Green Card holder working in India? Here are some US tax exemptions for you
November, 22nd 2011
If you are a green card holder, then you would know that for tax purposes, you would be treated as a resident alien by the US Internal Revenue Service or IRS. And as a resident alien, you would have to pay tax in the US on all your global income.
Recently we have seen a lot of reports about NRIs returning to India. If you are among them and are also a Green Card holder, then there are some things you should know about your US tax obligations.
"An important point is the foreign earned income exclusion," explains Rajesh Vaidya a CPA and Senior Accountant at Florida based Raju Maniar CPA firm. "The IRS has a certain exemption for green card holders who are working abroad and earning a salary or self employment income abroad," Vaidya says.
There are two exemptions for green card holders working outside the US. Let us look at these in detail.
Foreign earned income exclusion --Eligibility To be eligible for the foreign earned income exclusion you must satisfy the following criteria: You must: 1. Have foreign earned income Foreign earned income includes salary and wages received for working in a foreign country, in this case, in India or even self employment income from a business or profession in India. Earned income includes value of perquisites such as lodging, meals, car etc provided by the employer. It also includes allowances such as education allowances, moving allowance etc.
2. Have a tax home in a foreign country Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you are permanently or indefinitely engaged to work as an employee or self-employed individual.
3. Meet either the bona fide residence test or physical presence test You meet the bona fide residence test if you are a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. In the case of India, the tax year is on financial year basis.
You meet the physical presence test if you are physically present in a foreign country 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive.
If you satisfy all these criteria, then you will be eligible for foreign earned income exclusion. The limit for this exclusion for tax year 2011 is USD 92,900. That means, foreign earned income of up to this limit will not be taxed in the US.
--Tax on other income Remember that this exclusion pertains only to 'earned income,' that is, income from wages, salaries or self employment. If you earn any other income such as interest on bank deposits, rent from property, capital gains on sale of investments or property, these would be taxed in the US (you can claim credit on any taxes paid in India on such income on form 1116). Even on earned income that exceeds the limit of USD 92,900, you would have to pay tax in the US. You would need to figure the tax on this income using the tax rates that would have applied had the individual not claimed the foreign earned income exclusion.
--Claiming the exclusion This exemption does not however mean that you need not file your returns in the US. In order to claim this exclusion you will have to file your return in the US, declare this income and then claim the exclusion using Form 2555. Once you have decided to claim this exclusion you cannot take credit in the US tax return of taxes paid in India on the same income. You can however claim credit on taxes paid in India on the other income like interest, rent, capital gains etc.
You can however, claim a credit for the taxes paid on that income in India.
--Important points If you have self employment income in India, you can claim this exclusion but the exclusion applies only to income tax. You would still have to pay self employment taxes in the US.
Foreign housing exclusion and deduction Foreign housing exclusion and deductions are available along with the foreign earned income exclusion. The housing exclusion is applicable to salaried individuals while the housing deduction is applicable to the self employed. Vaidya explains, "A green card holder can claim a total exemption of $ 92,900; this includes foreign earned income exclusion as well as foreign housing exclusion and deduction. The assumption is that a person who has a lower earned income is provided housing or accommodation by the employer. And the foreign housing exclusion is provided to the housing component. So if an individual earns more than $92,900 as earned income, he can claim up to $ 92,900 as exclusion. If he earns $ 50,000 as earned income and $ 20,000 as value of housing, he can claim $ 70,000 toward these two exclusions."
Having understood that, here are a few finer points of the foreign housing exclusion and deduction.
--Eligibility In order to claim the foreign housing exclusion and deduction, you must satisfy the same criteria that apply to foreign earned income exclusion. The home that you claim this exclusion/deduction on must in your foreign tax home.
--Housing amount The housing amount is nothing but the amount of exclusion/deduction you can claim. Housing amount = your housing expenses - base housing amount Your housing expenses include rent, fair rental value of housing provided in kind by your employer, utilities, household insurance etc. The base housing amount is 16% of the foreign earned income exclusion amount (computed on a daily basis), multiplied by the number of days in your qualifying period that fall within your tax year. For instance, for 2010, the maximum foreign earned income exclusion was $91,500 per year; 16% of this amount is $14,640, or $40.11 per day. You would need to multiply $40.11 by the number of your qualifying days during the tax year 2010. Remember that the total housing exclusion/ deduction has an overall cap of 30% of the earned income exclusion (computed on daily basis) multiplied by the number of days of your qualifying period.
For the self employed, they can claim a foreign housing deduction; that is, the housing amount can be deducted from the gross income. The net income (after deducting the housing amount) will then be exempt up to a limit of $ 92,900.
--How to claim housing amount The foreign housing exclusion and deduction can be claimed using form 2555 which must be attached to Form 1040. Claiming the foreign earned income exclusion and the housing exclusion/ deduction is a complicated process and should usually involve the help of a professional.