What is the difference between Form 8938 and FBAR form in terms of reporting of Foreign Financial Assets?

What is the difference between Form 8938 and FBAR form in terms of reporting of Foreign Financial Assets?

by | May 17, 2019 | Blog, Tax Extension, Tax Planning, Tax Preparation

What is the difference between Form 8938 and FBAR form

in terms of reporting of Foreign Financial Assets?

Form 8938,FBAR, FATCA, these are some of the acronyms that might confuse a lot of taxpayers. Especially when it comes to foreign financial assets, which one should a taxpayer choose and why.

Form 8938

The HIRE Act was the triggering factor behind the FATCA or the Foreign Account Tax Compliance Act coming in to effect in 2010. As per this Act, financial institutions are required to report the assets held by US-based account holders or run into the risk of withholding on certain taxes. As per the HIRE Act, US citizen also needs to declare their foreign financial investments. This is where Form 8938 comes into the picture. Taxpayers of the United States of America use Form 8938 to fulfil the FATCA obligations. The form must be submitted along with their annual tax return.

FBAR

The Bank Secrecy Act of 1970 was the deciding factor behind the introduction of Foreign Bank Account Reporting or FBAR. The intention of this Act was to discourage tax evasions by foreign investments. While the Act was ignored for a very large period of time, it has caught up quite a bit in recent years. The Government’s push towards this compliance has been a major factor. Couple that with hefty penalties and more people are filing FBAR forms as compared to previous years. The IRS also has a voluntary disclosure program for individuals who might have to file FBAR.

The Difference

While on the surface it might seem that both the forms are collecting exactly the same information, there are quite a few subtle differences.

FBAR form is for US persons having an interest in foreign financial accounts. Also, they must meet the specified thresholds.

Form 8938 is for specific US persons having an interest in foreign financial assets. Also, they must meet the thresholds mentioned.

  • Unmarried individuals with assets worth $50,000 or more on the last day of the fiscal year or $75,000 or more during anytime in the fiscal year.
  • Married individuals with assets worth $100,000 or more on the last day of the fiscal year or $150,000 or more during anytime in the fiscal year.
  • Reported Materials

For FBAR, individuals need to report the maximum value of their foreign financial accounts.

For Form 8938, individuals need to report the maximum value of their foreign financial assets.

  • Thresholds

The FBAR’s threshold value is $10,000. Thus, if the total financial value of accounts exceeds $10,000 it must be reported.

The threshold value for individuals filing Form 8938 who are living outside the country are:

  • Unmarried individuals with assets worth $200,000 or more on the last day of the fiscal year or $300,000 or more during anytime in the fiscal year.
  • Married individuals with assets worth $400,000 or more on the last day of the fiscal year or $600,000 or more during anytime in the fiscal year.
  • Where to file

FinCEN’s BSA e-filing system is how you should file your FBAR Form and it is all electronic.

Form 8938 must be filed along with your annual federal tax return.

  • Penalties

Failing to file FABR non-willingly results in a fine of $10,000. And the penalty for willful non-filing results in a fine of $100,000 or 50% of the balance in the accounts.

Form 8938 has a penalty of $10,000 for not filing the form. The amount increases by $10,000 for every 30 days passed, to a maximum of $60,000.

You can now decide for yourself, which form you need to file when it comes to Foreign Financial Assets reporting.

What Is IRS Form 1099-INT: Interest Income?

What Is IRS Form 1099-INT: Interest Income?

by | May 9, 2019 | Blog, Tax Extension, Tax Planning, Tax Preparation

What Is IRS Form 1099-INT: Interest Income?

Tax filing season can be stressful, to say the least. With several documents, investments, proofs and bills to take care of, various Forms can make things a bit more overwhelming. Thus, the golden rule of starting early always pays off. When you start early, you have additional time at hands to review your filing and more importantly, fill the Forms as accurately as possible without much stress. IRS Form 1099-INT is one such form that the expects during your tax filing. What is it about? And when and why you should file it, let’s find out.

What is it?

Form 1099-INT by the IRS must be used by taxpayers to declare their earned interest. All investors receive the form by their payers of interest at the end of the year with a breakdown of the interests earned and any other related expenses. $10 is the minimum value, above which a payer must provide the Form to its investors. At the same time, you need not attach all the Forms 1099-INT with your tax returns.

Details of 1099-INT

It is essential that you understand the details of the Form, which will, in turn, help you fill the appropriate information in your tax return.

  • Box 1

This box contains any income that you receive which is taxable, such as interest earned on savings accounts.

  • Box 2

This box represents any penalties that you have been charged with, due to premature withdrawals.

  • Box 3

The contents of this box represent interests earned on bills, bonds or Treasury notes.You need to be a bit careful since some of them are tax-exempt.

  • Box 4

This box reports any taxes that were withheld by your payer.

  • Box 8

This box contains information about your investments that earn interests with state and local governments. A municipal bond would be a good example of it.

Information Contained in Report

Form 1099-INT contains the following information.

  • The name and address of any payer.
  • The name and address of the recipient.
  • Any foreign taxes paid.
  • Any form of state taxes withheld.
  • Any form of federal taxes withheld.
  • Identification numbers of the payers as well as recipients.
  • The amount of interest paid (only if it exceeds $10).
  • Total bond premiums.
  • Total bond premiums on the tax-exempt ones.
  • Total amount of interest that is exempt from taxes.
  • Total amount of interest earned on Treasury bonds, US savings bonds etc.

Reporting Form 1099-INT

The Box 1 income, as mentioned above, must be reported in the taxable income row of your tax return. The interests earned is taxed in the same way as other sources of income. Box 2 mentions about the penalties, for which you can opt for deductions when it comes to the adjusted gross income. One must not forget to report the taxes withheld mentioned in Box 4. You should include the amount in your tax return under Payments.

All the interest that you earn on deposits made to your bank accounts, amounts that were withheld from your federal taxes or foreign taxes, dividends paid by insurance companies, indebtedness etc. must be reported in Form 1099-INT.

Apart from the above, interests earned in the form of real estate mortgage investment conduit (REMIC), financial asset securitization investment trust (FASIT) or collateralized debt obligation (CDO) must also be reported in the Form 1099-INT.

Individuals earning more than $1,500 in interests must declare all their payers in Part 1 of Schedule B of Form 1040. Also, you can only include income that you have received and not the ones that you are owed.

What is US Tax Form 1040 – Foreign Tax Credit?

What is US Tax Form 1040 – Foreign Tax Credit?

by | May 2, 2019 | Blog, Tax Planning, Tax Preparation

What is US Tax Form 1040 – Foreign Tax Credit?

The taxation system in the US taxes its taxpayers on their global income.US Tax Form 1040 Since there are chances that taxpayers could have paid taxes for income in the respective countries, the Foreign Tax Credit system is more useful than one might think.

By definition, the foreign tax credit system is a tax credit system that is non-refundable and is paid to individuals who have paid taxes to foreign governments for their withholdings. The tax credit is available for anyone who has some form of investment in a foreign country or works in a foreign country.

What is it?

The Foreign Tax Credit is essentially a tax break that the IRS and the government provide to help taxpayers reduce their tax liabilities. After all the deductions are taken out of the taxable income of a taxpayer, the tax credit is then applied to it. Naturally, it helps to reduce liable taxes. And it reduces the taxes dollar to dollar.

This means, that if you owe $2,000 to the government and are entitled to receive $900 worth Foreign tax credits, your net liability is $1,100. Thus, you will end up paying only $1,100 as taxes.

Tax credit systems are either refundable or non-refundable. If you have access to a refundable tax credit, this is how it would work. If you were liable to pay $2,000 as taxes and had tax credits of $2,300, the tax credit will take care of the liable taxes. And, you will receive the remaining $300 back.

On the other hand, if the same tax credit was a non-refundable one like Foreign Tax Credit, things would be a bit different. You will have to forfeit the remaining $300. Of course, you do not end up paying any taxes from your pocket for the above-mentioned example.

Who Choose Tax Credit?

There are quite a few benefits which make them a compelling option.

  • The tax credit reduces your tax liability dollar to dollar, unlike deductions which merely reduce your net taxable income.
  • In the event that the tax credit exceeds a certain limit for a year, you can carry forward the excess for the next year.
  • The Foreign tax credit is yours for the taking even if you do not itemize your deductions. You can then opt for standard deductions, on the top of the tax credit.

One must note that not all the taxes that you pay to a foreign government is available as a tax credit against your federal tax liability. If you haven’t paid or accrued the taxes, the taxes in question is not legal, the taxes are not based on income or the taxes were never imposed on the taxpayer, you cannot opt for Foreign Tax Credit.

How to Claim?

You can claim your Foreign Tax Credit either with Form 1116 or without it. Individuals who have only one source of foreign income can opt for a Form 1116. The taxpayers must report whether their income is on an accrual basis or cash basis. Should your budget not consider the incomes until you receive it, you can opt for a cash basis or else the accrual basis.

There are a few a situation where a taxpayer can claim for the foreign tax credit without having to file Form 1116. The only pre-condition being, they should meet the eligibility criteria. If you are a single taxpayer and have paid less than $300 then you can skip filing the foreign tax credit form. Similarly, for married joint filing taxpayer, the limit is $600. The Foreign Tax Credit is an effective measure that allows taxpayers to reduce their liability.

The income tax complication with the financial New Year for the NRI’s residing in the US

The income tax complication with the financial New Year for the NRI’s residing in the US

by | Apr 30, 2019 | Blog, federal income tax, income tax, NRI, Tax Planning, Tax Preparation, Tax Refund

The income tax complication with the financial

New Year for the NRI’s residing in the US

As India is developing rapidly, globalisation has resulted in more opportunities. Stronger economic ties with developed markets like the US has made many Indian’s studies and work overseas. Such Non-Resident Indian’s living in the US, juggle between two different tax jurisdictions. NRI taxation rules are completely different as compared to the rules applicable to ordinary Indian residents. Hence, the tax provisions for Non-Resident Indians are separately dealt under ‘NRI taxation’ section of Income Tax Act, 1961. NRI taxation involves the host of obligations and reporting requirements along with changing tax provisions each year which makes it quite complicated. With the beginning of the new financial year, NRIs residing in the US may have to face challenges or tax complications in below areas.

Determining tax residential status in India

Primary challenge for NRI wanting to undertake tax compliance is determining the tax residential status for the year in India. Residential status is classified as Non-Resident Indian (NRI, Resident but not Ordinarily Resident (RNOR) or Resident and Ordinarily resident for tax purposes depending on number of days spent in India. It could get quite complicated to understand the status.

An individual is deemed to be non-resident in India if any one of the conditions below is satisfied.

  • Your stay in India during the previous year is less than 182 days
  • Your stay in India during the four years immediately preceding the previous year is less than 365 days and you have been in India for less than 60 days in the previous year.

A resident individual is considered as RNOR, if any of the below conditions are not satisfied or only one of the below condition is satisfied.

  • You are resident in India for at least two years out of 10 years immediately preceding the relevant year
  • Your stay in India is for 730 days or more for seven years immediately preceding the relevant year.

Important thing to consider here is previous year is period of 12 months starting from 1st April to 31st March.

Income tax return forms

Which ITR (income tax return) form to use for filing is the next challenge that you would face being NRI. With the change in norms, NRIs are now required to use either ITR2 or ITR3 for filing income tax. NRIs with no business/profession income can file income tax in ITR2. ITR3 needs to be used if you have business/profession income to report.

Tax treatment of investments and income

For NRIs, only income earned in India is taxable. When it comes to understanding exchange control norms and tax implications on making investments, it’s quite complex. To understand complex income tax provisions relating to income and investments in India comprehensively, it’s wise to seek expert help. As income earned by NRIs is subjected to double taxation, it becomes imperative for NRIs to understand tax implications before making investment choices. Also, there are provisions to save tax liability to an extent which needs to be carefully understood. With the complexities involved and time constraints, liaising with banks and other financial institutions where investments are held also could get challenging.

Tax relief claims

After understanding the tax treatment, there are also many provisions available for saving tax liabilities which can be beneficial for NRIs such as Double Taxation Avoidance Agreement (DTAA). However, the process of claiming benefits under DTAA could be challenging as one needs to provide extensive disclosures such as overseas tax residency certificate. Tax identification number of home country and details of assets held abroad etc.

Conclusion

A strong economy needs more stringent tax regime for the increased development. As India is aiming towards strengthening economy, tax regimes are getting stricter and stringent. Understanding the taxation process and keeping yourself updated on change in provisions and norms can help you effectively adhere to tax laws and stay tax compliant. Being an NRI, seek help of professional experts to file income tax returns and plan your taxes for the year ahead efficiently.

 

How to claim your TDS refund for the NRI’s residing in the US

How to claim your TDS refund for the NRI’s residing in the US

by | Apr 22, 2019 | Blog, income tax credit, IRS, NRI, Tax Payers, Tax Planning, Tax Refund, tax savings, TDS

How to claim your TDS refund for the NRI’s residing in the US

TDS refund For an NRI residing in the US, income tax is applicable for the income that is earned in India. Be it salary earned in India or for services rendered to India or on earnings from investments and assets, NRI is liable to pay income tax if the total income for the financial year is more than Rs. 2.5 lakhs.

In India, It’s not very simple when it comes to income tax rules for NRIs.As per tax rules, any payment to non-resident Indians (NRIs) is required to be made after deduction of tax deducted at source (TDS) even if the income of that person is less than Rs. 2.5 lakhs. However, NRIs are allowed to claim refund of TDS deducted at the time of income tax filing if he/she falls below the minimum taxable income i.e. 2.5 lakhs.

Here are some of the major income types on which TDS is deducted for NRIs.

  • Payments received for services rendered in India
  • Interest income earned on bank savings and deposit accounts – NRO accounts
  • Rental income from property owned in India
  • Sale of bonds, mutual funds and shares
  • Sale of property in India owned by an NRI

TDS refund can be claimed by NRIs residing in the US by filing the income tax return in India. Income tax filing is quite a simple process. As the new financial year begins, it’s also important for NRIs to know the time limit to file the income tax for claiming refund.

NRIs are required to file income tax return before 31st July of the new financial year. Any delay would attract penalty. For example, for the financial year 2018-19, income tax filing needs to be done by 31st July 2019 for claiming TDS refund.

Here are the few easy steps for NRIs to file income tax return in India

Reconcile your incomes and taxes with Form 26AS

After determining the residential status for the financial year, NRI‘s need to reconcile their TDS credit or advance taxes paid with the data reflected in Form 26AS.

Keep the necessary documents ready

Keep important documents such as PAN card, bank details, investment details, TDS certificates, passport and Form 26AS ready as these documents give you relevant information required for income tax filing.

File your income tax return through income tax e-filing portal

  • Log on to income tax e-filing portal with your e-filing account user ID and password. Download ITR2 or ITR3 form depending on your type of income.
  • If you earn any income from business in India, ITR3 would be applicable. ITR2 would be applicable if you are not earning any business income (excludes capital gain on sale of assets/property) in India.
  • Fill in all the relevant details and calculate your tax liability.
  • Once all the details are filled validate your form by entering one time password (OTP) sent to you on your registered number.
  • Save the validated XML file on your system and then upload the saved file with adding your digital signature to it.

Verify your income tax return

Once you are done with uploading your tax return file on income tax portal, ITR-V will be generated which needs to be submitted to IT department. On receipt of this, your income tax return will be processed.

It’s important to note that, refunding of TDS will take about 6 months’ time or more. However, the refund is issued with interest of 6% p.a which is applicable from the end of financial year.

NRIs residing in US can save on TDS through DTAA (Double Taxation Avoidance Agreement) as both the countries have signed tax treaties. In this case, as an NRI taxpayer you can avoid paying tax twice for the same income. DTAA either eliminates or reduces your tax implication on the income earned and taxable in India.

Conclusion

As an NRI, adhering to two different tax laws at once can be quite challenging. Knowing and understanding the process involved in the taxation can help you save tax liabilities. Keep yourself updated and seek a professional help whenever needed.

The income tax implications of selling your property in India for the NRI’s residing in the US

The income tax implications of selling your property in India for the NRI’s residing in the US

by | Apr 16, 2019 | Blog, global income tax, NRI, Tax Planning, Tax Refund

The income tax implications of selling your property in India for the NRI’s residing in the US

Indian real estate market is the third largest in the world. Attractive real-estate opportunities, RBI’s general permission and falling rupee value against dollars in recent times have created more interest among Non-resident Indians to invest in immovable properties in India. Along with buying a property of their own, many NRI’s may even have inherited properties in India. When it comes to dealing in property transactions for NRIs, taxation is one of the vital aspect to be considered. Let’s take a look at the income tax implications of selling property in India for NRI residing in the US.

Tax implications of selling property in India

Under the Income Tax Law in India, income from selling property is taxed under the head ‘capital gains’. Taxability on capital gains will be based on the period of holding of the property. Capital gains are taxable in the year of property transfer irrespective of receipt of sale consideration. Here are the tax treatment for capital gains arising out of selling of property in India.

  • Short-term capital gains: If you are selling the property before 24 months from the date of property purchase, gains are treated as short-term capital gains which are taxable at the normal tax slab applicable for you as an NRI. The buyer is liable to deduct TDS (tax deducted at source) at 30% rate irrespective of the tax slab.
  •  Long-term capital gains: If you are selling the property after 24 months or two years from the date of property purchase, gains are treated as long-term capital gains. For which, tax will be applicable at the rate of 20% with applicable surcharge and cess.

Capital gains are calculated as the difference between the sale value and cost of purchase. In case of inherited property, date and cost of purchase to the original owner (from whom the property is inherited) need to be considered for computing capital gains. In case of long-term assets, cost of purchase is indexed to adjust for inflation.

Tax exemptions to reduce tax-outgo

NRIs can claim tax exemptions under Section 54 and section 54EC on long-term capital gains arising out of sale of residential property in India.

  • Section 54: As an NRI if you sell a long-term residential property, you can claim tax exemption on the gains if you acquire another residential house either one year before the sale or two years after the sale of property. Exemption can also be claimed if you construct another residential house within a period of three years from the date of transfer of such property. However, exemption claim is limited to the lower of total capital gains on sale of property or cost of purchase/construction of new property. And, no exemption can be claimed in respect of property purchased or constructed outside India.
  • Section 54EC: As an NRI, you can also save tax on your long-term capital gains by investing in tax saving bonds issued by Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI). To claim the tax exemption on long-term capital gains on sale of property, you need to invest in these bonds within six months from the date of transfer of property. Maximum of Rs. 50 lakhs is allowed to invest in these bonds which are redeemable after three years.

In order to avoid the deduction of TDS, it’s important to produce the relevant proofs or certificate of exemption to the buyer. However, you can claim refund of excess TDS deducted at the time of filing income tax return.

NRIs residing in US needs to keep in mind the tax implications applicable for them in US (country of residence) while selling property in India. It’s important to report the income and related details without any errors. Erroneous tax returns can land you in trouble. IRS sends out more than 9.1 million of notices every year to tax payers for erroneous tax returns. Failing to respond to notice can attract penalties.

Conclusion

Selling property for NRIs is not really a complex thing if taxation and legal aspects are dealt properly. Seeking professional help can smoothen the process and help in saving the tax liability to certain extent.