global income will be taxable in India as well. To avoid this situation, Article 4 of India-US tax treaty provides certain tests (called ‘tie-breaker rules’) whereby a person will qualify as a tax resident of either India or US depending upon country where they have permanent home, where personal and economic interest lie, where such person resides habitually or nationality (in a particular order). In most cases, Indian nationals being US citizens and living and earning in India, could be considered as tax residents of India. On the other hand, US expatriates coming to India for a limited duration may be considered US tax residents and their income will be taxed accordingly. This article focuses on US tax compliances to be carried by US citizens who eventually become tax residents of India.
• Taxability of Income Earned once US citizen is considered as Tax Resident of India

 India Sourced Income: Once US citizen is considered as a tax resident (ROR) of India, global income of such person will be taxable in India including income earned in India from salary, capital gains, interest, etc. Such income may not be taxable in the US considering provisions of India-US tax treaty. It is important to note that India sourced income and assets will have to reported in the US by filing various forms i.e. there may not be any requirement to pay taxes in US on such income, but reporting of global income to US revenue and treasury authorities by US citizens needs to be carried out. Key reporting requirements are discussed in the subsequent paragraphs.

US based income: US based income will be taxable for tax residents of India in the US in the year in which such income accrues. Such income may also be taxable in India if a person is a tax resident of India and credit of taxes paid in US will be available while filing India tax returns.

The India-US tax treaty ensures that global income is not taxed in both India and the US.

• Federal Reporting requirements (IRS and Treasury) for US citizen who are India Tax residents and are earning income in India

 

1. Form 1040: The global income threshold to file tax returns under Internal revenue Services (IRS) Form 1040 for calendar 2022 (1 January 2022 to 31 December 2022) is as under:

   Single or Married Filing Separately—$12,950

   Married Filing Jointly or Qualifying Widow(er)—$25,900

   Head of Household—$19,400

   US citizens who are at least 65 years old or blind will be able to claim an additional standard deduction of $1,400. The same will be $1,750 if using the US citizen is single or head of household filing status. If a US citizen is both 65 and blind, the additional deduction amount will be doubled. (The above thresholds are different depending on applicability of standard deduction, age 65+, dependent, disaster loss cases)

   Example – If a US citizen, being single, below 65 years and tax resident of India, is earning salary income in India of USD 15,000 (INR 12 lakh approx), he/she may be required to file Form 1040 with IRS.

          Therefore, US citizens staying in India (or anywhere outside US) have to file Form 1040 in case their global income exceeds aforesaid thresholds

 

2. Form 2555: Form 2555 form needs to be filed if a person is claiming foreign earned income exclusion. In simple words, wherever a person is taking benefit of India-US tax treaty in relation to any India sourced income claimed exempt in US, this form needs to be filed. This form has to be filed while filing form 1040.
3. Form 1116: Form 1116 is filed to claim the Foreign Tax Credit which reimburses US citizens for taxes paid in a foreign country (India), where an income is taxed both in US and India.
4. Form 8938: It is imperative that a US citizen living outside US may acquire and build assets in country of residence. A US citizen who lives outside of the US needs to file Form 8938 along with tax return when such person holds a total combined value of foreign assets (financial plus non-financial assets) worth more than $300,000 at any time during the calendar year or $200,000 on the last day of the calendar year.
5. FBAR – Form 114: A US citizen is supposed file FBAR (Report of Foreign Bank and Financial Accounts) in Form 114 when his financial interest in or signature authority over foreign financial accounts viz. bank accounts, mutual funds, brokerage accounts, if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. Generally, an account at a financial institution located outside the US is a foreign financial account. However, it does not include certain accounts such as  NOSTRO/ correspondent accounts, accounts owned by government, military, IRA retirement account and some other specified accounts.

Timeline: The original due date for filing these federal forms is 15 April of the next calendar year and an additional 2 months are given to US citizens living abroad. Although, Form FBAR -114 needs to be filed by 15 October

• State Taxes: Each state has a different system of taxation and therefore, a US citizen may have to check applicability of state tax compliances depending on his domicile state or state from which he/she is earning any income.
• Taxation of Gifts, Inheritance and Estate Tax:

1. In case any asset in India is gifted, the right to tax the same is with India as per the India-US tax treaty. In any case, as per India tax laws, gifts in certain cases are exempt under the provisions of Income tax laws. However, income earned from such assets gifted (eg. Rent, dividend, interest, etc.) will be taxable. Further, reporting of receipt of gifts in India and income therefrom maybe required in the US. 
2. When it comes to US assets, there are three types of gift taxes:

• Gift tax (Federal): Applicable when one transfers money or property to other person without getting any consideration / inadequate consideration. This is not taxable per se and IRS gets involved only if value of gift exceeds USD 16,000. However, income earned from such assets gifted (eg. Rent, dividend, interest, CG) will be taxable in US and India.
• Inherent Tax (State): Currently, only six states levy inherent tax
• Estate Tax:a. Federal: The estate tax is a tax on a person’s assets after death. The IRS exempts estates of less than USD 12.06 million from the tax in calendar year 2022.b. State: There are around 14 states that levy estate above a specific threshold which vary from state to state.

Conclusion 

In conclusion, though a US citizen residing in India is not earning any income in the US from any source or asset, he/she is not completely exempt from carrying out compliances in the US in case their global income (including India sourced income) are above specified thresholds. US citizens who are residing outside US are advised to monitor their global income and analyze applicability of reporting requirements in the US on periodic basis.

Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The thresholds, forms, compliances, etc. mentioned above are as on the date written (April 2022) and the same may vary in future. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal.

Author Information:

Shravan Suratwala is a Partner and Aditi Shelke is an article assistant at S.M. Suratwala & Co., Chartered Accountants. Author can be reached at shravan.suratwala@outlook.com