Given the large number of Indians who queue up for US visas and green cards, NRIs and PIOs who are American tax-payers are not a small number. The starting point for the taxation process in America is determining the residency status of a person.
Indians will fall under the category of foreign national in the US. The actual taxation depends upon whether a person is classified as a resident or a non-resident alien in the US. The position can change year after year and a re-evaluation is required to determine the position every year.
There will be income arising at different places for Indians who are covered under the income tax provisions in the US and these will have to be dealt with separately. Depending upon the way in which the income has arisen, and the residential status of a person, the final impact will be determined.
Who Needs to File?
If you are a non-resident alien doing business in the US, you are required to file a tax return regardless of your income
You are considered to be engaged in business even if you are an employee working for wages. If you are a student or scholar visiting the US on a F, J, M or Q visa, and are classified as a non-resident for US tax purposes, you are required to file a tax return each year you are in the US, if you have any income subject to US income tax
If you are an exempt individual (under residency status), you are required to file Form 8843 regardless of your income
Forms required to be filed
Form 1040NR, US non-resident alien income tax return, or, if you qualify, Form 1040NR-EZ, US income tax return for certain non-resident aliens with no dependents, and individuals with a medical condition.
A resident alien is a foreign national who meets specified conditions and is hence considered as a resident for the purpose of tax in the US. The implication of being classified thus becomes clear afterwards as various types of income keeps getting taxed. In such a case, all income received by a person from any source will be taxable unless this is specifically exempt from tax.
The mode of taxation is such that, just like in India, there are several deductions available to individuals depending upon their position, and then the income is taxed at specific rates for specific incomes. This is known as graduated rates. Income for taxation purpose will include several common heads like salary and allowances, dividends, interest, gain from sale of property and income from other sources.
There is an important factor that has to be considered in calculations as income refers not only to the cash received but also to the fair market value of property or services made available to a person. For example, if a person is provided with a motor car with a fair market value of $10,000 by an employer, then this is to be added as income. The exception to this is an investment or other property purchased where even though the fair market value might have gone up there is no gain till the time that a sale is actually made.