USC & OCI in India - Avoid Double Taxation of Earned, Unearned & Variable Income

[jaykana]

Hi There,

Here is my situation and questions :

1. I am USC and OCI living with my spouse and 2 dependent kids in India since last 2 years working as an Artist. I have minimal US Interest Income and the income in India comprises of : Interest Income, Dividends, House Rent, and some Self Employment i.e sale of art.

2. As required, I pay TDS and Income Tax on Rent, Interest Income, Self Employment etc. to Income Tax Authority of India.

3. How do I need to file my US taxes with IRS ? Would that be : Form 2555 for Self Employment Income, and Form 1040 for Interest Income, House Rent Income etc. ?

4. How do I avoid Double Taxation of my Interest Income (unearned) and Rent Income (variable) in addition to that of Self Employment Income (earned) ? This is in view of the fact that Form 1116 cannot report income already reported via Form 2555 etc. I am confused.

Please advise at the earliest.
Thanks in advance,

BJ

[Desi]

Hi There,

Here is my situation and questions :

1. I am USC and OCI living with my spouse and 2 dependent kids in India since last 2 years working as an Artist. I have minimal US Interest Income and the income in India comprises of : Interest Income, Dividends, House Rent, and some Self Employment i.e sale of art.

2. As required, I pay TDS and Income Tax on Rent, Interest Income, Self Employment etc. to Income Tax Authority of India.

3. How do I need to file my US taxes with IRS ? Would that be : Form 2555 for Self Employment Income, and Form 1040 for Interest Income, House Rent Income etc. ?

Yes.


[QUOTE]4. How do I avoid Double Taxation of my Interest Income (unearned) and Rent Income (variable) in addition to that of Self Employment Income (earned) ? This is in view of the fact that Form 1116 cannot report income already reported via Form 2555 etc. I am confused.

Income reported on form 2555 is for foregn earned income exclusion. If the income is already excluded, then you cannot claim corresonding tax credit also. That would be double dipping.

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Just noticed that this question was posted in another thread also and has already been answered by KKA.

http://www.r2iclubforums.com/forums/showthread.php/22611-Promotion-kkassociate.com-answers-your-USA-tax-questions-till-April-1st-2011?p=392734#post392734

[jaykana]

Hi Desi,

Thanks for responding. Let me give some more details to make myself clear :

I am US Passport and OCI (Overseas Citizen of India) holder living in India for last 400 days with my wife and 2 dependent school going kids, all of whom are of same status. I work as a self-employed artist in India.

I have income from Sale of my Art (Earned Income), Interest Income from my Foreign and US accounts (Unearned Income), and Foreign House Rent (Variable Income) for Tax Year 2010. I have to pay taxes to Govt Of India on worldwide income. US has Tax Treaty with Govt of India.

Do I use Form 1040 to report Unearned Income (Interest Income of Foreign and US Accounts) and Variable Income (Foreign Rental Income), and Form 2550 to report Earned Income (Sale of my Art Work).

Since you advise avoiding mention of direct income excluded by Form 2550 for tax credit, do I then use Form 1116 to get Tax Credits to avoid Double Taxation of Unearned, and Variable Incomes ? Do I list unearned, and variable incomes in Form 1116 also ? Indian Govt is already taxing all my income from these sources. Am I using correct forms. Is my understanding correct ?
Please help.

[Desi]

Hi Desi,

Thanks for responding. Let me give some more details to make myself clear :

I am US Passport and OCI (Overseas Citizen of India) holder living in India for last 400 days with my wife and 2 dependent school going kids, all of whom are of same status. I work as a self-employed artist in India.

As USC, you are required to file form 1040 for your reportable income.

I have income from Sale of my Art (Earned Income), Interest Income from my Foreign and US accounts (Unearned Income), and Foreign House Rent (Variable Income) for Tax Year 2010. I have to pay taxes to Govt Of India on worldwide income. US has Tax Treaty with Govt of India.

Do I use Form 1040 to report Unearned Income (Interest Income of Foreign and US Accounts) and Variable Income (Foreign Rental Income), and Form 2550 to report Earned Income (Sale of my Art Work).

As USC, form 1040 is the main form, you use. All other forms are in addition to this.

Yes, your interest income goes on form 1040 and schedule B as needed. Rental income on schedule E, Form 2555 for Foreign earned income.

Since you advise avoiding mention of direct income excluded by Form 2550 for tax credit, do I then use Form 1116 to get Tax Credits to avoid Double Taxation of Unearned, and Variable Incomes ?

Yes,

Do I list unearned, and variable incomes in Form 1116 also ? Indian Govt is already taxing all my income from these sources. Am I using correct forms. Is my understanding correct ?

Yes.

[jaykana]

Thanks Desi !
Does one risk too much if interest income is not reported ?
Any instances of action in such cases ?
Its a pain paying taxes on your hard earned interest at both places and then
applying for tax credit on paid taxes, especially if that is your primary income.
I have also read that Tax Credit does not give you a good result i.e
you still end up paying more to IRS. True/False ?

[Desi]

Thanks Desi !
Does one risk too much if interest income is not reported ? [/quote] Tax evasion can be punished with both fines as well as imprisonment and is deemed criminal.

Any instances of action in such cases ?

I do not track these things.

Its a pain paying taxes on your hard earned interest at both places and then
applying for tax credit on paid taxes, especially if that is your primary income.
I have also read that Tax Credit does not give you a good result i.e
you still end up paying more to IRS. True/False ?

Each case would vary. You have to fill out a form 1116 for your case and see.