Issue filing both US and Indian taxes

[WageRage]

Hello,

I have an interesting problem.

I have earned both US and Indian salary for 2010 ? after filling up the details of my US income in Turbo Tax, I see a Federal tax refund of 4,000$. When I enter my Indian income, I see the tax refund changing into a tax due of $1,000. Does anyone know why my Indian salary results in an increase of this additional 5,000$ when the Indian salary is exempt (and is excluded) and the Adjusted Gross Income (AGI) and the Taxable income remains the (same with and without including the Indian income). I have spent approx equal amount of time in both US and India for last year and am USC ? if that helps in anyway.

Thanks in advance!

[kkassociate]

Hi Wagerage,

Try considering a foreign tax credit option by using form 1116, see if that make any difference.

Regards,
KKA
US and India tax filers
www.kkassociate.com

[Desi]

Hello,

I have an interesting problem.

I have earned both US and Indian salary for 2010 – after filling up the details of my US income in Turbo Tax, I see a Federal tax refund of 4,000$. When I enter my Indian income, I see the tax refund changing into a tax due of $1,000. Does anyone know why my Indian salary results in an increase of this additional 5,000$ when the Indian salary is exempt (and is excluded) and the Adjusted Gross Income (AGI) and the Taxable income remains the (same with and without including the Indian income). I have spent approx equal amount of time in both US and India for last year and am USC – if that helps in anyway.

Thanks in advance!

Open Turbotax and go to forms view. Open form 1040 and go to tax computation (second page after Taxable Income line) and see what has changed there.

[Tijean250]

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[WageRage]

Interesting..

My US income is amount X.
My Indian income is amount Y.

Turbo tax calculates the tax due on X + Y This is T(X+Y).
It then calculates tax on Y- T(Y) and then subtracts this from T(X+Y).

However this is not the same as T(X)!! Still very odd..

[Desi]

Interesting..

My US income is amount X.
My Indian income is amount Y.

Turbo tax calculates the tax due on X + Y This is T(X+Y).
It then calculates tax on Y- T(Y) and then subtracts this from T(X+Y).

However this is not the same as T(X)!! Still very odd..

It is a bit different than the way you have stated. It is due to a provision called stacking provision. The impact of this is high when someone has US income higher than the deductions and exemptions and a reasonably high Indian income also.

To know the detail, go thru the following posts as well as other posts in those threads:

POST #49

Therajs,

Long time no hear. Hope everything is fine with you. Seems like we are seeing you in the forum after an absence of couple of years at least if not more.

In the example you provided, the US tax would be zero.

What is stacked is not gross income but AGI is stacked on top of full excluded income.

In the example you provided the AGI would be zero.

Here is an example calculation that I had done earlier. ( #16 ) In addition, Bobus has pointed out some instances where this would be taxing ( My silly finance question ! posts 53)

For most people this will not make much difference. This hurts those in larger brackets.

Let us take the case where someone has say Foreign earned income of $35K and they have IRA distribution of 25K. Their income becomes $60K.

Standard deduction, and personal exemptions for spouse and two children, add upto 23500. That leaves taxable income of 60K-23.5K =36.5K.

The way the foreign earned income exclusion worksheet calculates this is as follows:

Taxes on 36.5K (MFJ) --------------------- $4724
Tax on foreign earned income (35K) -------- $4499

Net tax ---------- = -----------------------$ 225.

Prior to the new law this would have been tax on $1500 which would be $150.

The difference is $225 - $150 = $75.

This is the difference due to stacking.

Yes, that is the law, however the overall impact for most people is small. Each person should do the form 2555 and the worksheet for line 44 to find out their impact.

===========
POST #16

Nand,

For most people this will not make much difference. This hurts those in larger brackets.

Let us take the case where someone has say Foreign earned income of $35K and they have IRA distribution of 25K. Their income becomes $60K.

Standard deduction, and personal exemptions for spouse and two children, add upto 23500. That leaves taxable income of 60K-23.5K =36.5K.

The way the foreign earned income exclusion worksheet calculates this is as follows:

Taxes on 36.5K (MFJ) --------------------- $4724
Tax on foreign earned income (35K) -------- $4499

Net tax ---------- = -----------------------$ 225.

Prior to the new law this would have been tax on $1500 which would be $150.

The difference is $225 - $150 = $75.

This is the difference due to stacking.

Yes, that is the law, however the overall impact for most people is small. Each person should do the form 2555 and the worksheet for line 44 to find out their impact.

======
Threads:

My silly finance question !
MT: US laws on Foreign Earned Income Exclusion

[gurusw]

WageRage, you also have to file returns with GOI for earnings from India. Are you planning to pay taxes to USA for India wages, and then claim refund from India? I ask because looks like refund process from India takes at least 6 months, and in my opinion it's better to pay taxes to India for Indian wages, and show USA that the taxes have been paid.

This is just a hypothetical suggestion from me as I am not in the same situation yet. Folks - if WageRage goes down the path I am suggesting, are there any disadvantages?

[WageRage]

Desi,

Thanks for pointing me to the right links which explain the issue.

KKassociate,

I tried the 1116 route and found a more favorable outcome that way. Thanks a lot!

Gurusw,

My indian taxes are TDS so the Indian government already has my money - I am showing in my US 2010 that taxes for wages earned in India have already been paid to Indian government. This may not be the best route and I will explore options for next years filing.

You are right about the delays in claiming refund from India though...

[gurusw]

Gurusw,

My indian taxes are TDS so the Indian government already has my money - I am showing in my US 2010 that taxes for wages earned in India have already been paid to Indian government. This may not be the best route and I will explore options for next years filing.

You are right about the delays in claiming refund from India though...

I learnt that one of my colleagues is also using TDS on India wages to avoid paying taxes to IRS. So maybe that's the way to go. Please let us know if there is indeed a more favorable route.

This example also made me realize that the foreign income will push one to higher tax bracket - effectively limiting the Roth conversion one can do in a given year. Only 17K of taxable income for MFJ can push the filer in 10% tax bracket in 2011.... http://fairmark.com/reference/index.htm#rates
So a MFJ earning 20L of Indian salary & he will be paying at least 15% taxes for any ROTH conversion!