For a U.S. Person (U.S. Citizen, Green Card holder, F1, H1 and L1 visa holders) there are many tax compliances within and outside of the United States. Most Non Resident Indians (NRIs) have some form of investments or assets back home in India.
Let us look at some of the provisions.
INCOME TAX
• A U.S. Person is required to disclose his/her worldwide income and file U.S. Income tax return (regardless of where he or she resides).
Example: A U.S. Person residing in India and having NO source of income in the U.S., is still required to file a U.S. income tax return, if he or she has income in India.
•The income that is tax free in India is still taxable in the United States.
• The highest tax rate in India is 30%, where as the highest tax rate in the United States is 39.60%.
• Non filing of the income tax return can lead to both civil and criminal prosecution. Civil would include interest and late penalties. Criminal would include the following:
• If a U.S. Person owns shares of an Indian Company in excess of 10%, he or she is required to disclose it to the IRS. Non disclosure penalty is $10,000 to a maximum of $50,000 per year.
• If a U.S. Person has an interest in an Indian Partnership firm with more than 10% share, they are required to disclose it to the IRS. Non disclosure penalty is $10,000 to a maximum of $50,000 per year.
• If a U.S. Person has financial interest with any financial institution outside the United States (eg: in India, UK, etc.) and the aggregate value of all foreign account exceeded $10,000 at any time during the year, then they are required to disclose it to the U.S. Treasury Department. Non disclosure penalty is $10,000 per year.
ESTATE (INHERITANCE) TAX
• The Estate Tax is a tax on the transfer of property at your death. The amount of tax is determined by applying the relevant tax rates to the taxable estate (that is the gross estate reduced by any deductions).
• The value of property that is included in the gross estate is its fair market value on the date of the death.
• For the year 2013, estate upto $5.25 million (inflation adjusted) for an individual and $10.50 million for a couple is exempted from estate tax. Anything beyond that is taxed at 40%.
• Estate includes worldwide assets.
• Non U.S. Persons, whose kids are U.S. Persons need to plan for
the future.
Example: Mr. A who is an Indian Citizen has a son Mr. C who is a U.S. Person. Mr. A has assets worth $2 million. On Mr. A’s death all assets are transferred to Mr. C.
Mr. C has assets of $5.25 million. Mr. C has a son Mr. Z. On Mr. C’s death, an Estate duty of $0.8 million would be required to be paid before the assets are transferred to Mr. Z.
Indirectly the assets of Mr. A are also taxed in the estate duty.
Sanket Shah is the Co-Founder and Managing Director of NS Global—an advisory firm founded by certified professionals from the U.S. and India to provide multi jurisdictional tax solutions to individuals having assets and/or an income base in India and the United States. www.nsglobal.com.