In this video, Abhinav is discussing some Pre-Immigration Planning Tips for Indian residents moving to US.
Video transcript below (kindly note that auto-transcription can contain errors):
Hello. This is CA Abhinav, and I welcome you. In this video, I’ll be discussing some points on how you can plan and reduce your US tax liability before you move into the US. Basically, if you have, like, got a job offer from US and you’ll be planning to move to US, what all actions you can do before moving to US. Right?
You are in India, and you will be moving to US in some time. What all actions you can do to reduce your tax liability legally reduce your tax liability once you become a US resident. So, basically, how to leverage your nonresident alien status as per US tax law to reduce to reduce or minimize your tax liability. So let us discuss some points. See, first of all, understand that, this is a separate video I have made upon the residential status and tax residents as per the US tax law.
See, understand, if you’re a US citizen or you are a US resident, that means either you are a a green card holder or you pass the substantial presence test. That means you live in US for a certain number of days. You become a US resident. If you’re not a US resident, then you are only taxed on the effectively connected income, which is known as ECI or the FDAP income, fixed determinate annual periodic. Only those incomes from US sources you are taxed.
That means you are not taxed for example, think of Indian tax law. If you are a non resident as per Indian tax law, you are only taxed on Indian sourced incomes. Right? Similar with US, as a non resident, you will only be taxed on the US source incomes, So you have to take advantage of this nonresident status for planning your US tax for future US tax liability, reducing your future US tax liability. How to do that?
I’ll explain. Now as soon as you receive the green card now when you land in the United States, you get a conditional kind of a green card. Right? And then after some time, you receive a permanent, you receive a proper green card. Now even if you receive a permanent, conditional green card for all purpose tax US tax purposes, you become a tax resident of the US, or even if you don’t receive that, you stay beyond a fixed number of days, your US liability starts.
And, what is your US liability? Your US tax liability is that US will tax you on your worldwide income. So it is not like in India what we have the r naught status. So in India, like, you have been living 10 years, 15 years outside India, and when you come back to India, India gives you this time, 2, 3 years, for the r naught status where for the 2, 3 years, only the Indian incomes will be taxable. Your foreign incomes will not be taxable.
No. It is not like that in US. US, the moment you land in the US, US will tax you on your worldwide income, which includes income from India also. Now even so we what you have done is that as an as a as a resident of India, you have planned the investments in certain ways, like you have invested in certain tax free avenues, like, mutual funds. Now mutual funds are taxable, but still there is a over in a certain amount, it is taxable.
So mutual funds or ULIBS or, you know, like, a you know, another tax free investment avenues in India. You might have, like, ELSS and all those things. So with that objective you have invested, Now all these tax free investments, even, even your NRE fixed deposits, all that will be taxable in the US. Don’t think that there is anything tax free now. So Indian tax law is very lenient in terms of having these exemption tax exemptions, but US will tax you on each and everything, even whatever your Indian source income.
So all your tax planning that you’ve done in India will go for a haywire. Right? So okay. So that is one thing. So, now coming to tax return filing.
Right? So what basically, what I meant to say is that first, understand your US tax liability in US. After you become a tax resident of US everything will become taxable so you have to let go of this kind of notion that you know I have tax free investments in India nothing is tax free right it’s all taxable now so you’ll have to readjust your investments in India by having a CA in India who is aware of US tax law, sit with him, understand, and make adjustments to your India investments so that it’s proper. Right? The tax liability is minimized.
Okay. Apart from tax return filing, you have to also make yourself so there is a requirement for tax return filing in US. So, generally, for so US works by calendar year, right, as a tax year. So it’s, like, January to December, and the tax return is filed on around April. So it is April 15, 2024 for 2023 calendar tax year.
Right? So apart from filing a 1040 tax return as an individual, you need to also be aware of certain reportings. What are the reportings? First is a FBAR report, foreign bank accounts. Right?
Foreign bank account reporting. That means if you have a foreign bank accounts so there are lot of conditions in that. I have made separate video on FBAR, separate video on form 8938. You can check on my channel. So FBAR, basically, above US dollars 10,000 if you have investments in foreign financial account, which includes also includes your brokerage accounts in India.
Reports reported in FBAR. FBAR is to be reported by 2 FinCEN, and then there is a separate reporting of form 8938. For that, the threshold is quite higher. Right? So both evaluate and, report.
Now for beef before because now this is a complex reporting. Right? What you be basically need to do is, as I said, sit with your tax adviser in India before moving to US, close unnecessary financial accounts in India, which only will create a because, anyways, there’s no tax free now after you move to the US. It will unnecessarily create a problem in terms of reporting because, see, in India, what you need to do is only in the Schedule FSI and FA. In Schedule FA, you need to report your foreign accounts.
Right? If you’re a resident and ordinary resident. In US, if you’re a resident, you have to do report in the form 1040, then you need to report in f bar. And if you qualify, for 8938, then you need to report in 8938 also. So there is a lot of reporting requirements are there.
So better close, consolidate things in India before moving to the US. It will help simplify a lot of things and will not involve issues like claiming foreign tax credit and all. See, it’s good that countries have ETA and then you can claim foreign tax credit, but when it comes to actually claiming them, it’s a lot of calculation which a person who doesn’t know the tax law in detail may make a mistake. Right? So better to kind of adjust the financial affairs in India before leaving itself.
Okay. Now there are certain more disclosure requirements with respect to if you are part of a foreign trust, if you receive gifts or inheritances from non US citizens, which is form 3520 352 a reporting, foreign partnership reporting, foreign corporation. If you like, have a company in India, private limited company in India, which is even if it’s doing business or no, you need to report foreign partnerships if you have a if you are a member of a partner in a partnership firm in India. Foreign mutual funds, that means if you and this is this is really, I mean, scary. If you have Indian mutual funds, which we so much of us invest, it’s a very good investment avenue, right, if you want to save for your retirement and all.
But all these things, mutual funds in India, qualify as a passive investment company, and the punitive aspect of this is that US will like, for example, your mutual fund, you have not sold it in India. It the value of the mutual fund, moves from 100 to 1 150 in a year. US will treat that 50 rupees as a unrealized gain, and you will tax every year on that unrealized gain. So it doesn’t make sense then to and then you have to do separate reporting is 8621 reporting, right, for these kind of pooled investments. So you’ll have to think through.
Right? See, I cannot explain all the things. I’ll make maybe do separate videos on specific aspects. Right? But the important thing is that once you know that US, you’ll be living in US for, like, 4, 5, 10 years.
Right? So you don’t want every year unrealized gain from your Indian mutual fund investments to be taxed in US. You pay taxes on that in US. Right? You don’t even get a credit foreign tax credit because you don’t have you have not sold them in India.
So you can decide to let go, sell those assets in India, taking care of the, whatever the capital the holding period of the investments in India, and then invest afresh in US. Because if the same investment, same exposure, like, for example, you have India ETFs in US, Franklin and other, ETFs are there, which have India exposure, you can take the same exposure to Indian stock markets being outside of India, being in US, and you’ll not have to kind of go through these kind of reporting and tax requirements. So you’ll have to think through on your investments in India. Read up on India USADTA. So, if you can, do that because there are certain beneficial provisions.
For example, NRO interest is taxable at a interest is taxable at a lesser rate in US. So then there are certain incomes which is only taxable in US. There are certain incomes which is only taxable in India. For that, you have to either read up on the India US DTA or have a tax adviser, tax consultant who knows both the India and the US taxation who can help you and also the foreign tax credit, how to get the credit in your tax return. Okay.
Now understand, this is what a lot of people I interact with, they make the mistake, is that they think that if I go in US and I pay taxes in US on the money, I don’t have to pay taxes in India. No. It does it doesn’t work like that. See, there are definitely some exemptions that are available in the DTA. That is a different thing.
But, see, US has the right to tax you because you are a resident of that country even though the assets are there in India, and India has the right to tax you because the income is there in India, why will Indian income tax department leave that? So there will be situations where you will, regardless of the provisions of DTA, there’ll be many incomes, which you’ll have to offer it in US, offer it in India, and then comes to the question of foreign tax credit. Even that even there, there are issues with respect to the year mismatch because in US, they have the January to December in India, we have the April to March. So doing those necessary calculations are important, but important thing I’m trying to say is that India source income, if your income is sourced in India, regardless of your in the tax filing requirement tax paying requirement in US, you have to file the India tax return. Do not make a kind of a error that you’d stop filing Indian taxes now that you are paying US taxes on this income.
Right? So now keep filing tax status in India even though now this is important, what I’m saying. Even though your income is less than the minimum, which is which is the 3 lakhs, which is as for the new tax regime, it is 3 lakhs and below. You don’t need to file a tax return. If you’re a nonresident as per Indian tax purposes, still my request will be file tax returns in India even if it’s a nil tax return.
Why? Number 1, it has to, you know ensure continuity your Indian tax assessments are continuous right any TDS that you have deducted that has been deducted you can claim it back any losses if you have business income any business loss it can be carried forward And the most important thing is that the Indian so what the Indian tax department does is that if there is a against a PAN, there’s a return that has not been filed, they file a kind of a not a notice, but they ask that question that why the return has not been filed. And then you have to go manually in the income tax website and then fill that this is the reason. Let go of that all the problem. At least go ahead and file the tax return in India.
Right? It’s better to be open and transparent with the income tax department, both of US and India, than to not file and then have to explain that why I did not file the tax return. Okay? Now this is important, very important, and I’m not kind of selling or marketing my services here, but this is important thing. See, now there’s a lot of, you know, global, you know, cross border transactions that happen.
Right? And, like, there is a gift that you are sending money, you’re receiving money. You have assets in India, and there are transactions in India. So find a CA. Either find a CA who knows both the India and the US tax law, or you find a CPA in USA who knows both the India and US tax law.
Right? If you find a good kind of an adviser and you have that adviser by your side, see, it always help whether you are kind of filing tax returns or not. It always helps to speak with someone pick up a call and speak with someone wherever you are stuck on, you know, the tax provisions before you make a transaction. Tax return filing is another thing. But if you can find someone trustable, then do have a person who knows both the tax laws.
Okay. Plan your departure from India as per the Indian tax law. Right? So that we have this rule of 1 in to 2 days or more. If the stay is there, then you qualify as a tax resident of country.
But if you plan your tax the departure in such a way if you’re leaving for employment, right, It’s only when you leave for employment. Otherwise, it’s 60 days will also comes in picture. But if you are leaving for employment outside India and 182 days or less than 182 days your stay is there, then you can qualify as nonresident from day 1. Right? So you have to plan it in certain way, then you can qualify as a nonresident for Indian tax purposes, and then you only have to pay the taxes I mean, the disclose and pay taxes on the Indian income.
Now be aware of the new 1 20 days rule that has come. That means, earlier, there was only the 63, 65 days rule and the 182 days rule. But now the new rule in 20 after 2021 that has come is that if your taxable income in India is over 15 lakhs, then instead of 60 days, it is 1 20 days for classification of you as a resident. So check on that particular rule, then there is a deemed residency provision, and this is very, very important for people who plan their tax residency and the stay in various countries in in in such a way that they don’t pay tax in any country, so that will not happen now. Now India says that if you if you are an Indian citizen and income is more than 15 lakhs more than 15 lakhs for a for a financial year and you are not liable to tax in any other country, you’ll have to offer the you will be deemed as a resident and not already resident for India.
So that again is a rule that we need to keep in mind. Then there’s a FIMA requirement. In India, we have the foreign exchange management act, which requires you to convert all the resident accounts to nonresident within reasonable time. So once you move to the US or before moving to the US also, if you have got the visa and everything, you can approach the banks, the brokerage houses and all, and get this thing done between resident and nonresident. Convert the account from resident.
So this is a requirement. Right? You have to do this. Now try investing in US. See, there is always this thing to take the India exposure and everything right because the India is a growing country and everything but then when you consider about the implications like the PFIC tax implication then when you talk about the taxability that it will be taxed in US right, then the currency conversion aspect that, you know, if you send money to India and you take out the money, bring it back to India, then there is lot of money, like, 2%, 3%, 4%, you lose in only in the currency conversion.
Right? So then depreciation. So if you want to be in in US for a long period of time and you’ll need the money in US, plea please also keep in mind that the Indian currency the trend that is there is that Indian currency keeps on depreciating as against the US currency. So your net real return after taking more to onto account, depreciation, kind of conversion tax, and everything will be much lower as compared to what the return that you see, what an Indian Mutual Fund is offering you. Right.
So again, have a tax adviser who can advise you on these aspects before moving to the US and then my suggestion to you is that if you are in the US, try investing in the US. If you want to take India exposure, take India exposure through a dedicated ETF or a feeder fund from US instead of investing in Indian, markets. Right? Continue to have an active India phone number because a lot of times the OTP and all is required. So just continue to have an active India phone number with you.
You can activate those plans, cheap plans. Now one more thing is that if you are working from home right now and you already got the offer and you the contract has been established and before moving to the US for some months you are working in India, then there are certain tax implications that are there for working remotely for the US client. I have made separate video, post on this on my website, www.abhinavgulechha.com. I will also make a video on this so you can know and, you know, be compliant. So there is an income tax implication.
There’s a GST implication. Right? So if that be the situation, then it is a different, but I just thought to make a point. Okay. If you’re a green card holder only and only if you’re a green card holder, not a US citizen, but a green card holder can claim himself or herself as an Indian tax resident.
In the US tax law itself, there is this thing about a closer connection rule. That means if the closer interest, closer connection is to India, then you can claim yourself as a nonresident alien for the US tax purposes. So see if you can fit into that and, you know, lot of problem will be solved if you fit. There are a lot of ifs and buts, but then a tax adviser can help you in that. PFIC tech taxation, I’ve already discussed that of the Indian mutual funds.
This is very, very important because lot of people moving to US already have lot of Indian mutual funds exposure, so you’ll have to decide on that before moving. TDS compliance requirements. Now if you qualify as a NRI, then your tenants if you have properties in India and your tenants, they have some obligation to deduct, TDS on you and file the TDS, and then, give you a quarterly TDS return and all those compliances are there, not on you, but on the tenants that you have. So while the penalties will not be on you if you don’t comply, it’s advisable if a tenant has kind of trusted you, for, by taking the your flat on rent, you can at least inform them that these will be the requirements so they can prepare themselves. Right?
So that is how it is. Then power autonomy, you can decide if you have, like, complex transactions in India, like real estate. You want to sell real estate in India, or if you want to create a trust or manage a trust, you can give a power attorney for complex transactions. If it is there, then you could give. Now, now from a US tax law perspective, a noncitizen spouse does not qualify for unlimited ex so there is an unlimited exclusion in terms of gifts.
Again, this provision is for meant for HNIs, sorry, high net worth individuals. You can give unlimited, gifts to your spouse. However, if the spouse is not a US citizen, right, she doesn’t qualify for unlimited exclusion. Right? So you can consider cons being a nonresident, you can consider gifting her or him beforehand.
Right? So rather than after becoming a US resident, then it becomes a difficulty. Now investments at a gain. Now this is very important. Now if you have, like, investments in stocks and, you know, various places, whatever investments you have, you even real estate.
Right? If you have investments which are, like, for example, you have purchased a stock at 100 rupees, and now the value of that stock is 400 rupees. So there is a 300 rupees unrealized gain. Right? Mark to market gain that is there.
Now best option is to recognize those gains prior to moving to US because once you move to the US, so between 100 to 3 400 difference of 300, the US will also tax it. For the US, the cost of acquisition will be 100. But if you sell it in India for, like if you sell it for 400, you recognize the gains on the 300 and pay tax on it in 300, the tax on the on the gain, and maybe if you want to repurchase, repurchase that share at 400. When it comes to US taxing it, the US will tax it at 400. Now depending upon how big your investment portfolio is, this can this only one tip can result, into you in, like, gains resulting in lakhs.
Right? It’s massive gain you can make if you just readjust the cost basis of your investments prior to moving in the US. Of course, do check the India tax implications before doing that. Now if those investments which are at a loss, so you have certain shares which are like you invested at 100 rupees, but now they are standing at 50. So 50 rupees is mark to market loss.
Do not do not sell those shares do not okay, I’m it’s recognized losses no, I’m saying recognize gains recognize gains after you shift recognize losses after shifting to US to set off so for those shares, keep them. Right? Recognize, that means sell them after you shift to the US. So when you do that, what will happen is that whatever 50 rupees loss that you have, you can offset it against the US income, whatever income you are getting in US. Right?
So then you can plan it accordingly. Classify your investments, which are standing at a gain right now, which are standing at a loss. For the gain, you can readjust the cost basis by doing a sale and repurchase transaction or loss. Do it after you move to the US and becoming a res US resident. Okay.
Important. If you plan to come to US for interviews or you stay for, you know, for choosing your home or a business, right, Ensure that don’t plan it in such a way, the stay number of days, that you don’t become a US resident by passing the substantial presence test. And also take care not to have a physical buy a physical residence in US or a physical permanent establishment for business person. Because if you do that, then even if you go back to the to India and then those things are done, then you may qualify as becoming a US resident. Right?
So so try to take care of those things. Now very important, estate tax. So again, if you’re a high net worth individual, understand this, if you come to US, you become a US now there are different rules for becoming a US resident for estate tax purposes, which I will not go into, but basically, the it’s all the intention. You want to stay permanently in the US. So you go there in US, and you have a big investment portfolio, like, running into, like, 100 of crores or something, right, across the world, maybe in India, right, and you die there, your US will tax your estate at 40%.
Right? You will have to pay a straight 40% tax. It’s a maximum 40% tax rate. Instead of that, what you can do is that you can offset that tax liability or avoid that tax liability by and this is all legal. Right?
You can create a non US non US trust, maybe a Indian trust and move the assets. Is it may be a irrevocable trust. You move the asset because trust is considered separately from a US tax perspective. It’s not the individual thing. So if you create that kind of a trust and move the trust now, again, this all requires very careful kind of planning and structuring so that it should you know, you don’t after doing that, also, you don’t want to be end up kind of falling in the US tax net.
But if you do that, you can save a considerable amount of estate tax if at all you die and the worldwide assets become taxable. Now if you’re setting up a business entity in US before moving to US, ensure that it does not qualify as effectively corrected income. There are certain asset purpose tests and some tests are there. So ensure that it doesn’t qualify. Otherwise, the income even before you’re moving to the US, the income will qualify as a taxable you’ll be highly taxable for the income in US.
Now if you have a business in India now you are moving to the US, you have an already existing business in India, You can elect to classify as a disregarded entity for the US tax liability purposes. Right? What basically it does is that the it saves you from double taxation on the income. So if you do not classify as a disregarded entity for the US tax purposes, US can tax you twice. You can US can treat it as a PFIC income and treat all the gains as a as a dividend, deemed dividend.
Right? And also, doing this particular thing can step up your cost basis for the assets that are there as part of that company in India. Now this these are 2 three things what I’m telling is a bit complex so I’ll kind of make separate videos on that and it requires very careful structuring but even if you do that if you have a business running business in India by doing this thing you can save lot of amount of tax future tax that would have otherwise incurred in US. Right? So that you can do.
So I think I’m done, with this particular the tips. I hope this video was useful in some way do share your thoughts and your feedback and your queries on the comment section thank you so much for watching this video thank you so much.