Dilemma: R2I with One spouse USC and other GC OR both spouses USC?

[r2i-2008]

Dilemma: R2I with One spouse USC and other GC OR both spouses USC?
Many of on this forum are in dilemma weather to R2I with One spouse USC and other GC OR both spouses USC? I am in the same boat. I have spent several months reading posts on this forum and outside. I have put together a summary of my reading. I hope to make decision this week since I am running out of time to apply for USC. My R2I plan is Oct 2008. I hope experts like Bobus and otherswill help me guide thro this confusion:

Advantages of both spouses USC:
1. Ability to travel to the USA and several other countries without visa.
2. Ability to comeback to USA for work in case R2I does not work out. The job scenario in non IT field is not as rosy as IT.
3. All family has one set of travel document (USC). Easier to manage international travel.
4. In case kids want to come to US for studies or work, can relocate with kids to USA.

Disadvantages
1. Potentially higher income taxes on some types of investment income. E.g. LTCG on stocks in India is nil. USC still has to pay LTCG taxes to the US upon sale of Indian stocks.
2. US real estate LTCG 15% till 2011 and 20% beyond 2011, Vs India 10%. Hence will end up paying up to 10% extra to IRS on real estate sale in India.
3. PFIC regulations will make investment in Indian MF unattractive. All mutual fund investment needs to be managed from the US mutual fund companies or US brokerage houses.

Advantages of one spouse USC and the other IC:
The IC partner will apply REP before moving to India. From what I have learned from a lawyer and immigration discussion boards, the REP can be extended once. This will provide 4 years of GC period. In case R2I is not successful in these four years, there is an option of coming back to the USA. In future if need arises to return to USA, USC spouse can sponsor the IC spouse.
1. Invest in India in IC?s name. Hence make use of Indian tax shelters and investment opportunities. Such as- zero LTCG tax on stocks investment, lower capital gains tax on real estate sale and tax deferred infra-bonds to delay taxes on LTCG gains on real estate income.

2. Invest in Indian MFs in IC?s name. This is not a clear advantage because in case IC deceases the USC partner will have PFIC tax consequences to deal with.

3. Starting business in India in the name of IC will be easier and tax efficient. I believe USC has to pay SS and Medicare taxes on self employment. I do not know if this affects USC?s ability to start business in India. Experts please comment?

Disadvantages:
1. Assets left in the USA in the name of the IC have estate tax issues beyond 60K. In case IC is not domicile in the USA, his Indian estate does not come under US estate tax purview.
2. USC spouse?s gross estate = worldwide estate. Marital Deduction= unlimited only if estate placed in QDOT (Qualified Domestic Trust). Otherwise pay estate tax on estate beyond $1M. This need confirmation from experts.

I am looking for guidance from experts on following questions:

1. I believe USC has to pay SS and Medicare taxes on self employment. I do not know if this affects USC?s ability to start business in India. Experts please comment?

2. Any issue with receiving inheritance by USC from Indian parents. I think if inheritance or gift is over $100K, USC need to declare to IRS. I am not sure if there are any taxes due. Pl comment..

3. What are the chances of estate tax in future? Prior to 1988, the USC to non-resident-non-USC spouse transfers ordinarily escaped taxation because U.S. citizens and resident aliens were allowed to transfer unlimited amounts of property to their spouse?s free of any U.S. estate and gift tax. Any change in estate tax laws has more possibility of screwing up estate tax planning of USC / IC couple as compared to USC/USC couple.

4. In case of USC+IC couple, USC spouse?s gross estate = worldwide estate. Marital Diduction= unlimited only if estate placed in QDOT (Qualified Domestic Trust). Otherwise pay estate tax on estate beyond $1M. This need confirmation from experts.

5. In case the estate passed on is a house or land, and the recipient of the estate does not have cash to pay estate taxes. What are the escape routes?

Revelent threads:
1. Abandoning USC process midway
http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=45551&ShowDelete=0&CDir=-2&all_topics=1
2. http://www.visalaw.com/03sep4/11sep403.html
3. R2I as aspouse of USC http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=53975&ShowDelete=0&CDir=-2
4. US citizenship for R2I
http://groups.msn.com/R2IClub/general.msnw?action=get_message&mview=0&ID_Message=147752&LastModified=4675589424238604530

5. USC VS GC
http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=46757&ShowDelete=0&ID_CLast=53699&CDir=1
[/font]

[cyberabadi]

Excellent Post! I would be in the same boat (IC+USC).

To add to the above list (Guidance Required):

6. How should we handle Real Estate property held in India (Held by USC independently or jointly with IC)? What are the Tax implications when we sell this RE property in India? What are the Tax implications on Rental Income?

[HighTorque]

Good thread. I would also be interested in those information and also this...

Starting business in India in the name of IC will be easier and tax efficient. I believe USC has to pay SS and Medicare taxes on self employment. I do not know if this affects USC?s ability to start business in India. Experts please comment?

Do USCs pay SS and Medicare as company owners in India?. Anyone R2Ied folks done this and can comment on it?.

[r2i-2008]

Thanks for moving it to right discussion board..

[HighTorque]

To add to the above list (Guidance Required):

6. How should we handle Real Estate property held in India (Held by USC independently or jointly with IC)? What are the Tax implications when we sell this RE property in India? What are the Tax implications on Rental Income?

Since the resident tax experts have not got to this yet, I will try to take a swag at this for now:

Your Real Estate Property held in India is Taxable, period. When you file MFJ(that is the best option), they will fall under the 'UNEARNED INCOME' category, So you will not be able to leverage the 'FOREIGN EARNED INCOME EXCLUSION'(only wages, salary, bonuses etc) of $85k/person. Assuming you have covered the taxes/capital gains if you have it on the Indian IT side on the sale of RE, you will STILL be liable to taxes with IRS also.

I wonder what USCs residing in India plan to do when they sell their RE, Stocks, bonds etc. Gurus, Correct me if wrong?

[HighTorque]

OP,

1. I believe USC has to pay SS and Medicare taxes on self employment. I do not know if this affects USC’s ability to start business in India. Experts please comment…

check out this link

http://www.irs.gov/businesses/small/international/article/0,,id=97160,00.html

Extract:

You are in business abroad as a consultant and qualify for the foreign earned income exclusion. Your foreign earned income is $95,000, your business deductions total $27,000, and your net profit is $68,000. You must pay self-employment tax on all of your net profit, including the amount you can exclude from income.

Interpretation: Regardless of the foreign earned income exclusion, you still pay tax on the net profit.

I guess in the case, the best work-around for USC would be to partner with IC folks or have IC spouse to own the company and USC be in the payroll. Any more suggestions?

[HighTorque]

^^ Bump

Would the tax experts, admins and others care to comment on the answers given in post #5, and the workaround suggested in #6 makes sense?

[DosaiLvr]

Since the resident tax experts have not got to this yet, I will try to take a swag at this for now:

Your Real Estate Property held in India is Taxable, period. When you file MFJ(that is the best option), they will fall under the 'UNEARNED INCOME' category, So you will not be able to leverage the 'FOREIGN EARNED INCOME EXCLUSION'(only wages, salary, bonuses etc) of $85k/person. Assuming you have covered the taxes/capital gains if you have it on the Indian IT side on the sale of RE, you will STILL be liable to taxes with IRS also.

I wonder what USCs residing in India plan to do when they sell their RE, Stocks, bonds etc. Gurus, Correct me if wrong?[/quote]

You are correct about this. I could avail tax shelter in India but will need to shell out LTCG in the US

Further, I am under the impression that this applies not just to USCs, but also to any resident (GC, H1Bs and/or anyone else who is living and is taxable in the US)

Added later: My understanding is that, primary residence LTCG exemptions apply in the case of foreign residence as well. So, an USC who has lived in his/her house or can establish the same (drivers license, phone, utility bills etc.) can avail exemptions (250k single, 500k married?)

[DosaiLvr]

http://www.irs.gov/businesses/small/international/article/0,,id=97160,00.html
[/quote]

Extract from the above quoted link:

Who Must Pay Self-Employment Tax?
If you are abroad and you are a self-employed U.S. citizen or resident you generally are subject to the self-employment tax. This is a social security and Medicare tax on net earnings from self-employment of $400 or more a year. Your net self-employment income is used to figure your net earnings from self-employment. Net self-employment income usually includes all business income less all business deductions allowed for income tax purposes. Net earnings from self-employment is a portion of net self-employment income. This amount is figured on Schedule SE. The actual self-employment tax is figured on net earnings from self-employment.

*******

Being employed by the Indian business and earning less than $85k appears to be a better choice.

I can't remember the thread titles, but am almost 100% sure that these questions were addressed in the finance forums...

[HighTorque]

Further, I am under the impression that this applies not just to USCs, but also to any resident (GC, H1Bs and/or anyone else who is living and is taxable in the US)

Yes, that is correct.