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By Rajkamal Rao
Go back to Immigration, Taxes & Finance
[This page and the hypothetical example should not be construed as legal, tax or investment advice. For tax advice or more technical questions about how tax laws apply to you, please consult your tax advisor].
US citizens and permanent residents are required to file taxes with the IRS, state and local tax authorities every year - even if they don’t owe taxes. Further, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. An important thing to remember is that your worldwide income is subject to U.S. income tax, regardless of where you reside. Here's a good article in US News on the topic.
The IRS has stepped up your obligations to report your foreign financial dealings - such as those with an Indian bank account. If you have a financial interest in a foreign country (including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account), the Bank Secrecy Act may require you to report the account yearly to the IRS by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). In general, if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year you must file this form.
The New York Times reports that "overseas financial institutions brace for new reporting requirements beginning July 1, 2014. That is when thousands of foreign financial institutions will be required to report to the I.R.S. the foreign accounts of “U.S. persons” under the Foreign Accounts Tax Compliance Act, or Fatca".
If a taxpayer is required to file the FBAR form, this must be done before June 30th of the year immediately following the calendar year being reported. The June 30th filing date may not be extended. Failure to file the FBAR by the filing date may result in a civil penalty not to exceed $10,000. FBAR's filed for the 2013 calendar year have to be filed using the BSA E-Filing system.
Not to be undone, the Indian government is doing the same. Business Today, of the India Today group of publications, reports in its May 2012 issue that starting in 2012, in a move to track foreign assets and income generated there from, the Indian Finance Ministry has proposed that Indian residents should provide details of foreign assets held by them (including financial interests in any entity or signing authority in any account outside India). It is not clear if US citizen returnees qualify as Indian residents. And whether the Indian government is seeking to tax income from foreign assets or simply aiming to have assets listed. Clarifications are expected from the government before filing deadlines for the 2013 tax year.
India taxes all income generated in India on a progressive scale. For the returning Indian, the tax calendar is confusing. The Indian government's Financial Year (FY) starts April 1 and runs through March 31. The Assessment Year (AY) always follows the Financial Year. For example, your income earned during FY 2013 (April 1, 2013 - March 31, 2014) is assessed beginning April 1, 2014 and if any taxes are owed, they are due to the Indian government before July 31, 2014.
Indian Income Tax slabs for the Financial Year 2013-14 year are as follows (Source: http://financeminister.in/latest-india-income-tax-slabs).
When you return to India to work or run a business, your income in India is fully taxable in India according to the above slabs. But because the US taxes global income, your India income is taxable in the US as well. And any income you derive from the US when you are in India (such as income from interest and dividends from a US financial institution) is fully taxable in the US.
Does this mean that you will be paying double taxes? Yes, indeed. The only consolation is that the US and India have entered into a Double Taxation Avoidance Agreement - DTAA - which aims to limit tax rates (and hence taxes) for people facing double taxation. India has DTAA agreements with 65 countries including the U.K., Japan, France, and Germany. These agreements provide relief from double taxation of incomes by providing generous exemptions and also by providing credits for taxes paid in one of the countries. The India DTAA for the US is a flat 15% which means US returnees pay a 15% tax rate to India and not the much higher, progressive slabs mentioned above. And the US allows taxpayers to deduct taxes paid to India.
Here's a hypothetical example of a family with earned income in India filing both in India and the US.
But the process to receive this rather favorable tax treatment - DTTA - is rather onerous. Because India, by default, assumes that you are not eligible for the DTTA benefit, Indian employers are required to withhold your taxes at source (a process which is abbreviated as TDS - Tax Deducted at Source) at the higher rate. Unlike the US, banks and other financial institutions (which pay interest, capital gains or dividends) are also required to withhold taxes when interest is paid out. The computer systems of all of these organizations will deduct taxes at the higher, general rate.
To prove that you are eligible for DTTA, you need to present to Indian employers and banks a “Residency Certificate” from the IRS. The IRS provides this certification on Form 6166. It is a letter printed on U.S. Department of Treasury stationery certifying that the individuals or entities listed are residents of the United States for purposes of the income tax laws of the United States. You may use this form to claim income tax treaty benefits and certain other tax benefits in foreign countries.
To have the IRS issue you this letter, you need to complete Form 8802, Application for United States Residency Certification.
Use of the Form 8802 is mandatory. It takes 45 - 60 days for your request to be processed by the IRS - and you must file only after Dec 1 for the tax year. For example, a request for 2012 must be received by the IRS with a postmark date on or after December 1, 2011, otherwise it will be returned. The IRS used to charge a fee of $35 to issue 20 residency certificates for free. But effective March 2012 this fee was raised to $85, a whopping 150% increase. [Welcome to life under the Obama years!]. You can use these residency certificates at the various Indian institutions you do business with. An additional set of 20 certificates can be obtained for $5. The Indian finance minister has clarified that residency certificates are the ONLY document acceptable to the Indian government to grant DTTA benefits.
There are several events here that unfortunately cannot be synchronized. By the time you receive your IRS Form 6166, your Indian employer and bank would have continued to withhold taxes at the higher rate. And then there is processing time for the Indian institutions to accept and key in the DTTA rate into their computer systems. Your best bet therefore is to recover your overpayments as a refund when you file your India income taxes which are due by July 31. [Remember to hold on to a few Residence Certificates that you can attach to your India tax return].
Given all of these complications, retaining a qualified India Chartered Account (who is experienced with DTTA) is highly recommended.
Should a returning Indian who starts his own business in India pay Social Security and Medicare taxes to the IRS. Yes, indeed. The rules for paying SS taxes on Self Employment (SE) income when you live abroad are very clear. Note that you can't claim a foreign housing deduction on your SE taxes.
Should a returning Indian pay US state taxes? Yes again. US states are hungry for revenue and tax their residents on world-wide income, just like the federal government. The general rule is that the last state you lived in, voted in and had a driver's license in counts as your last state. This rule applies to military families so we're reasonably sure it applies to us ordinary mortals as well.
Go back to Immigration, Taxes & Finance
[This page and the hypothetical example should not be construed as legal, tax or investment advice. For tax advice or more technical questions about how tax laws apply to you, please consult your tax advisor].
US citizens and permanent residents are required to file taxes with the IRS, state and local tax authorities every year - even if they don’t owe taxes. Further, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. An important thing to remember is that your worldwide income is subject to U.S. income tax, regardless of where you reside. Here's a good article in US News on the topic.
The IRS has stepped up your obligations to report your foreign financial dealings - such as those with an Indian bank account. If you have a financial interest in a foreign country (including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account), the Bank Secrecy Act may require you to report the account yearly to the IRS by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). In general, if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year you must file this form.
The New York Times reports that "overseas financial institutions brace for new reporting requirements beginning July 1, 2014. That is when thousands of foreign financial institutions will be required to report to the I.R.S. the foreign accounts of “U.S. persons” under the Foreign Accounts Tax Compliance Act, or Fatca".
If a taxpayer is required to file the FBAR form, this must be done before June 30th of the year immediately following the calendar year being reported. The June 30th filing date may not be extended. Failure to file the FBAR by the filing date may result in a civil penalty not to exceed $10,000. FBAR's filed for the 2013 calendar year have to be filed using the BSA E-Filing system.
Not to be undone, the Indian government is doing the same. Business Today, of the India Today group of publications, reports in its May 2012 issue that starting in 2012, in a move to track foreign assets and income generated there from, the Indian Finance Ministry has proposed that Indian residents should provide details of foreign assets held by them (including financial interests in any entity or signing authority in any account outside India). It is not clear if US citizen returnees qualify as Indian residents. And whether the Indian government is seeking to tax income from foreign assets or simply aiming to have assets listed. Clarifications are expected from the government before filing deadlines for the 2013 tax year.
India taxes all income generated in India on a progressive scale. For the returning Indian, the tax calendar is confusing. The Indian government's Financial Year (FY) starts April 1 and runs through March 31. The Assessment Year (AY) always follows the Financial Year. For example, your income earned during FY 2013 (April 1, 2013 - March 31, 2014) is assessed beginning April 1, 2014 and if any taxes are owed, they are due to the Indian government before July 31, 2014.
Indian Income Tax slabs for the Financial Year 2013-14 year are as follows (Source: http://financeminister.in/latest-india-income-tax-slabs).
When you return to India to work or run a business, your income in India is fully taxable in India according to the above slabs. But because the US taxes global income, your India income is taxable in the US as well. And any income you derive from the US when you are in India (such as income from interest and dividends from a US financial institution) is fully taxable in the US.
Does this mean that you will be paying double taxes? Yes, indeed. The only consolation is that the US and India have entered into a Double Taxation Avoidance Agreement - DTAA - which aims to limit tax rates (and hence taxes) for people facing double taxation. India has DTAA agreements with 65 countries including the U.K., Japan, France, and Germany. These agreements provide relief from double taxation of incomes by providing generous exemptions and also by providing credits for taxes paid in one of the countries. The India DTAA for the US is a flat 15% which means US returnees pay a 15% tax rate to India and not the much higher, progressive slabs mentioned above. And the US allows taxpayers to deduct taxes paid to India.
Here's a hypothetical example of a family with earned income in India filing both in India and the US.
But the process to receive this rather favorable tax treatment - DTTA - is rather onerous. Because India, by default, assumes that you are not eligible for the DTTA benefit, Indian employers are required to withhold your taxes at source (a process which is abbreviated as TDS - Tax Deducted at Source) at the higher rate. Unlike the US, banks and other financial institutions (which pay interest, capital gains or dividends) are also required to withhold taxes when interest is paid out. The computer systems of all of these organizations will deduct taxes at the higher, general rate.
To prove that you are eligible for DTTA, you need to present to Indian employers and banks a “Residency Certificate” from the IRS. The IRS provides this certification on Form 6166. It is a letter printed on U.S. Department of Treasury stationery certifying that the individuals or entities listed are residents of the United States for purposes of the income tax laws of the United States. You may use this form to claim income tax treaty benefits and certain other tax benefits in foreign countries.
To have the IRS issue you this letter, you need to complete Form 8802, Application for United States Residency Certification.
Use of the Form 8802 is mandatory. It takes 45 - 60 days for your request to be processed by the IRS - and you must file only after Dec 1 for the tax year. For example, a request for 2012 must be received by the IRS with a postmark date on or after December 1, 2011, otherwise it will be returned. The IRS used to charge a fee of $35 to issue 20 residency certificates for free. But effective March 2012 this fee was raised to $85, a whopping 150% increase. [Welcome to life under the Obama years!]. You can use these residency certificates at the various Indian institutions you do business with. An additional set of 20 certificates can be obtained for $5. The Indian finance minister has clarified that residency certificates are the ONLY document acceptable to the Indian government to grant DTTA benefits.
There are several events here that unfortunately cannot be synchronized. By the time you receive your IRS Form 6166, your Indian employer and bank would have continued to withhold taxes at the higher rate. And then there is processing time for the Indian institutions to accept and key in the DTTA rate into their computer systems. Your best bet therefore is to recover your overpayments as a refund when you file your India income taxes which are due by July 31. [Remember to hold on to a few Residence Certificates that you can attach to your India tax return].
Given all of these complications, retaining a qualified India Chartered Account (who is experienced with DTTA) is highly recommended.
Should a returning Indian who starts his own business in India pay Social Security and Medicare taxes to the IRS. Yes, indeed. The rules for paying SS taxes on Self Employment (SE) income when you live abroad are very clear. Note that you can't claim a foreign housing deduction on your SE taxes.
Should a returning Indian pay US state taxes? Yes again. US states are hungry for revenue and tax their residents on world-wide income, just like the federal government. The general rule is that the last state you lived in, voted in and had a driver's license in counts as your last state. This rule applies to military families so we're reasonably sure it applies to us ordinary mortals as well.
Thank you for such a wonderful blog. Regarding the taxes, do we have to file Form 8802 every year if we want to avail of the 15% taxation rate in India?
ReplyDeleteUnfortunately, yes. Residency is to be established and proven each year.
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