Given the large number of Indians who queue up for US visas and green cards, NRIs and PIOs who are American tax-payers are not a small number. The starting point for the taxation process in America is determining the residency status of a person. Indians will fall under the category of ‘foreign national’ in the US. The actual taxation depends upon whether a person is classified as a resident or a non-resident alien in the US. The position can change year after year and a re-evaluation is required to determine the position every year.
There will be income arising at different places for Indians who are covered under the income tax provisions in the US and these will have to be dealt with separately. Depending upon the way in which the income has arisen, and the residential status of a person, the final impact will be determined.
Resident alien
A resident alien is a foreign national who meets specified conditions and is hence considered as a resident for the purpose of tax in the US. The implication of being classified thus becomes clear afterwards as various types of income keeps getting taxed. In such a case, all income received by a person from any source will be taxable unless this is specifically exempt from tax.
The mode of taxation is such that — just like in India — there are several deductions available to individuals depending upon their position, and then the income is taxed at specific rates for specific incomes. This is known as graduated rates. Income for taxation purpose will include several common heads like salary and allowances, dividends, interest, gain from sale of property and income from other sources.
There is an important factor that has to be considered in calculations as income refers not only to the cash received but also to the fair market value of property or services made available to a person. For example, if a person is provided with a motor car with a fair market value of $10,000 by an employer, then this is to be added as income. The exception to this is an investment or other property purchased where even though the fair market value might have gone up there is no gain till the time that a sale is actually made.
There are several incomes which will be deemed to have been received in the US and in this case it is taken as if the resident aliens have earned such income when specific conditions are fulfilled. These include cases where the income is earned by a foreign corporation that they control, by passive foreign investment companies and by trusts that they have established for the benefit of US persons.
There are some specified deductions that a person might enjoy. This would include standard deduction that is available for people based on their specific filing status along with personal exemption. On the whole, when it comes to a resident alien, all the income earned by them will be taxed in the US. They cannot hide behind the fact that a part of the income was not earned in the US and hence will not be taxed there.
For those Indians who have become resident aliens and derive income here in India, there is often a dual taxation that they have to take care of and the double tax avoidance agreement helps in the issue. The various items that are covered in the treaty will override the US income tax laws. Any item that is not covered by the treaty will be taxed according to the US law.
The main benefit of using the double tax agreement is to try and reduce the US tax burden, but this is possible only in specific conditions. People who are dual residents and are claiming treaty benefits have to file a specific form with respect to that part of the year for which they were considered non-resident. Further, a person who is resident in US under the treaty can also use the treaty terms to reduce his taxation in overseas countries.
Non-resident aliens
The real difference in taxation will arise when the position of non-resident aliens is considered because the tax impact for them is different. The income that they earn has to be broken up into various parts depending upon its nature. Income related to a US trade or business will be considered as normal income and taxed according to the graduated rates in force. This will include income from business and compensation income that is earned during the year.
The complications and the difference starts when income of differing nature is brought into the picture. The next category is an income that is of US source, but is not effectively connected with a US trade or business. This includes investment income where the source is not any type of local US trade or business, and here the tax impact is a flat fixed rate (30%) or a lower rate according to the tax treaty, if applicable. Finally, if the income is a foreign source income of a person who is not engaged in a US trade or business then the it is the best situation for a non-resident alien. This is because there is no tax to be paid at all on such income.
There is a long list of items that will classify as being US source income but not effectively connected with a US trade or business like interest, dividend, royalty, rent and other fixed or determined income. There are no deductions allowed in such a situation.
In case a US non-resident alien has gains other than real property investments, then there is no taxation unless the person is in the US for 183 days during the year. This is applicable no matter the amount of the gains or the number of transactions made during the year.
Another factor that has to be understood is that there is likely to be an extensive amount of tax deducted at source. This is known as withholding tax in the US. Just like in India the person might file a tax return to get a refund of some excess amount that has been deducted as TDS or withholding tax.
No comments:
Post a Comment