Video transcript below (auto-transcription can cause errors):
Hi. This is Abhinav, and, in this video, I’m cup covering, US tax traps that, Indians who are moving to US, they need to know. Now there are lot of such tax traps, from whatever I could think of, in this slide I have put it, but, since there are many, so this I’ll just name it as part 1, this video, and then I will make a part 2 and maybe part 3. Right? So, let us start.
Okay. So the idea here is that to make you understand that, US is a different country, with respect to other countries, many other countries in terms of taxation. They have a citizenship based taxation, and that kind of taxation is followed by, OGUS is the only country, and there are few more countries like Eritrea and even Myanmar, which countries, impose tax on their citizens and residents. So that is one big difference, in, in terms of how US taxes, its citizens and residents. Plus, US basically has views non US investments in a very kind of a suspicious light.
So they have a lot of provisions, which are quite harmful for people who are moving into US and having investments in India. So, many times what, Indians do because they get the h one b under the h one b quota, they get a kind of a a visa to move to US. They don’t know the implications, and then after moving to the US, they come to know, and some people even don’t know, the implications being in US. So they end up making non-compliances in US, and US, has a lot of, you know, high penalties in terms of, noncompliance, US noncompliance, the no the foreign income or foreign assets non-compliances. Right?
So the idea here is to make you aware of the tax trap so that when you make the decision to move to US or living in US, making the decision to maybe obtain a citizenship or a green card, and then returning back to US from US to India, you can just kind of arrange and plan your kind of affairs financial affairs beforehand. Right? Do some planning. Right? And don’t just, move without proper planning.
Right? So let’s start. So getting first is because of the US citizenship based taxation, if you are a US citizen or a green card holder, you will forever be a US person. Right? Even if you want to you even if you move to India or you move to any other country, US will keep taxing you as a resident.
So so you will remain wedded to the US tax system and the associated implications, as a US resident if you obtain a US citizenship or green card. Now I understand that it is definitely, not practicable if you want to live in the US for a long term. You don’t want to live another kind of a a hanging sword of h one b visa because if the h one b visa ex kind of expires or, you know, the employer, okay, fires you or something some something like that happens, then there is, I think, a limited period of, like, 60 days in which you have to move back to your home country. I so I’m not a immigration person, but some kind of those provisions are there, which are very highly unfavorable and, you know, provisions that can cause anxiety in a person. So, definitely, the person may want to obtain a US green card, but my point is that if you go for citizenship or green card, please at least know the kind of implications that the tax implications that you will expose yourself to even if you move back to India.
So for people who, like, have a GC or a citizenship and move back to India, not knowing that, you know, the provisions of filing a 10 40 every year, disclosing the Indian incomes in the US tax return every year, they expose themselves to the noncompliance of, US tax law. Right? So we don’t want to see, as a law abiding person, I want to comply with the tax requirements, tax obligations of India as a Indian citizen, and also the place or the country where I go to. So if I’m even going to Germany, Germany has its own requirements of so every country, mostly countries, have requirements of taxing their residence, which US also does, but US has a peculiar system of taxing their citizens and green card holders on worldwide income irrespective of the fact that they have moved out of US. Right?
So there are certain peculiarities with respect to US. So always, when you move to a foreign country, be make sure before moving to, have an idea of the tax regulations so that you can arrange your India and that country investments in compliance with the both the laws. Then estate tax for nonresident. So if you have lived in US, you accumulated 41 k, made certain investments in US, and then if you move out of US, when you move out of US, you become a nonresident alien as per the US tax law. Now estate tax US has a estate tax, which only few countries have, and US the estate tax for residents, there’s a very high limit of, I think, 13,000,000 or something like that.
The very, very high limit is there. Only that threshold, if you cross that, then the state tax will lap. But for nonresident aliens, people who do not who are not US citizens, green card holders, and who are not, residents of US, who are nonresident, holding US domiciled assets above 60,000, which is very small threshold. Even if you’ve lived in US for a few years, you accumulate, like, amounts in your 4 zero one k and other investments more than 60,000. And if you’re living in India and you die, right, there’s an unfortunate death, right, of yours, then there is a very complicated system of a tax.
It’s like a graduated tax of 18 to 40% on the value of the estate, not the income, value of the estate. Plus, there are some compliances with respect to filing the estate tax return in form 706, and that return filing and all takes 1 to 2 years, and only after that, your family will get the money. Right? So you need to be aware of this. So you need to keep your assets below this when you plan to return to India.
You can move it to other jurisdictions like Ireland, or you can move the money back in India and then invest in India. Try to keep it below 60,000. Right? I’ll make separate video on estate tax, how what are the provisions, how to, avoid estate tax. I’m not a US tax expert, but I will try to the best of my ability for Indians, how they can avoid estate tax.
I will make a video on that. If you are a not US citizen or GC, if you live in India, then you are taxable. The tech the provisions are as for the residents, so you are protected. But I’m talking here about the non resident aliens. 1, not USCGC.
Now no estate gift tax treaty or Social Security agreement with India. So US doesn’t have these treaties with India. Right? Then even in the India US DTA, the provisions of that DTA in it’s a it’s a weak treaty. It’s not as strong a d t treaty as, India the US UK treaty or the US Canada treaty, where certain investments like Canadian RRSP and all those investments, US gives them the same recognition as Canada does.
Right? But India US DTA, there are no as I will cover in the for the lot of tax advantaged accounts that you have in India, like They will not hold any value with US. US will tax the income every year if you are a US resident or if you get USCGC, then then for the entire duration of your investments, even after you turn to India. So you need to be mindful of that. Then there is a savings clause in the India, US DTA, which basically prevents US citizens or residents from availing certain DTA benefits.
So on top of it, it’s a weak treaty. Then on top of it, there is a savings clause, whereby if you’re a US citizen or a GC or a resident, you may not, US may not give you certain DTA concessions. Right? So you need to be aware of this. Right?
Not blindly rely on the DTA. Right? Then PFIC. PFIC, if you hold any Indian if you’re an Indian who is trying to move to US, and if you hold any Indian mutual fund or any pooled type of investments like ETFs, right, you need to read up on the PFIC, Passive Foreign Investment Corporation. I made a separate video on PFIC.
There is a very, very onerous tax and reporting requirement on such old investments foreign old investments. Right? Now there are certain benefits that you can have up to a certain threshold of 25 k to 25k50k. That threshold, if you have, you can still continue to have those investments with proper precautions, but there is a proposed rule also now which says proposed provision in the internal revenue code, which says that if you are, having these investments and if you’re, like, moving out of US, if you’re, the on the last year of your US residency, it will be treated it there it there is a provision of deemed disposition that US will deem that you have sold these assets, and the profit the and the tax US will impose tax on the entire unrealized gain. So the basic provision is that, if you hold, like, Indian mutual funds of 10 rupees and they become 20 rupees, so you have not sold the Indian mutual funds, but US will still, every year, apply unrealized the amount of income from those investments, like the 10 rupees income, US will tax it as per your tax lapse.
Right? No. Not even as per tax lapse. It is as per the 37%, which is the highest maximum marginal rate in US. Right?
So this is very, very onerous requirement. Plus, you have to, for every scheme of the mutual fund of the ETF, you have to separately file a, form 8621. Now there are final provisions with respect to certain elections, like a MDM election you can make or, you know, there are certain those provisions are there, which I have covered in that video. So, please, if you have any Indian pooled investments, you need to have a strategy to liquidate them before moving to US. Or if you’re in US, then you need to take certain precautions so that you do not fall in the PFIC tax loophole.
Right? So a lot of places I see, they sell the, you know, the kind of Indian mutual funds to US residents without telling them of the PFIC tax implications. And by the time the person has invested a substantial amount in the what they or they always say about the India growth story and all these things. Right? And so and the people buying to that without knowing the US tax implications, and then they end up with huge liabilities and non compliances in US.
So please take care of that. Then then there is this point about the f bar and form 8938 reporting. So if you are a US resident, you need to make these kind of reportings. FBAR is, like, having a threshold of 10,000 USD, and, form 8938 is has a higher threshold. But, like, if you have, like, sold a property in India and, you know, money comes to your Indian bank account, then you may be breaching these limits.
Right? So please take care of the f bar form 8938 reportings for your Indian bank accounts and investments. Right? Not only bank accounts, but also other investments. So please read up on the provisions and make the proper reportings as required by the IRS.
The penalty for wrong reporting or willful nondisclosure reporting is willful nondisclosure is very, very high. Right? So you cannot compromise on that. Get a CPA in US, preferably someone who has experience in US nonresident taxation. Right?
Because I’ve, like, seen cases where people have their CPAs, and those CPAs themselves don’t know about the PFIC and other things. Right? You tell them that, okay, this is PFIC, and then they do accordingly. So don’t do that. Get a CPA.
1st of all, ask them whether you have expertise in the US knowledge in, like Indian investments. Right? Not Indian investments, but how to treat the US tax law provisions on foreign investments. Right? From a from a perspective of US tax law.
Do you have expertise in that? Then only you hire a CPA. Right? And be prepared to pay higher charges. Right?
Because, of the kind of expertise that is involved. Now IRS has certain compliances, like, between India and US, like, if you are giving a gift to someone. Right? Someone giving a gift to you. Right?
Many transactions are there, which require reporting on the form 70709 3520. 8621 is the defect reporting, and there are other reportings also. Then if you have any partnership, directorship, interest in India, that is like, US use them as a very suspicious, pers from suspicious eyes. So there are certain, you know, reportings there that you need to make. Right?
So please take care of the IRS compliances, which are there on various cross border transactions and investments. Right? Okay. Now, if you have returned back to India, you need to file a w eight b e n, to the US peers of income, which can be a broker, which can be your, kind of, maybe an employer, right, or any client in US. If you don’t do that, then there is a backup withholding tax that will apply a flat 24%, which is very difficult to claim tax return in India.
Now, always, if you also, if you don’t provide W8BEN, then, US can apply the provider can apply a 30% withholding on the FDAP income for the fixed determinant annual periodic income, which is interest, dividend, and other incomes. Instead of that, if you file w eight b e n, then you can get a lower treaty rate of 25% withholding. Right? And, so if you don’t file w eight b e n, you don’t get the benefit of reduced treaty rates as per India and US. And then if you need to claim a refund.
So for example, the provider has the has charged, withhold a 30% tax rate and whereas the actual tax rate as per the treaty on the dividend income was the 25%, then the only option for you will be to submit a form 10 40 n r to claim a refund. And there’ll be charges for filing 10 40 n r also, so, which may even exceed the amount that you want to claim a refund. So you need to take care of filing a w eight b e, and first change all the addresses, to, the Indian address in your four zero one k, to the you know, wherever your investments are there, and give a w eight b e n to them. Yeah. 24 backup withholding tax, I’ve already said.
This point, I’ve already covered. Very difficult to claim the credit as the if near impossible to claim the credit of that backup tax backup withholding tax, as per the FTC provisions in India. Then there is US doesn’t offer any step up, in the cost. Right? When once so you have any Indian investment, which is like a, say, a mutual fund investment, or take a share, like a 10 rupees share, and on the, date of, you moving into the US, it becomes it is 15 rupees.
Right? So US doesn’t offer you a kind of a step up basis that and then when you sell it, it is at 20 rupees. Right? So when you sell it, the US will tax you on the entire 10 rupees, the difference between 20 10 rupees. So US will not say that, okay.
We will give you a step up basis up to 5 rupees and because you entered US, and it was, like, 15 rupees then. No. US will not do like that. Similarly, India also doesn’t give a step up basis. So always best strategy is that before you move, you do some kind of a pre, immigration tax planning pre immigration tax planning before moving to US.
Right? I made a separate video on planning to move to US, do these things. You can check that. So what you can do, you can sell and repurchase. You can first let go of full investments in India to the extent possible, mutual funds, ETFs, and other investments.
Right, you if you hold shares and all, you can kind of sell and repurchase them considering the MGM position. That means only you do this approach when you have a gain. Right? Because if there’s a loss in the investment, then it is definitely please keep those investments. Don’t sell them because that loss can be set off against the US, the US, capital gains.
Right? In right? So see the MTM position, near to the time that you’re making a move to the US if there’s a gain position in the US in the India, and you can also see the India tax implications because India also offers up to 1.2 lakhs, capital gains exemption. Right? So if they are if they are long term and up to 1 point covered within 1.25 lakhs, you can do a kind of a tax gain harvesting in India, and, you can, basically sell and repurchase the investment so that you get an automatic step up step up basis, which will reduce the US tax liability on these investments, in US.
So that kind of planning, you can do. Right? Okay. USA does not recognize. So lot of people have this confusion that, and similarly, India also doesn’t recognize.
So US doesn’t recognize. So in in India, you invest in which is basically all the income is kind of tax free. Everything is tax free. Gains are also tax free. EPF, everything is tax free.
Gains are also like, if you, like, if you withdraw and you have 5 years more of service, tax free NPS. So it’s basically a tax referral kind of a thing. US will totally ignore all the tax advantage nature of your Indian investments. So what problem happens is that all your best, kind of, late plans, that means all the best strategies you made for your tax planning in India will all go for waste the moment you move to US. Because when you move to US, US will tax you on everything, income from BPF, income from EPF, income from NPS, income from your, NRE fixed deposits.
Right? So people think that NRE fixed deposits money is taxed in India. No. It will be taxable. It is tax free in India, but the entire interest is taxable in US.
Right? So US totally does not recognize that’s why India US is a very weak treaty. Right? You don’t get any significant protection. Similarly, India also doesn’t recognize 401 k IRA, Roth IRA.
India also doesn’t recognize. Right? So because of the relations between countries like US, Canada have a very strong relation. Right? US, UK have a very strong relation, so it gets the kind that strong relationship gets reflected in the DTAs also.
Right? But in India, US, it is not like that. So you need to plan so that’s why the need to plan your finances in that better way so that you can kind of reduce the so so impact will come. Right? But you can if you plan properly, then the impact can be reduced.
Then US gives proportionate credit of Indian tax. So if you have Indian tax so you may say, okay. DTA is okay. No problem. I will get the foreign tax credit as per US, loss.
No. Please read the foreign tax credit provisions in US. US curves a proportionate credit, of the Indian tax. For so for example, there is a, like, a, a 3 rupees of income, Indian income, right, which you want to which is taxable in US, and you want to claim a credit of that income in US. So you may think that, okay.
I will get the entire 3 rupees tax, the income the tax on that 3 rupees income, in US also. No. US will give you credit of, the proportionate, the tax of that, India tax with respect to so either total income, US income, which US will tax worldwide income, is 10 rupees. Of which 3 rupees is the Indian income, US will give you credit of 3 by 10. That is 30% of that Indian tax which you have paid on that Indian income.
Right? So it will not be the full credit. Then there are certain states like California, which don’t give the credit for foreign country tax. Right? So then US has a very difficult kind of a system.
There is a federal tax, which has certain provisions and which has certain beneficial provisions. Then you have the states that impose additional tax, and they do not give credit for certain tax. Like, for California, I know is that it doesn’t recognize certain tax advantaged investments, maybe, I think, 529 or HSA, which the US federal tax recognizes. So the tax planning in US is very complicated. It is not only one law.
Like, in India, you have the income tax act, which is the only one law. In US, there is a federal tax, and then there is a state tax provision also you need to check. So you need to have a CPA in like, if you are moving to California, you need to have a CPA in California who has an expertise of the federal as well as the state tax, and you have an a CPA a CA in India, and those both professionals are needed, Right? Because of the complexity. And if you find if you’re lucky enough to find a person who is expert in both the things, then nothing like it.
Right? Okay. No unlimited marital tax exclusions for any gift. So if you make any gift, then there is a specific provision that you should make a gift to a u US citizen spouse. Any gift that you make is totally exempt.
However, there’s this unlimited marital tax exclusion does not apply to any gift made to a non US citizen spouse. So, generally, why you gift? Gift gifting helps you reduce your estate. Right? Reduce your estate from estate tax liability.
So you may someone want may want that of a person is a US resident planning to return to India in a few years, and he generally, there is a limit of 18,000. This is a 20, 24 limit. It 18 thou up to 18,000 USD. If you gift, then it is not covered in the, overall, limit for the estate tax. But you can make a gift to your spouse, and and that gift to a spouse is not covered in the, is excluded from your estate.
But for a non US citizen spouse, there’s no unlimited marital exclusion. Right? So there is a discrimination there. So, generally, it is I think the limit is 1 point 1 lakh 75,000 USD. That limit is there.
So that also you need to check, and, accordingly, you can plan. Then, okay. In Indian who is moving to USA has kind of a, Indian home. A purse person has a home in India, and, generally, what happens is that the person may decide to maybe settle for a longer term there, or he wants to purchase a house in, say, California, and he wants to sell the home. Then please aware be aware that US would so India will tax as per its domestic law.
US will also tax as per its domestic law. There is no relief available under the India, US DTA. So when US taxes this income, the sale of India Home, US generally gives a 2.5 to, like, 50,005 5 lakh dollars if married filing jointly, kind of an exemption is available if, you’ll have lived in the household for 2 over the past 5 years. That 2, 5 year rule is there. So if you have moved to US and if you have, like, stayed for a considerable time, like 10 years in US, and then you are thinking of selling your house, then you will not get that exemption.
So you need to be very clear that at the time of moving to US, you need to be clear that you need to sell the house within to claim this 22 2 5 year rule, the exemption of, right, so you need to just plan accordingly. Then US, taxes you on the unrealized currency gain, which is also known as phantom gains. So, basically, there is no gain because US will calculate the tax on the sale of India assets, on the sale of India home, on the USD, so USD at the time of purchase, USD at the time of sale. So if there is a portion of the income from the capital gain, the, portion of the capital gain arises purely due to exchange fluctuations. US there is no real gain.
This is only because its gain is calculated in USD, and it occurs due to the exchange fluctuation. US will still tax it. Right? So you cannot say that it’s because of currency gains, so I get some exemption. So please also be mindful of that.
So that currency risk is to the extent there, right, when you, maybe, have foreign, investments, back in India. Okay. So tax liability of US home yeah. Tax liability of US home. So you have a house in US and you want to sell, that house.
I will make a separate video on this these particular aspects. I’m just covering it here as a overview. So you have a u home in US and you want to you are moving out of US, and you are not a resident of US, still, if you have a home in some states, the states will continue to treat you as a resident and maybe tax you on the worldwide income. Right? So so you need to decide that if you want to fully get out of the US tax system, you may have to decide on the kind of sale of US home, right, before or within a reasonable time after moving from US.
So check the provisions of US Federal law as well as the state law. Right? So that implication, you need to keep in mind. And then there is a provision that if of unrealized income taxation provision is there, of US home of a non US resident, then there’s a provision that if that non US resident, sells the US home, then there is a flat, I think, 15%, tax withholding on the on the proceeds of the home. Right?
So that provision is also a very harmful provision that, it’s flat 15% of your house that, will be kind of the sales proceeds will be withheld for tax purpose. And then you have to then file a 10.40 n r and, get the refund adjustment of that withholding. Right? So you can you have to be mindful of with respect to your US home. Right?
State tax implications, you need to check as I discussed already. These are not only the federal tax, but you also need to check the state tax implications, not only with respect to your US investments. Right? For example, some states don’t give the benefit of a HSA. Right?
Some states don’t give the benefit of a 5 to 9 contributions, which whereas 5 to 9 and HSA are very good tax advantaged accounts in US. Some states do not recognize them. Some states do not give that credit for tax paid in India. Right? So and so and how they treat the Indian incomes?
So you need to also check the state provisions. Then accidental American implications is where, a person is an accidental American. That means you, your wife, was there in US for some years, and you have a child in US, but that child is is by birth. He or she gets a citizenship of US. Right?
And then when you return back to India so you were on an H1B visa, and you did not apply for a GC or a USC, and you return back to India, but your child is still a US citizen. Right? And many children, they don’t know that they have to still comply with the US entire US taxes. They remain buried to the entire US tax system. So when they become, like, 18, 20, 25, 30, they start earning their incomes in India.
So maybe your son starts a job in India and all. So that that income is taxable in US also because your son is a US citizen. Right? So, there’s these cases of some, celebrities and some politicians, like, I think Boris Johnson had this thing where all of his US UK income got taxed because he left US when he was 5 years old, and he was unaware of the US taxation provisions. As of birth, you get a citizenship and all.
So there was a tax liability that the IRS imposed on him, and so you can read up, on this accidental American, right, thing. So you need to, decide on that. Okay. So this is part 1. Whatever I could think of, I have made a video on this.
I hope it was useful. It gave you some useful pointers. I’ll make a part 2 of this video in some, days, some days’ time. I hope this was useful. Thank you so much for watching this video.
If you have any queries and comments, do share in the comment section. Thank you.