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- November 13, 2024
How to Deal with NRI Taxation Like a Pro?
If you are a Non-Resident Indian (NRI) living in the USA, there are a lot of things that you need to take care of while doing financial planning. We all know how complex the US tax system is. So it has to be tackled properly. On top of that, you will also have to deal with Indian tax regulations. So, things might get a bit tricky. That’s why we decided to create a blog that can help NRIs like you with their financial planning.
So, let’s start.
What are the Different Types of NRI Statuses?
Firstly, it’s essential to determine your residency status. When it comes to US taxation, NRIs are the ones who are of Indian origin and are living in the USA but are not citizens of the USA. The Internal Revenue Service (IRS) uses two tests to determine residency for tax purposes:
#1 Green Card Test
If you are a lawful permanent resident of the USA at any time during the calendar year, you are considered a resident for tax purposes.
#2 Substantial Presence Test
You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the USA on at least:
1. 31 days during the current year, and
2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
– All the days you were present in the current year, and
– 1/3 of the days you were present in the first year before the current year, and
– 1/6 of the days you were present in the second year before the current year
Tax Obligations for NRIs in the USA
As an NRI, your tax obligations in the USA depend on your residency status. If you qualify as a resident for tax purposes, you’ll be treated just like a US citizen in terms of taxation. This means you will have to report your worldwide income. Yes, that means you will have to report money you made outside the USA. Here are a few points that you must know:
Income Reporting
You must report all types of your income to the IRS. This includes income via wages, sales, interest, dividends, and capital gains.
Tax Filing
You’ll have to file an annual tax return using Form 1040. You will have to mention all your income sources in this form.
Tax Rates
The USA uses a progressive tax system. This means the tax rate varies from 10% to 37%. The exact tax slab depends on your income level.
Double Taxation and Relief
One thing that bothers the NRIs the most is the fear of double taxation! Given the tax system, a lot of NRIs might have to pay taxes in India as well as the USA. However, to mitigate this issue, the USA and India have a Double Taxation Avoidance Agreement (DTAA). Here are some key points of this agreement:
Tax Credits: You can claim a foreign tax credit for taxes paid in India, reducing your US tax liability.
Exemptions: Certain types of income, such as pensions and social security benefits, may be exempt from double taxation.
Tax Treaties: The DTAA outlines specific provisions for various income types, ensuring you are not taxed twice on the same income.
Foreign Bank Account Reporting
As an NRI, you may have financial accounts in India. The IRS mandates that you must report these accounts if their total value is above $ 10,000 at any instance during the year. This is done through the Foreign Bank Account Report (FBAR), filed using FinCEN Form 114. On top of that, you will have to comply with the Foreign Account Tax Compliance Act (FATCA). This act mandates the reporting of all your foreign assets that exceed a certain threshold on Form 8938.
Estate and Gift Tax
NRIs are also subject to US estate and gift taxes. The key considerations include:
Estate Tax
If you own assets in the USA at the time of your death, they may be subject to estate tax. The estate tax exemption for 2024 is $13.61 million.
Gift Tax
Gifts made to individuals are subject to gift tax if they exceed the annual exclusion amount. This amount was $18,000 per recipient for 2024.
Retirement Accounts and Investments
Investments and retirement accounts are critical components of financial planning. You must know the following things:
401(k) and IRA
Contributions to these retirement accounts are tax-deferred, meaning you pay taxes on withdrawals during retirement.
Mutual Funds and Stocks
Dividends and capital gains from these investments are subject to US taxes, and you may also need to report them on your Indian tax return.
Real Estate
Rental income from US properties is taxable in the USA, and you must comply with reporting requirements in both countries.
Compliance and Penalties
- Ensure you file your tax return by the deadline, typically April 15th. Extensions may be available, but late filing penalties apply if you miss the extended deadline.
- Accurately report all income, deductions, and credits. Misreporting can lead to penalties and interest charges.
- Maintain detailed records of all income, expenses, and foreign accounts to support your tax filings.
So make sure that you follow each of these points.
When You Should Take Professional Assistance?
NRI taxation has a lot of complexities. There are so many variables that make the return filing complex. So, we strongly recommend consulting with professionals like CROWNGLOBE. These agencies have expertise in managing NRI taxation. They have dedicated teams who specialize in tax optimization. If you are an NRI, it is always better to consult with such professionals. They will ensure you do not face any troubles with the IRS or any other compliance issues. Tout ax professionals with expertise in US and Indian tax laws can help you deal with the complexities of both systems.
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