Tax on foreign income

[pratikpv]

Hi,

I came to USA on Feb 2012. Now I am resident alien.

I want to know do I need to pay taxes in USA for following incomes?

(1) Interest given by banks in India ( This is NOT tax free income in India)
(2) Dividend from stock. ( This is tax free income in India)
(3) Gratuity paid my ex-employer. ( This is tax free income in India)
(4) Employee provident Fund withdrawn ( This is tax free income in India)

Any help will be really appreciated.


Thanks,

[gregvath]

Hi pratikpv,
If you were not in the U.S. previous to Feb 2012 you are considered dual status for tax purposes. This means you were a nonresident up until the date you became a resident. You would become a resident for tax purposes the day you arrived in Feb if you were present for at least 183 days in 2012. For (1) bank interest from India (or anywhere)-yes you would report the interest as income just as a resident would starting the date you arrived. Interest income paid by India bank as a nonresident would not be reported. For (2) Dividend from stock-yes same as for interest see above. For (3) gratuity-yes (as is case for all gross income) if you received it when you were a resident no if you received it as a nonresident (you go by the date paid). You can use the foreign tax credit if you pay IT (tax) on the reported income. For (4) provident fund- I believe this amount was deducted from your gross income so in essence you are paying tax on this amount when you were a resident but not when you were a nonresident. One note as a dual status filer you do not get to use the standard deduction. You can however itemize your deductions. Also, if you are married you may be able to file as a full year resident and take the standard deduction by filing an election. You will then include all the income discussed including your gross India income for 2012. IRS Publication 519 will discuss most of these issues including how to file as dual status.
greg

[pratikpv]

Hi pratikpv,
If you were not in the U.S. previous to Feb 2012 you are considered dual status for tax purposes. This means you were a nonresident up until the date you became a resident. You would become a resident for tax purposes the day you arrived in Feb if you were present for at least 183 days in 2012. For (1) bank interest from India (or anywhere)-yes you would report the interest as income just as a resident would starting the date you arrived. Interest income paid by India bank as a nonresident would not be reported. For (2) Dividend from stock-yes same as for interest see above. For (3) gratuity-yes (as is case for all gross income) if you received it when you were a resident no if you received it as a nonresident (you go by the date paid). You can use the foreign tax credit if you pay IT (tax) on the reported income. For (4) provident fund- I believe this amount was deducted from your gross income so in essence you are paying tax on this amount when you were a resident but not when you were a nonresident. One note as a dual status filer you do not get to use the standard deduction. You can however itemize your deductions. Also, if you are married you may be able to file as a full year resident and take the standard deduction by filing an election. You will then include all the income discussed including your gross India income for 2012. IRS Publication 519 will discuss most of these issues including how to file as dual status.
greg

Thank you for your time and help. Thank you.

[pratikpv]

I am married. (on Dec 2011) So can I file for full year as resident alien? ( I think I will get better refund with standard deductions)

Also If I file my return for full year as resident alien then do I need to pay tax in USA for indian salary of Jan 2012 and part of Feb 2012? I already paid tax for this income in India. (if yes, How much tax credit I can get?)


Where I have mention about "Gratuity paid my ex-employer" and "Employee provident Fund" in 1040?

Thank you once again for your time. Appreciate your help.

[gregvath]

Yes you can file as married filing jointly with one of two elections depending on if your wife came with you in Feb. Your spouse would need an ITIN or SSN. If she is a tax resident as well as you there is an election to file both of you as full year residents. You only get to use this election once so you must decide if 2012 is the year you want to use it. If she never came to the U.S. or does not meet the 183 days presence in 2012 use the election to treat a nonresident spouse as a resident. Both elections are explained in IRS Pub 54. In both scenarios you would include 2012 worldwide income on your return (includes gross India income). In many cases the trade-off to claim full year residency will give a larger refund. You can also get credit for all or some of the income tax you paid to India on your India income from January to February using the foreign tax credit, Form 1116. The amount you get as a credit depends on your total income, India income, and tax paid to India. This tax would include the Indian equivalent to income tax (the IT) not the equivalent to Social Security (PF). Doing a tax return like yours takes a lot of time and research to do it correctly, there is also a lot of misinformation on the web so be cautious.
greg

[Jeff4cpa]

pratikpv, I agree with gregvath's analysis.

[pratikpv]

Thank you gregvath and Jeff.

My wife (who is an Indian citizen, just like me) came with me on Feb 2012 in US. So she is also resident alien for tax purpose.

Where I have to mention about "Gratuity paid my ex-employer" and "Employee provident Fund" in 1040?

I have not received any w2 kind of form from my Indian employer for "Gratuity paid my ex-employer" and "Employee provident Fund". And I'm not going to get it also. Because this is a tax free income in India. How do I report these incomes to IRS in 1040? Do I need to send my indian bank statement in which I deposited the checks of these income with my tax returns?


Also If as my understanding I have 2 option.
(1) file return as resident alien for the full 2012 year.
- I can claim standard deduction, correct?

(2) file return as dual status. non-resident alien as well as resident alien.
- in this case I have to fill 1040NR and 1040, both?
- I can not declare my wife is dependent on me in 1040NR, is it correct?
- I can declare my wife is depedent on me in 1040, is it corrent?
- I can not claim standard deduction and I have to itemize the deduction, correct?


I am trying to understand which way I will save more tax. Please suggest.

[gregvath]

I have not received any w2 kind of form from my Indian employer for "Gratuity paid my ex-employer" and "Employee provident Fund". And I'm not going to get it also. Because this is a tax free income in India. How do I report these incomes to IRS in 1040? Do I need to send my indian bank statement in which I deposited the checks of these income with my tax returns?

You need two items from your India income your gross income and the income tax paid. I usually obtain these numbers from the pay stubs. Hopefully you can get the amount of income you received in India with the items broken down from your employer for each pay period. How do you know how much income tax was paid (IT) per pay period? I believe you should do your best using the info you have available. Another way is you can use your Indian tax form to estimate the income and tax, but because it is over a different tax year than the U.S. tax year it is generally less accurate than your income received per pay period. Your India income is provided on line 7 of the 1040 and included with your U.S. wage income. Your India tax paid would go on the form 1116. You would not send any proof of income or tax paid, but rather keep supporting documents with your records in case the IRS requests them later. I will address your two options in a bit.
greg

[gregvath]

Also If as my understanding I have 2 option.
(1) file return as resident alien for the full 2012 year.
- I can claim standard deduction, correct?

(2) file return as dual status. non-resident alien as well as resident alien.
- in this case I have to fill 1040NR and 1040, both?
- I can not declare my wife is dependent on me in 1040NR, is it correct?
- I can declare my wife is dependent on me in 1040, is it corrent?
- I can not claim standard deduction and I have to itemize the deduction, correct?


I am trying to understand which way I will save more tax. Please suggest.

Filing as (1)-married filing jointly with the election to be treated as full year residents usually saves the most tax, though you can only do this once. You get to use the larger standard deduction for married taxpayers. I regret to say my last post suggested Pub 54 for the elections; it is actually Pub 519 that contains this information.

Filing as (2)-dual status. In your case as a nonresident in the first part of the year and a resident for the last part of the year you file the 1040 without the standard deduction. I write “dual status” across the top of the form. You can use the schedule A for itemized deductions. You also need to file the 1040NR as a statement even it contains zeros for income and tax. I have seen the IRS request page 5 of the 1040NR specifically so I now include all five pages of the 1040nr. I write “dual status statement” across the top of this form. Again Pub 519 has this information. You can claim your wife as a dependent on the 1040. No need to add her to the 1040NR. The income to include on the 1040NR is any income you received while a nonresident that is taxable to the U.S. Nothing you have said so far would include this type of income. You would also include interest and dividends earned during the time you were a resident in the return from all worldwide sources. Also add schedule B if you had a bank account in India even without any interest. Answer the three questions in part III. You may need to file Form TD F 90-22.1.
greg

[pratikpv]

Wow. Thank you so much for your answer.

Also,
Employee provident fund of India is called 'Pension' or 'Social security' in US tax terms?
Also gratuity is called 'Tip' in US tax terms?

I moved to US from India for job purpose. So I think I can get tax credit for "Moving".

In Feb 2012, I moved to Southern CA from India with my wife ('Company A' sponsored the air tickets for both of us ... and etc). I changed the 'Company A' and Joined 'Company B' in July 2012. So 2 times I had to move for Job purpose in 2012.

(1) From India to Southern CA
(2) Southern CA to Northern CA.

Will I get tax credit for both the moves? I had to pay back air tickets cost of my wife to 'Company A' when I left them. ( 'Company A' can not ask me to pay back my air tickets expenses, as they sent me on H1B VISA. And they have not asked me also.)

I don't have any moving cost receipts for both the moves. Will that be OK to show all moving costs on both the moves? Can I show my air tickets costs of Move#1.


Which form I need to fill to get the moving expense credit?

Kindly suggest.

[gregvath]

The provident fund of India is similar to Social Security.
The gratuity for India is not really similar to tips for U.S. tax purposes as tips here are taxable.
Moving expenses are explained well enough for your purposes in the instructions for Form 3903, its a short read.
Your first move would not pass the time test because you were not at the job for 39 weeks (unless you were laid off).
You could take the expenses that you paid for in your second move if you pass the distance test in the 3903 instructions. I would recommend receipts which you keep for your records to substantiate or prove the expenses were legitimate (if nothing even credit card statements would help). You have a complicated return, you are brave my friend. Hope this helps.
greg

[pratikpv]

Ya... Its complicated and I'm filing return for the first time in US... so I have not much experience... But you have helped me a lot. Thank you very much for all your help.


I am still confused about gratuity. What is gratuity of india called in US tax terms?


Provident fund is taxable in US as its kind of Social Security in US tax terms?

What about gratuity ?

[gregvath]

I am still confused about gratuity. What is gratuity of india called in US tax terms?

The best U.S analogy I guess is a severance pay, though in the US it is up to the employer how to manage and of course it is taxable when you receive it. We should be clear on a few points. I have seen Gratuity on the pay stubs of some clients withheld from their gross income. This amount should not be excluded from gross income on the U.S. tax return. Also if you receive a payment from your Gratuity because you left your employer after 5 years for example, during a time in which you are a resident or treated as a resident in the U.S. you should include this amount in your gross income.

Provident fund is taxable in US as its kind of Social Security in US tax terms?

Same as for Gratuity any amount of Provident Fund withheld on the pay stub is taxable income in the U.S. In other words you do not exclude this amount from your gross income from India. Same treatment for Social Security in the U.S. for U.S pay. Payment from the Provident fund is taxable in the U.S. as worldwide gross income if you receive it when you are a resident. U.S. Social Security of course is generally not available until retirement after the age of 62. Their are some scenarios were you could avoid paying U.S. tax on part of a Provident fund payout if you had already been taxed by the U.S. on amounts withheld from your India income. As this is your first year in the U.S. this will not apply.
greg

[bugbear18]

Reporting foreign income

Hi pratikpv,
If you were not in the U.S. previous to Feb 2012 you are considered dual status for tax purposes. This means you were a nonresident up until the date you became a resident. You would become a resident for tax purposes the day you arrived in Feb if you were present for at least 183 days in 2012.

Hi... I moved to the US for the first time in May 2012. I have received income in India from Jan to April. As per rules and presence test, I can file taxes as a resident alien using Form 1040. Do I need to report income earned from Jan-Apr in my 2012 tax return?

[pratikpv]

one more query. I left the indian employer in mid of Dec 2011. And after the long process to withdraw the money of PF, i actually got the money in 2012. I was on US when I got the PF money. Same for gratuity, I got the money from the same employer. ( left that job in Dec 2011 and got the money in 2012 when I was in US). So is this considered as income of 2011 ( as i left that job in 2011) or income of 2012 ( as i actually got the money on 2012)

Please reply as soon as possible, i have less time to file it now.