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.

 

The top 3 things to keep in mind if you are returning to India in this financial year 2019-20

The top 3 things to keep in mind if you are returning to India in this financial year 2019-20

by | Apr 9, 2019 | Blog, income tax, Tax Extension, Tax Planning, Tax Preparation, Tax Refund

The top #3 things to keep in mind if you are returning to India in this Tax financial year 2019-20

For a non-resident Indian, who lived in another country for many years, the decision of returning to India permanently is never an easy one. There are a lot of considerations to be made for this transition, specifically on financial year matters. To avoid financial loss during transition, Investments, transfer of assets most importantly, taxation process and planning needs to be done thoroughly. Tax Here are the three most important things to keep in mind for NRIs returning to India in this financial year.

Understand your tax status and tax implications

As you return to India permanently, your tax liability for the financial year largely depends on your tax status for the year. You are considered as Non-Resident Indian (NRI)if you satisfy any of the below conditions.

  • Your total stay in India is less than 182 days during the financial year. Or,
  • You are not present in India for 60 days or more and 365 days or more in the four financial years prior to the relevant tax year.

If your tax status is NRI for the year, your income earned outside India is not taxable. Only, income earned in India are taxable for the year.

There is another category of NRI called ‘Resident but Not Ordinarily Resident’ (RNOR).You can become RNOR, if your stay in India in the seven financial years immediately preceding the relevant financial year is less than 729 days or if you have been Non-Resident Indian (NRI) in nine out of ten financial years preceding the relevant tax year.

If you are returning to India, you can keep your RNOR status for up to three financial years after your return to India. You can benefit hugely out of this as your income earned in India is only taxed not the global income. With RNOR status, you can enjoy many tax benefits on various incomes. Here are some of them.

  • Pensions from pension scheme held overseas
  • Capital gains from sale of properties and shares held overseas
  • Interest income from Resident Foreign Currency (RFC) and Foreign Currency Non-Resident (FCNR) deposits
  • Interest on deposits held overseas
  • Dividends earned on securities held overseas
  • Rental income from properties held overseas

Once you lose RNOR status, you will become ordinary resident of India and then your global income will be taxed in India. If your overseas income is taxed abroad, then you can claim tax benefits under Double Taxation Avoidance Agreement (DTAA).

Act oninvestments and assets held overseas

Firstly, you need to jot down list of investments and assets held overseas. This can help you plan properly. If you are planning to dispose overseas investment and assets, you need to plan for transfer of proceeds. If you plan to hold the investments and assets as it is overseas, reporting of such assets for the taxation purpose overseas need to be planned carefully. In order to avoid double taxation, experts recommend to dispose foreign assets and investments and get the proceeds transferred to India when you are an NRI or RNOR.

Re-plan your financials

As you close your overseas bank accounts, investments and get the assets transferred to India, it becomes necessary to re-work on your financials. As you return to India, your bank accounts held in non-resident status needs to be re-designated as resident accounts. However, your Resident Foreign Currency (RFC) account and Foreign Currency Non-Resident (FCNR) accounts can be held till maturity. Similarly, all your investments in India needs to be updated with the change in status. Not just there will be change in your investments, assets and tax implications on them, but also there can be change in your income and expenses. Hence, re-planning your finances need to be kept in mind while returning to India.

Conclusion

To ensure smoother transition, every aspect needs to be well thought out and planned. You can take help of tax experts and financial planners to experience easy transition and for better financial decisions.

Things to take care of, when you visit India for your annual vacation this summer

Things to take care of, when you visit India for your annual vacation this summer

by | Apr 2, 2019 | Investment & Income, Tax Extension, Tax Planning, Tax Preparation

NRI’S Things to take care of, when you visit India for your annual vacation this summer

Non-Resident Indians living away from motherland usually plan their trip or vacation to India during winter as they could celebrate some of the popular festivals with family. Many NRIs also plan their annual vacation in summer as spring is the season of marriages and other celebrations to be with family and friends. Are you also a NRI planning your annual vacation to India this summer? Then, there are few more things to take care of apart from celebration and spending quality time with family and friends. Let’s take a look at important things to take care of during your India visit this summer.

Review you finances

As the new financial year has just began, first quarter of the year is the best time to have a look at your financial portfolio in India and act upon existing investments accordingly. India has numerous investment options. Explore investment options available for you in India to diversify your portfolio. Understand tax implications of investments that you are planning for the year. As you make financial plan, take your global income, expenses, investments, assets and loans into consideration to arrive at the better plan in align with your future financial goals. For retirement planning, if you are unsure of your returning back to motherland, have alternative and flexible plans in place.

Income tax filing and tax planning for the year

Being a Non-Resident Indian, you are required to file income tax return on your income earned in India in an applicable form (ITR2 or ITR3 depending on your income type). For the financial year 2018-19, you are required to file income tax in India before 31st July 2019. As you are visiting in the first quarter of the new financial year, you can take care of things related to income tax filing for the year gone by. Learning change in requirements, new rules and requirement of documents can help you out finish the filing process smoothly. You can also take a look at ways to save tax liabilities such as claiming benefits under Double Taxation Avoidance Agreement (DTAA).

According to latest income tax return forms, if you are claiming tax relief under Double Taxation Avoidance Agreement (DTAA), you will need to provide more extensive details such as overseas tax residency certificate, tax identification number of home country and assets held abroad etc.

You can also plan ways to save tax for the current financial year. Beginning of the year is the perfect time for tax planning. You can take help of professionals who expertise in taxes of both geographies so that you can plan your taxes efficiently and file your taxes smoothly in India.

Review your insurance portfolio and seek sufficient coverage

Take a look at your insurance portfolio and ensure you have sufficient insurance coverage. If the existing coverage is not sufficient, plan efficiently to manage future uncertainties. It’s important to understand that insurance planning and risk management is an integral part of your financial planning. Not just the life insurance, you need to pay attention to health coverage also keeping in mind of your plans to return to India in future.

If you are living in US, you would have created health savings account (HSA) for future medical needs as it is a tax-advantaged medical savings account. As per data, HAS investment assets approached 8.3 billion dollars by the end of 2017 with 22% increase in assets year on year. Though, HSA sounds interesting for NRIs build corpus to pay for eligible medical expenses, it’s important to have health cover in India as well for treatments undergone in India as well as for future coverage and tax benefits.

Conclusion

Make your annual vacation to India worthwhile this summer by effectively planning your financials and taxes along with having family fun time. Seek help of certified financial advisors and tax experts to plan ahead in an efficient manner.

Understanding Tax Bracket for Tax Filing in 2019 for NR in the US

Understanding Tax Bracket for Tax Filing in 2019 for NR in the US

by | Mar 30, 2019 | global income tax, Tax credits, Tax Planning, Tax Preparation

Understanding Tax Bracket for Tax Filing in 2019 for NR in the US

The tax filing season for 2018 is just around the corner. However, the IRS has just released the updated tax brackets adjusted with inflation for 2019. If you are in the middle of tax filing for 2018, it is better to finish the same before moving to 2019 changes.

The latest iteration adjusts the tax brackets and certain credits according to inflation. But the first and foremost step is to figure out whether you are liable to file tax returns. The IRS’s website has a link which will help you identify whether or not you need to file returns.

However, the following simple criteria should help you understand the same. If your income exceeds these levels, you are liable to pay taxes. There still are seven tax brackets but there have been subtle changes to the income tax brackets.

  • 10% tax rate

    • If you are single and earn up to $9,700.
    • If you are married and filing jointly and earn up to $19,400.
    • If you the head of a household and earn up to $13,850.
    • If you are married but filing separately and earn up to $9,700.

  • 12% tax rate

    • If you are single and earn between $9,701and$39,475.
    • If you are married and filing jointly and earn between $19,401 and $78,950.
    • If you the head of a household and earn between$13,851 and $52,850.
    • If you are married but filing separately and earn between $9,701 and $39,475.

  • 22% tax rate

    • If you are single and earn between $39,476 and $84,200.
    • If you are married and filing jointly and earn between $78,951 and $168,400.
    • If you the head of a household and earn between $52,851 and $84,200.
    • If you are married but filing separately and earn between $39,476 and $84,200.

  • 24% tax rate

    • If you are single and earn between $84,201 and $160,725.
    • If you are married and filing jointly and earn between $168,401 and $321,450.
    • If you the head of a household and earn between $84,201 and $160,700.
    • If you are married but filing separately and earn between $84,201 and $160,725.

  • 32% tax rate

    • If you are single and earn between $160,726 and $204,100.
    • If you are married and filing jointly and earn between $321,451 and $408,200.
    • If you the head of a household and earn between $160,701 and $204,100.
    • If you are married but filing separately and earn between $160,726 and $204,100.

  • 35% tax rate

    • If you are single and earn between $204,101 and $510,300.
    • If you are married and filing jointly and earn between $408,201 and $612,350.
    • If you the head of a household and earn between $204,101 and $510,300.
    • If you are married but filing separately and earn between $204,101 and $306,175.

  • 37% tax rate

    • If you are single and earn above $510,300.
    • If you are married and filing jointly and earn above$612,350.
    • If you the head of a household and earn above$510,300.
    • If you are married but filing separately and earn above$306,175.

How to Assess?

The first step of assessing your tax liability, you first need to calculate all your sources of income. This total income amount at the end is known as the gross income. You can then apply all the adjustments and exemptions from your gross income. This then becomes your AGI or adjusted gross income. It works as the starting point for calculating your tax liability.

Top #10 reasons to file your taxes every year

Top #10 reasons to file your taxes every year

by | Mar 23, 2019 | income tax, tax deductions, Tax Planning, Tax Preparation, tax savings

Top #10 reasons to file your taxes every year

It is a common tendency for all of you to wait until April to file your taxes. While it is all fine as long as you file taxes, the earlier you do the better it is. Gone are the days when filing taxes was a difficult and tedious job.

Every year about 10 million taxpayers end up paying $130 on average for estimated tax penalties. Thus, filing and paying your taxes every year on time will help you avoid such penalties.

With several government initiatives and tools in place, it is easier to get through tax filing these days. Here are the top reasons why you should consider filing your taxes every year and at the earliest.

Faster Processing

It is advisable that you do not file close to the deadline. It only delays the processing and in turn, results in slowing down the entire process. You might also run into the risk of submitting while the servers are under heavy load, further slowing down the process. The file at the earliest for faster processing of returns.

Proper Documentation

While the complexity of filing returns has come down by a considerable margin, it is far from ideal. One can still get overwhelmed by the entire process. It is recommended that you start early so as to figure out of there are any additional documents that you might need to submit.

Faster Refunds

Taxpayers who file their taxes earlier are more likely to receive their entitled returns early. Since you file early, there won’t be too many returns for the IRS staff to go through or process. And thus, they can complete them at the earliest.

Additional Time to Pay Taxes

Filing your taxes early will help you determine the amount that you have to pay to Uncle Sam. It must be noted that even though you can file your returns earlier, you do not actually have to pay any taxes till the 15th April deadline. This will allow you to plan your taxes better.

Avoid Extension

There are certain circumstances, where requesting an extension for your taxes is much needed. Consider this, a person was carrying all their tax documents to the office and they get stolen on the way. Or a person lost his/her house to fire, burning down all the documents in there. These are legitimate reasons for filing an extension. Others, not so much. Instead of opting for extension and slowing down the process, it is better to get it done at the earliest.

Better Help

If you need the services of any tax agents, the most reputed ones will most likely be booked closer to the deadlines. In the event that you file your taxes earlier, you can seek professional help without having to wait.

Financial Help

If you are looking to utilize the FAFSA or Free Application for Federal Student Aid either for yourself or for someone else in your family, it is recommended to do it at the earliest. The earlier you file your taxes, the better are your chances of receiving the maximum amount out of it. The aid is dependent on the most recently filed return.

Identity Theft

Every year a lot of taxpayers are victims of tax fraud. In the year 2014, about 3 million people reported the same. It usually takes place if you wait till the end to file your taxes.

Clear Things up

Filing taxes earlier gives you ample time to fix if something is wrong with your taxes. This is one of the simplest and most straight forward benefits of filing your taxes every year and on time.

Buying a House

Your mortgage provider would want to have a ton of supporting documents from your end. These include W2 form, bank statements, tax returns and so on. Thus another added advantage of filing your taxes every year.