1. Introduction

U.S. taxpayers with financial ties to India must adhere to international tax and asset reporting laws. The IRS mandates reporting of foreign income and assets, including:

• Bank Accounts: NRO, NRE, Savings, Fixed Deposits (FDs)
• Investment Accounts: Demat, Mutual Funds, ETFs
• Rental Properties
• Provident Funds: Public Provident Fund (PPF), Employee Provident Fund (EPF)
• Life Insurance Policies

Understanding these obligations is crucial for compliance.

2. Worldwide Income Taxation

• Global Taxation: The U.S. taxes individuals based on their status as U.S. persons, not merely residency. This means:
  • All worldwide income must be reported, even if taxed abroad.
  • Potential reductions in U.S. tax liability are available through the Foreign Tax Credit (FTC) or the Foreign Earned Income Exclusion (FEIE).

Examples:

• Arjun, a new Green Card holder, must report foreign passive income that's tax-exempt in the source country.
• Priya, a Green Card holder, reports foreign passive income and may claim foreign tax credits for taxes paid abroad.

3. Foreign Asset Reporting Requirements

3.1 Bank Accounts (NRO, NRE, Savings, Fixed Deposits - FDs)

• Reporting Obligations:
  • FBAR: Required if the aggregate value of foreign financial accounts exceeds $10,000 at any time during the calendar year.
  • Form 8938: Reporting thresholds vary:
    • Single/Married Filing Separately: More than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
    • Married Filing Jointly: More than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
  • Interest Income: Must be reported on U.S. tax returns, even if accrued and not yet received.

Examples:

• Ravi relocated to the U.S. on an L-1 visa in February. He holds four bank accounts and three FDs in India totaling $250,000. Ravi must:
  • Report these accounts on FBAR and Form 8938.
  • Declare the interest income on his U.S. tax return.
• Anita, a lawful permanent resident, has an NRE account worth $90,000. Despite the interest being tax-free in India, she must:
  • Report the account on FBAR and Form 8938.
  • Include the interest income on her U.S. tax return.

3.2 Investment Accounts (Demat & Trading Accounts)

• Reporting Obligations:
  • FBAR and Form 8938: Required if accounts exceed the respective thresholds.
  • Form 8621: Necessary for investments in Passive Foreign Investment Companies (PFICs), such as foreign mutual funds.

Examples:

• Vikram has a Demat account in India with $400,000 in stocks. Although inactive, it generates dividends. He must:
  • Report the account on FBAR and Form 8938.
  • Declare the dividend income on his U.S. tax return.
• Sonia holds a Demat account with $400,000, comprising $250,000 in stocks and $150,000 in foreign mutual funds. She must:
  • Report the account on FBAR and Form 8938.
  • File Form 8621 for each foreign mutual fund.
  • Assess and report any excess distributions from these funds.

3.3 Mutual Funds & ETFs

• PFIC Reporting: Investments in foreign mutual funds and ETFs are typically classified as PFICs, necessitating:
  • Form 8621 filing.
  • Detailed reporting of distributions and gains.

Examples:

• Nisha owns five mutual funds in India, totaling $380,000, with no distributions. She must:
  • Report these funds on FBAR and Form 8621.
• Amit has mutual funds worth $480,000, with significant dividends received this year. He must:
  • Report the funds on FBAR and Form 8621.
  • Calculate and report any excess distributions.

3.4 Rental Properties

• Income Reporting: Rental income from properties in India must be reported on Schedule E of the U.S. tax return, regardless of net gain or loss.

Examples:

• Deepak owns three rental properties in India, with:
  • Gross income: $30,000
  • Expenses: $13,000
  • Indian taxes paid: $3,000
  • He should:
    • Report the income and expenses on Schedule E.
    • Claim foreign tax credits using Form 1116.
• Meera inherited a rental property in India, resulting in a net loss after expenses. She must:
  • Report the income and expenses on Schedule E.
  • Potentially carry forward the loss to offset future income.

3.5 Provident Funds (PPF & EPF)

• PPF: While tax-free in India, the growth is taxable in the U.S. as investment income.
• EPF: Generally tax-deferred under the U.S.-India tax treaty, taxable upon distribution.

Examples:

• Karan has a PPF account in India. Despite no distributions, the annual growth is:
  • Taxable in the U.S.
  • Increases the tax basis, reducing future taxable amounts upon withdrawal.
• Lakshmi participates in an EPF through her Indian employer. The account is:
  • Tax-deferred in the U.S. until she receives distributions.

3.6 Life Insurance & Life Assurance

• Investment-Based Policies: Growth exceeding premiums is taxable in the U.S.
• Premium Payments: May require excise tax reporting on Form 720.

Examples:

• Rahul owns an LIC policy in India. The policy's growth surpasses annual premiums, leading to:
  • Taxable income on the excess growth.
• Pooja pays premiums on a foreign life insurance policy. She may need to:
  • Pay excise tax using Form 720.

4. Foreign Tax Credits & Treaty Benefits

• Foreign Tax Credit (Form 1116): Offsets U.S. tax liability based on taxes paid to foreign governments.
• U.S.-India Tax Treaty: Offers specific benefits, potentially reducing double taxation. Taxpayers should review treaty provisions to maximize benefits.

5. Late Filing & Offshore Amnesty Programs

• Penalties: Failure to file **FB

Also Read: 1040 (NR) or 1040 (Resident) - Which return should a US Green card Holder residing abroad file?