USA

Residency for tax purposes

• US residence for aliens

  • Passing Green card test or substantial presence (roughly- in use for over 183 days recently) test means you are a resident.
  • Foreign nationals who are green card holders are generally considered domiciled in the United States even for U.S. estate and gift tax purposes.
  • Nonresident aliens may be in the U.S. legally but do not have green cards. They might be tourists or other visitors.

• Foreign residence for citizens

  • Tax home = business/ employment location. Abode = Dwelling. Both should be outside US for max exclusion.

Income tax

• The task of filing the taxpayer’s final return falls to the executor, the administrator, or a survivor.
• Inherited traditional retirement savings funds are counted as income.

Exemptions

• Nonresident aliens are required to pay income tax only on income that is earned in the U.S. or earned from a U.S. source. They do not have to pay tax on foreign-earned income.

Residents and citizens abroad

• Residents and citizens may claim the foreign earned income (employment or compensation through self-employment) exclusion and/or the foreign tax credit if they qualify. Tax treaties may apply too.
• Qualifying income
  • The income you receive from foreign-source pensions, investments, alimony, or gambling is not foreign earned income.
• Foreign presence
  • Bonafide Resident Test by being a resident in the country for a full tax year. (trips even to US don’t count.)
  • Physical Presence Test by being physically present there for at least 330 days within a 12-month consecutive period.
• Exclusions
  • Income up to Statutory maximum exclusion ($107,600 in 2020)
  • The foreign housing amount is the housing costs you paid with foreign earned income that exceeds 16% of the maximum exclusion, or base, amount. This amount has a cap amount at 30% of the maximum exclusion amount.
• Foreign Tax Credits against non-refundable income tax (not property tax etc.) paid abroad. The credit can only be claimed on income that is also subject to domestic taxation.

Retirement savings incentives

For conceptual details, see the capital-gains page.

Pre tax retirement savings (taxed on withdrawal):

• 401(k) a type of Employer sponsered 401(a) plan.
• IRA - opened by individual. No matching contributions.

Post tax retirement savings (not taxed on withdrawal) - Roth IRA. No US tax on accrual.

• Withdrawals (Tax-free in USA)
  • Contributions can be withdrawn anytime.
  • Earnings can be withdrawn after age 59.5 (5 years must have passed since account opening.)

Inherited retirement funds

• Money in traditional IRAs, employer-sponsored retirement plans including 401(k)s and 403(b)s, and annuities are treated as income in respect of a decedent, and therefore taxed to the heir.
• Exceptions - Roth IRAs and Roth 401(k)s. “No taxes are due on inherited Roth distributions as long as the account had been open at least five years at the time of the owner’s death. If the original owner dies before the five-year period has elapsed, you can satisfy the holding period by rolling the account over into an inherited Roth IRA and waiting until the holding period has passed.”

So, move regular IRA to roth IRA before dying! (5)

Non resident (both by visa and tax purpose test) aliens

• General flat rate (even divideds)- 30%
• US India tax treaty - IRS site.

Most Capital gains

• 0 US tax otherwise as per IRS and investopedia

Retiring with past US savings in India

References

• ET article - Slight inaccuracies - falsely claims that Roth IRA earnings are taxable.

Regular IRA and 401k

Tax on withdrawls

• lumpsum withdrawal at senior age - 30% for non resident aliens of the US (section 1441) + (India tax - US tax).
• monthly pension: Article 20 of the DTAA provides that any private pensions and annuities (does not include social security benefits or public pensions) received will be taxed only in the country in which the taxpayer is a resident.

If moving to India while in a lower tax bracket, it might be advantageous to move these funds to Roth IRA.

India Tax deferral
Source: TW

• Default situation: Income accrued in 401k is taxable in the U.S.A. only at the time of withdrawal. However, such income is taxable in India on an accrual basis.
• Scope
  • Applies to USA, UK, Canada, where withdrawals are taxed.
  • Finance Act 2021, effective April 1, 2022, inserted a new Section 89A in the Income Tax Act, 1961 (ITA).
• Rule 21AAA
• Form 10-EE should be e-filed before ITR.
  • You can thus defer the income getting accrued in your 401k account in the form of Interest, Dividend or capital gain.
  • This enables you to claim Federal tax deducted at the time of withdrawal as a relief u/s 90 in India at the time of withdrawal.
• Once this option is exercised, it will apply to all subsequent previous years and cannot be withdrawn. if the taxpayer has become a non-resident after exercising the option, then it shall be deemed that he/she has never exercised the option.

Roth IRA

US tax withholding for non-residents

• 30% withholding is blithely followed [IRS pub 515]
  • may be recovered via refunds [(bogle19)[https://www.bogleheads.org/forum/viewtopic.php?f=22&t=276156&p=4443965&sid=25f92b8dc859b54abb3a6b628ba5686f#p4443965]],
• only India tax on gains.

Estate tax

Not paid by the recipient of the estate (the inheritor), but by the estate.

Exemptions

• Basic exemption vaires based on citizenship and residence.
• Property situated outside USA is exempt.
  • proceeds of life insurance on the life of a non-resident non-citizen.

Residency and citizenship

Residency/ citizenship matters - this is slightly different from the income-tax case.

Citizen or US resident estate

U.S. citizens are subject to U.S. estate taxation with respect to their worldwide assets, even if they are not residents of the U.S.

There is a “lifetime exemption” - Estates of up to $11.4 million are free of tax, and from that point on, anything additional above that mark gets taxed at 40%. - from MF19

Payment

An estate tax return, Form 706, is required for a deceased U.S. citizen if the fair market value at death of the decedent’s worldwide assets plus the value of the decedent’s adjusted taxable gifts exceeds the basic exclusion amount in effect on the date of death.

Non resident aliens’ estate

Certain deceased nonresidents who were not citizens of the United States are subject to U.S. estate taxation with respect to their U.S.-situated assets.

Non-resident aliens have a $60,000 exclusion in the absence of an estate tax treaty. Applies to Indians.

Payment

• An executor for a nonresident, not a citizen of the U.S. must file an estate tax return Form 706-NA if the fair market value at death of the decedent’s U.S.-situated assets exceeds $60,000.

Inheritence tax

• Charged by some states.
  • 2021: The six states that currently impose an inheritance tax include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The tax rates on inheritances can be as low as 1% or as high as 20% of the value of property and cash you inherit.
• Inherited retirement savings funds are counted as income. See details in income tax section.

Gift tax

Usually (and de jure) paid by the donor.

Residency test (different from general tax residency)

• Foreign nationals who are green card holders are generally considered domiciled in the United States for both U.S. estate and gift tax purposes.
• A foreign citizen can be considered a U.S. resident for income tax purposes but not gift tax purposes.

Exemptions:

• Lifetime exemption of about 11.7M. Counting both spouses - you can double that.
• No return needed for anything below annual exclusion ($15,000 per recipient as of 2019). Above that, need to file Form 709; but not pay taxes if it’s below the lifetime exclusion.
• gifts to charities
• gifts to US citizen spouse
• Transfers by gift of property not situated in the United States from foreign nationals not domiciled in the United States are also not subject to U.S. gift taxes.

Exemptions for non-residents

• annual gift tax exclusion same as other taxpayers
• no lifetime exclusion
• no gift tax if the property is not located in the U.S. There is no gift tax if it is intangible property, such as shares in U.S. corporations

U.S. citizens and residents must report gifts from a non-resident alien that are more than $100,000 on Form 3520.

Exit / Expatriation tax

• 23.8%
• any individual (citizen or permanent resident for 8 years in 15 years) who had a net worth of $2 million or an average income tax liability of $124,000 for the five previous years (adjusted annually for inflation)
• Items considered
  • Assets that haven’t been taxed yet but would be in the future, such as capital gains on stocks or funds in retirement accounts

State exit taxes

• CA

Errors

Don’t wait to come into compliance. The IRS typically only offers amnesty if you reach out to them first. If they discover that you’ve failed to file and contact you first, you will lose the privilege of amnesty and face heavy penalties.