MT: Tax for US Green Card holder living in India

[RRK]

New thread to specifically address taxation questions of Green Card Holders returned to India.

R2Iers who have Green card or US Citizenship must file as Residents as per US tax laws. They are subjected to Global taxation as per US Tax laws.

Since they are residents of India, they are subjected to Global taxation from Indian tax perspective too.

RNOR and NRI status exempt persons from including foreign income in Indian tax computation. Once the person become ROR, all income are taxable by India.

Further, there is no concept of Married Filing Jointly in India. Hence a family must show their income separately for Indian taxes - very different from US Tax computation.

Let us address all these issues in this thread.

[mmrhyd]

I am a GC Holder, have been living in US for about 10yrs, will be returning to India in Jun/Jul 2007. I have read lots of posts on Finance and R2IClub forums and tried to familiarize my self to Finance, taxation,etc with reference to R2I.

I want to thank admins for providing such a great forum and all the contributing members for providing valuable information as well as sharing their experiences.

I have the following assumptions, plans and questions in my mind, would like comments from the members...

RNOR and Bank Accounts:
I will be RNOR for tax years 07-08, 08-09, 09-2010 and will be ROR from 4/1/2010 (As per RNOR Status Calc).

Will move some of my funds into FCNR and convert to RFC after return, assuming that I do not have to pay taxes to GOI until 4/1/2010, however have to pay taxes on interest to IRS until 12/31/07.

NRE Accounts have to be redesignated as resident accounts upon my return to India and the interest is taxable by GOI.


401K to IRA:
I have about 12k in 401K account and plan to rollover to IRA,and contributing 4k of 2006 and 4k of 2007 thereby increasing my funds in IRA to 20K.

Take the distribution in 2008 from IRA and pay only 10% penalty, as I will be filing US tax returns as Resident.

Tax Returns for 2007?
I would have to file US tax returns for FY2007 as a resident and report global income, including my salary in India in year 2007 (say from Aug07 thru Dec07), and pay taxes to IRS.

I will be a "Resident" as per Indian tax laws for FY07/08, my question is
When I file tax returns for FY07-08 in India, do I have to pay taxes to GOI again on the income in Cal Yr 07?
Since I would have already paid taxes on my global income in 07 to U.S., is there any treaty/laws to avoid double taxation?

Tax Returns for 2008?
Since I am planning to take a distribution in 2008, I will keep my GC and file tax returns to IRS as Resident.
Question is, if I file tax returns as resident to IRS then I guess I have to report my global income and pay taxes to IRS? Is this correct? If so what would I have to do when I file tax returns to GOI for FY08-09?

[Bobus]

Until you retain GC, even while you are in India, you have to file as US resident and report all income from all sources including FCNR, RFC, NRE and resident rupee bank account interest on US tax return.

One of the following has to be done with NRE account immeidately upon R2I:

(a) close
(b) redesignate as resident rupee account - interest is taxable by GOI even when you are RNOR.
(c) convert to RFC - interest is not taxable by GOI when you are RNOR.

FCNR interest is also not taxable by GOI when you are RNOR.

Take the distribution in 2008 from IRA and pay only 10% penalty, as I will be filing US tax returns as Resident.

Whether you can get away by paying just the 10% penalty will depend on what your total income from all sources including IRA withdrawals is, your filing status, number of dependents, ...

I will be a "Resident" as per Indian tax laws for FY07/08, my question is
When I file tax returns for FY07-08 in India, do I have to pay taxes to GOI again on the income in Cal Yr 07? Since I would have already paid taxes on my global income in 07 to U.S., is there any treaty/laws to avoid double taxation?

As RNOR, your US salary is not taxable by GOI, but your India salary is.

Regarding India salary, it is taxable by US too as long as you hold GC, but you can claim the foreign earned income exclusion or claim credit from IRS for tax paid to GOI on the same, whichever is more beneficial. Please note that foreign earned income exclusion rules have changed from 2006.

In light of this post, please feel free to post a revised plan and ask questions.

[ssppss]

Dear Forum Experts:

I have a few questions on Taxes. I and wife are currently Green Card, 2 kids are USC. I am considering either r2i immediately or work in some Asian country for a few years and then r2i.
[LIST=1]

I am currently a Green Card holder. If I live outside the US, then what is the tax rate?

Does this tax rate change if I live in India, or Taiwan, or Hong Kong, or Korea (places I am considering)?

If I take US citizenship, then what is the tax rate?

Do I pay taxes on the whole amount earned to both the local government (India, or Taiwan, Hong Kong, or Korea)? I mean to ask if earn $x, then is the tax calculated based on x for both local and US government? If not, how is it done?[/LIST]I appreciate your help.
Thanks

[Desi]

Dear Forum Experts:

I have a few questions on Taxes. I and wife are currently Green Card, 2 kids are USC. I am considering either r2i immediately or work in some Asian country for a few years and then r2i.
[LIST=1]

I am currently a Green Card holder. If I live outside the US, then what is the tax rate?

Does this tax rate change if I live in India, or Taiwan, or Hong Kong, or Korea (places I am considering)?

If I take US citizenship, then what is the tax rate?

Do I pay taxes on the whole amount earned to both the local government (India, or Taiwan, Hong Kong, or Korea)? I mean to ask if earn $x, then is the tax calculated based on x for both local and US government? If not, how is it done?[/LIST]I appreciate your help.
Thanks

[/quote]

1. For your query, what is the tax rate, I am assuming that your question is for USA. The tax rate depends on your net taxable income. If the income is $10K or $10000K, the tax rates are different. As a GC holder, you are liable for US tax on your worldwide income with foreign earned income exclusions.

2. The tax rate in general does not change as far as US ius concerned. US does have reciprocal double tax avoidance agreements (DTAA) with many countries and those DTAA may allow for some specific changes. I hope you did not expect anyone to give you a dissertation for tax idiosyncracies vis a vis each of those countries. You will have to look at DTAA for each of those countried for the detail.

3. No different than if you are a GC.

4. US taxes rsidents on global income and provides some exclusions for foreign earned income. It also allows for credit for foreign taxes paid on taxed income. As to foreign countries, their taxation is per their law. India taxes Indian residents (ROR0 on global income and provides for credits alos on foreign taxes paid.

[ssppss]

1. For your query, what is the tax rate, I am assuming that your question is for USA. The tax rate depends on your net taxable income. If the income is $10K or $10000K, the tax rates are different. As a GC holder, you are liable for US tax on your worldwide income with foreign earned income exclusions.

2. The tax rate in general does not change as far as US ius concerned. US does have reciprocal double tax avoidance agreements (DTAA) with many countries and those DTAA may allow for some specific changes. I hope you did not expect anyone to give you a dissertation for tax idiosyncracies vis a vis each of those countries. You will have to look at DTAA for each of those countried for the detail.

3. No different than if you are a GC.

4. US taxes rsidents on global income and provides some exclusions for foreign earned income. It also allows for credit for foreign taxes paid on taxed income. As to foreign countries, their taxation is per their law. India taxes Indian residents (ROR0 on global income and provides for credits alos on foreign taxes paid.[/quote]

Desi:

Thanks for the reply. I went through the IRS documents and also this forum. But some help would be appreciated.

I am considering two possible positions that are likely to materialize: One in India at US $75,000. One in Taiwan at $200,000. What would be the US Tax rate for either of them?

I went through the IRS documents and also this forum. But some help would be appreciated. So if I apply foreign credit of $85,000, then can I apply more deductions for my dependents (one wife, two kids)?

In Taiwan I understand that I would be in 40% bracket. So I pay 40% of $200K = $80 K to taiwan. Then does Uncle Sam tax me based on 200K or 120K?

Is there a web site I can find that will tell me if taiwan has DTAA with US?

Thanks.

[ssppss]

Follow up on my own post ... I searched on the web, esp IRS site. I do not think US has a double taxation avoidance treaty with Taiwan. So I guess Uncle Sam will take a good chunk of the possible $200K income. So my understanding is that I would be taxed 40% by Taiwan, and about 30-35% by US. Is this a correct assumption?

[Desi]

Desi:

Thanks for the reply. I went through the IRS documents and also this forum. But some help would be appreciated.

I am considering two possible positions that are likely to materialize: One in India at US $75,000. One in Taiwan at $200,000. What would be the US Tax rate for either of them? [/quote]

I do not know what would the US tax rate be. You have to do an exercise of filling in the form 1040 for each case assumed. You will also have to fill in form 2555. You should also read the publication on USC and resident aliens abroad ( I think it is pub 54). There is an exclusion available on foreign earned income. Your US income will be taxed at a rate after piggybacking on the excluded income after applying the deductions and exemptions.

[quote]I went through the IRS documents and also this forum. But some help would be appreciated. So if I apply foreign credit of $85,000, then can I apply more deductions for my dependents (one wife, two kids)? [/quote]

Yes, exemptions and deductions will be available as well as foreign earned income exclusion. The foreign earned income exclusion is $82,400 and not $85K. However the tax calculation is not straight forward as it requires piggy backing income on excluded amount to get the correct rate, hence an exercise of filling out the forms is the best way to get a good assesment of taxes.

[quote]In Taiwan I understand that I would be in 40% bracket. So I pay 40% of $200K = $80 K to taiwan. Then does Uncle Sam tax me based on 200K or 120K?[/quote]

Based on 200K and not $120K. You will, however, have credits available for foreign taxes paid.

The following documents will be of interest to you.

Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
Publication 514, Foreign Tax Credit for Individuals
Form 2555 (PDF), Foreign Earned Income
Form 2555EZ (PDF), Foreign Earned Income Exclusion
Form 1116 (PDF), Foreign Tax Credit
Tax Topic 853, Foreign Earned Income Exclusion - General

[Desi]

Follow up on my own post ... I searched on the web, esp IRS site. I do not think US has a double taxation avoidance treaty with Taiwan. So I guess Uncle Sam will take a good chunk of the possible $200K income. So my understanding is that I would be taxed 40% by Taiwan, and about 30-35% by US. Is this a correct assumption?[/quote]

I do not think you are taking into account, the foreign tax credit, the deductions, the exemptions etc. So I suggest read my previous post.

[aniwasi]

R2Ied Mar 2006(MFJ+2, GC, REP valid till Mar 2008).
Did 1st IRA withdrawal in Mar 2007 during 1st RNOR year, as per RRK-10 limits. Requested Fidelity to withhold 10% Fed Tax. Have not requested any CA state withholding. My taxman in the US says I'll have to pay 2.5% CA state tax next year, in addition to the 10% Fed.
However, since I'm residing in India when I did the withdrawal and I shall mention India address when I file return next year, no state tax needed is what I thought ?
I've not filed change of address(Form 8822) yet, but will do so shortly. Should I have done so beginging of the year itself, so that IRS would have record that I was staying in India when I made the withdrawal ? ANy remedy for this ?
Pls advise.