10 apr 2012
What are the tax obligations of a US citizen or green card holder?
Florida based tax attorney Rahul Ranadive explains, ''All US citizens and green card holders must file their tax returns in the US on their global income irrespective of where they live. They must pay taxes on such foreign income unless a treaty or statutory exclusion or foreign tax credit applies to reduce their US tax liability to zero."
Residence in both countries?
The above particular requirement of the US law might give rise to some confusion. As a citizen of the US or a green card holder living outside the US, you are treated at par with a 'US resident' for tax purposes. So you must pay taxes on your global income in the US. At the same time, if you have lived in India for more than 182 days in a financial year, you are treated as a resident of India. As per the Indian income tax act, a resident of India must pay taxes in India on his global income.
While the Double Taxation Avoidance Agreement (DTAA) talks about solving this tie-breaker, it does not mean that a person will file his returns only in the country that he qualifies as a resident (according to tie-breaker rules). Vinay Navani, a CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, P C, explains, ''A US citizen or green card holder living in India will have to declare his global income in his US tax return as well as his India return. The DTAA will only help in ensuring that a particular income is not taxed twice."
Cecil Nazareth, a CPA and partner with the cross border consulting firm India-US Consulting services also clarifies, ''Most people think that they will be taxed twice on the same income. That is not true. India and the US have a treaty agreement in place and you will get tax credit in each country on the taxes paid in the other."
According to Article 4 of the DTAA between India and the US, if a person qualifies as a resident of both countries at the same time, then he shall be treated as a resident of the country where he either has a permanent home or has closer economic ties. As this can be confusing, do seek a professional advisor to help you out.
How various incomes are taxed
Since this article seeks to address the needs of US citizens and green card holders residing in India, let us assume that the individuals in this case have a permanent home in India. Now, let us look at how various incomes are taxed.
Pensions
This is perhaps a common occurrence for a lot of people so let's deal with that first. You may have lived and earned in the US but finally retired to your homeland. You draw a pension from a company in the US.
The DTAA says: Any pension, (other than a Govt pension), or any annuity derived by a resident of a Contracting State (in our case India) from sources within the other Contracting State (US) may be taxed only in the first-mentioned Contracting State.
So if you are a green card holder or US resident living in India, any pension that you receive from US will be taxed only in India. In such cases, Navani explains, ''You would include with your US tax return, Form 8833, Treaty Based Return Position Disclosure and the pension received while a resident of India would not be included in the US tax calculation. However, to get the benefit of the treaty, a US return must be filed and the Form 8833 must be included. No credit is claimed since the income is not part of the calculation of US taxable income."
For Govt pensions, the rules depend on the nature of pension. Do consult your tax advisor.
Earned income: Salaries, wages and self employment income
If you are living in India and earning a salary from a company in India, then according to the DTAA, you will be taxed only in India. Similarly, in the case of self employment income, if you earn such income from doing a business in India, you will be taxed only in India.
Since this income is taxed only in India, you must file Form 8833 - Treaty Based Return Position Disclosure to indicate that according to the treaty this income will not be taxed in the US. Having filed this form, you would not have to declare this income in your Form 1040.
Such individuals also have an option of claiming 'earned income exclusion'. Ranadive explains, ''For earned income, citizens and GC holders living abroad can exclude up to $95,100 in 2012 from their taxable income. For earned income, no foreign tax credit is allowed on the first $95,100 excluded, but foreign tax paid on the amount of salary above $95,100 can be taken as a foreign tax credit."
US tax filing: Help for US citizens and Green Card holders living in India
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In an earlier article, we saw the US tax implications of foreign income on US citizens and green card holders living in the US. In this article, we take a look at the implications of such income on US citizens and green card holders living outside the US - specifically in India. Remember that the rules can be complicated and this article only seeks to provide a broad understanding. Consult your CPA or tax advisor for your individual situation.
What are the tax obligations of a US citizen or green card holder?
Florida based tax attorney Rahul Ranadive explains, ''All US citizens and green card holders must file their tax returns in the US on their global income irrespective of where they live. They must pay taxes on such foreign income unless a treaty or statutory exclusion or foreign tax credit applies to reduce their US tax liability to zero."
Residence in both countries?
The above particular requirement of the US law might give rise to some confusion. As a citizen of the US or a green card holder living outside the US, you are treated at par with a 'US resident' for tax purposes. So you must pay taxes on your global income in the US. At the same time, if you have lived in India for more than 182 days in a financial year, you are treated as a resident of India. As per the Indian income tax act, a resident of India must pay taxes in India on his global income.
While the Double Taxation Avoidance Agreement (DTAA) talks about solving this tie-breaker, it does not mean that a person will file his returns only in the country that he qualifies as a resident (according to tie-breaker rules). Vinay Navani, a CPA and director of tax at New Jersey based firm Wilkin & Guttenplan, P C, explains, ''A US citizen or green card holder living in India will have to declare his global income in his US tax return as well as his India return. The DTAA will only help in ensuring that a particular income is not taxed twice."
Cecil Nazareth, a CPA and partner with the cross border consulting firm India-US Consulting services also clarifies, ''Most people think that they will be taxed twice on the same income. That is not true. India and the US have a treaty agreement in place and you will get tax credit in each country on the taxes paid in the other."
According to Article 4 of the DTAA between India and the US, if a person qualifies as a resident of both countries at the same time, then he shall be treated as a resident of the country where he either has a permanent home or has closer economic ties. As this can be confusing, do seek a professional advisor to help you out.
How various incomes are taxed
Since this article seeks to address the needs of US citizens and green card holders residing in India, let us assume that the individuals in this case have a permanent home in India. Now, let us look at how various incomes are taxed.
Pensions
This is perhaps a common occurrence for a lot of people so let's deal with that first. You may have lived and earned in the US but finally retired to your homeland. You draw a pension from a company in the US.
So if you are a green card holder or US resident living in India, any pension that you receive from US will be taxed only in India. In such cases, Navani explains, ''You would include with your US tax return, Form 8833, Treaty Based Return Position Disclosure and the pension received while a resident of India would not be included in the US tax calculation. However, to get the benefit of the treaty, a US return must be filed and the Form 8833 must be included. No credit is claimed since the income is not part of the calculation of US taxable income."
For Govt pensions, the rules depend on the nature of pension. Do consult your tax advisor.
Earned income: Salaries, wages and self employment income
If you are living in India and earning a salary from a company in India, then according to the DTAA, you will be taxed only in India. Similarly, in the case of self employment income, if you earn such income from doing a business in India, you will be taxed only in India.
Since this income is taxed only in India, you must file Form 8833 - Treaty Based Return Position Disclosure to indicate that according to the treaty this income will not be taxed in the US. Having filed this form, you would not have to declare this income in your Form 1040.
Such individuals also have an option of claiming 'earned income exclusion'. Ranadive explains, ''For earned income, citizens and GC holders living abroad can exclude up to $95,100 in 2012 from their taxable income. For earned income, no foreign tax credit is allowed on the first $95,100 excluded, but foreign tax paid on the amount of salary above $95,100 can be taken as a foreign tax credit."
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