How Indian Income Taxed & Reported in the U.S.: Learn how Indian income is taxed & reported in the U.S. At Golding & Golding, we have helped hundreds of clients from India safely and accurately report their unreported foreign income & offshore assets to the IRS. In recent years, the IRS has begun the aggressive enforcement of foreign accounts compliance. This includes the U.S. and India entering into a FATCA Agreement in 2015. The failure to report interest, dividends, capital gains, royalties, bonus and other income from Indian bank accounts, mutual funds, stocks (Demat), PPF, LIC and other sources may result in significant offshore fines and penalties.
At Golding & Golding, each case is led by a Board-Certified Tax Law Specialist.
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How Indian Income is Taxed & Reported in the U.S.
How Indian Income is Taxed & Reported in the U.S is complicated. The U.S. Tax Treatment of Indian Income and IRS Reporting Rules are (unnecessarily) complex.
Here are a few basic (common) issues to consider:
- Foreign Interest Income is taxed in the U.S. (even if exempt in India)
- Foreign Dividend Income is taxed in the U.S. (even if exempt in India)
- Foreign Capital Gains Income is taxed in the U.S. (even if exempt in India)
- Foreign Accounts include Demat
- Foreign Accounts include PPF
- Foreign Accounts include LIC
- Foreign Mutual Funds may be a PFIC
Am I a U.S. Person?
The U.S. person vs. U.S. citizen analysis is a complicated analysis, because it is not limited to just U.S. citizens. The United States practices a very different type of tax law called Taxation on Worldwide Income aka Citizen-Based Taxation (CBT).
The worldwide taxation and reporting rules applies to U.S. persons, not just U.S. citizens.
U.S. person (for tax purposes) includes:
- U.S. Citizen.
- Legal Permanent Resident
- Foreign National who meets the Substantial Presence tTest
- Former Legal Permanent Resident who did not properly expatriate
Do I Pay U.S. Tax on my Indian Income?
Generally, the answer is yes. If you are a U.S. person, then the IRS taxes you on your worldwide income.
Here are a few commonly asked questions we receive:
I Live in India
If a U.S. person lives in India (or another country), but is still considered a US person (meets one of the above reference categories) they still have the file an annual tax return. Since they reside overseas, if the person meets the requirements of the Foreign Earned Income Exclusion, and they may be able to avoid taxation on the ~ $101,700 of income, as well as an additional/partial exclusion for housing.
My Income was Taxed in India (TDS)
If a U.S. person already paid tax in India by filing a foreign tax return or having money withheld from a foreign paycheck or account then the person may qualify for a foreign tax credit. With the foreign tax credit, the amount of taxes he or she paid abroad (using an equation) is applied to the taxes that would have otherwise been due to the United States on the foreign income received — so that the person is not paying double tax.
*It is typically not a dollar-for-dollar credit.
My Income such as PPF Growth and certain Mutual Funds is Tax-Free in India
Unfortunately, this does not really matter. The IRS rarely, if ever acknowledges the tax-free status of income under the rules of foreign countries. For example, if you are earning interest income in Singapore, that interest income is still taxable in the United States.
If your foreign retirement is accruing or growing and not being being distributed, you may still have to pay tax on the accrued but not distributed in. In addition, if you are able to deduct certain contributions from yourself or your employer to a foreign retirement fund, chances are that income that the amount which was deducted for foreign income tax purposes would still need to be included in your gross income under US tax return.
IRS Reporting Requirements
The default status is that everything has to be reported, and then you work backwards to determine whether some exemptions/exclusions may apply.
Here are some typical issues we come across:
PPF (Public Provident Fund)
Even though your Public Provident fund is not being taxed during the 15 years of growth, it will be taxed in the United States on the accrued, but non-distributed income.
Foreign Mutual Funds
Many of our clients invest funds with companies such as Kotak, ICICI, NJ investments, etc. Under U.S. Tax Law, the foreign mutual fund may have to be reported and taxed in the present year, depending on whether you receive distributions and whether the distributions are excess distribution. Simply because the money was reinvested does not mean it is not presently taxable (this is distinct from the money never being distributed, as opposed to distributed and immediately reinvested).
If your life insurance policy with Prudential, ICICI, LIC or any other number of different companies, and it has a surrender value, then it must be reported as well. Even if the NAV value is not all together clear.
Even though passive income in India (and many other countries) such interest Income, Dividends, Capital Gains is not always taxable in India, the United States still taxes you on the income.
Fixed Deposits that are accruing interest income but have not yet been distributed will also be taxable in the current year (not all at one time when it matures.)
Frequently Asked Questions (FAQ) About Indian Income & Reporting
Here are some of the more common questions we receive:
My Parent Controls the Account
This is a very common scenario. You may have some investment accounts back in India that either you opened yourself (before you came to the U.S. or after you started making more money) or your parents opened them on your behalf. Your parents are controlling the account, making the investments, and transferring the money to different fixed deposits to get you the best rate — and then immediately reinvesting it to avoid tax liability under India Tax Law.
Result: You still must report the accounts and income to the IRS.
I Didn’t Even Know I was on the Account?
While this is not specific to India, it is very common with our clients from India. Typically, the parents who are non-US citizens and still residing in India begin to move “pre-inheritance” to the children. If the child is a US person, then there are significant tax issues to contend with.
Result: You still must report the accounts and income to the IRS.
What if I Close the Accounts?
Simply closing the accounts will not achieve the intended purpose of avoiding reporting. In fact, oftentimes it achieves the opposite effect. That is because by closing the account after receiving a FATCA Letter, or otherwise being made aware of the reporting requirement, it means you have are acting willful.
If the IRS believes you are willful, you could be subject to excessive fines and penalties,
Joint Account But the Money is Not Mine?
If the money is in a joint account, for example between a U.S. child and a foreign parent, it still needs to be reported at least on an FBAR. The distinction between the FBAR and FATCA form 8938 lies in the distinction between having ownership, joint ownership, or signatures authority (FBAR) versus having no interest in the money (even if the child’s name is on the account).
With the FBAR, there is a much broader reporting requirement.
I Never Transferred the Money to the U.S.
If you meet the threshold requirement, you file the form. The form doesn’t ask whether you transferred the money back-and-forth. The IRS does not know your background, or why you did not report. Generally, the IRS will often come to its own conclusions.
The IRS Doesn’t Care About Me, I’m Not a Big- Fish
The reality is, not everybody gets caught – but the IRS does not have a throwback rule like most fisherman do; they are happy to catch a minnow and treat it like a whale.
Golding & Golding: Board Certified Tax Law Specialist
We specialize exclusively in international tax, and specifically IRS offshore disclosure.
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
- Learn more about the Board-Certified Tax Lawyer Specialist credential
- Learn more about the Enrolled Agent credential
- Learn more about Golding & Golding’s Case Accomplishments
- Learn more about Golding & Golding Testimonials from prior clients
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.