US Tax Implications and Reporting Requirement
US Tax Implications and Reporting Requirements for NRIs and US Persons
Overview
The United States follows a citizenship-based taxation system, meaning both US citizens and resident aliens (including Green Card holders and those meeting the Substantial Presence Test) are liable to pay US tax on global income, irrespective of where they live.
Who Is a “US Person”?
A US Person includes:
- US citizens (by birth or naturalization)
- Green Card holders
- Individuals meeting the Substantial Presence Test
Substantial Presence Test (SPT)
You are considered a US resident for tax purposes if you were present in the US for:
- At least 31 days during the current year, and
- A total of 183 days over the current year and the two preceding years, calculated as:
- 100% of days in the current year
- 1/3 of days in the previous year
- 1/6 of days in the year before that
Key US Tax Provisions
1. Federal Tax Filing Requirements
- Tax returns must be filed annually on a calendar year basis
- US Persons must report global income, including income from India (salary, rental, capital gains, etc.)
- Filing is mandatory if income exceeds prescribed thresholds
2. Federal Tax Rates (2024)
| Taxable Income | Single | Married Filing Jointly | Tax Rate |
|---|---|---|---|
| Up to $11,000 | Up to $22,000 | 10% | |
| $11,001 – $44,725 | $22,001 – $89,450 | 12% | |
| $44,726 – $95,375 | $89,451 – $190,750 | 22% | |
| $95,376 – $182,100 | $190,751 – $364,200 | 24% | |
| $182,101 – $231,250 | $364,201 – $462,500 | 32% | |
| $231,251 – $578,125 | $462,501 – $693,750 | 35% | |
| Over $578,125 | Over $693,750 | 37% |
3. Filing Deadlines
- April 15: Regular due date
- June 15: For US Persons living abroad
- October 15: With extension (Form 4868)
Exclusions & Special Provisions
Foreign Earned Income Exclusion
- Up to $112,000 (for 2023) of foreign earned income may be excluded under Section 911 if certain conditions are met.
Gift and Estate Tax
Gift Tax
- Applicable on transfers made by US Persons without adequate consideration
- Annual exemption: $17,000 per recipient (2023)
- Lifetime exemption: $12.92 million (2023)
- Tax Rate: Up to 40%
- Form 709 to be filed for gifts exceeding the annual exemption
Note: Gifts received by US persons from foreign persons exceeding $100,000 per year must be reported in Form 3520 (no tax, just reporting).
Estate Tax
- Applicable on worldwide assets of US citizens/residents
- Lifetime exemption: $12.92 million (2023)
- Estate return: Form 706 (due within 9 months of death)
Taxation of Indian Mutual Funds (PFIC Rules)
Most Indian Mutual Funds are treated as Passive Foreign Investment Companies (PFICs) and taxed as follows:
Three Taxation Methods:
- Mark-to-Market Election (most common)
- Annual taxation of notional gains
- Losses only allowed to offset previous notional gains
- Qualified Electing Fund (QEF) Election
- Requires detailed data from the Indian AMC (rarely feasible)
- Excess Distribution Method (default)
- Harshest: Historical income taxed at highest rates + interest
Form 8621 must be filed to report PFIC holdings.
Key US International Reporting Forms
| Requirement | Form | Threshold | Due Date |
|---|---|---|---|
| Foreign Financial Accounts (FBAR) | FinCEN Form 114 | >$10,000 in aggregate | April 15 (Auto ext. to Oct 15) |
| FATCA Reporting | Form 8938 | >$50,000 (Single) or >$100,000 (Joint) | April 15 or Oct 15 |
| Gift from Foreign Persons | Form 3520 | >$100,000 | April 15 or Oct 15 |
| Interest in Foreign Corporations | Form 5471 | As per control/ownership rules | April 15 or Oct 15 |
| Interest in Foreign Partnerships | Form 8865 | As per control/ownership rules | April 15 or Oct 15 |
Note: If you have reported assets under any of the above forms, you may be exempt from duplicating them on Form 8938, though the value still counts towards the reporting threshold.
Penalties for Non-Compliance
Failure to comply with reporting obligations (e.g., FBAR, FATCA, PFIC) can result in:
- Heavy civil penalties
- Criminal prosecution
- Loss of foreign tax credits or treaty benefits
Taxpayers can use IRS Streamlined Filing Compliance Procedures to rectify previous non-compliance.
Conclusion
US tax laws for NRIs and persons of Indian origin are complex and strict. Ensuring timely and accurate filing of tax returns and disclosure forms like FBAR, FATCA, and PFIC reporting is critical to avoid penalties.
Need Guidance?
Casela Advisors can assist with:
- US Tax Return preparation for NRIs
- FATCA & FBAR compliance
- PFIC reporting for Indian mutual funds
- Estate and gift tax planning
