Cross border employment is fairly common these days. Professionals are increasingly traveling to other countries for employment and this gives rise to tax implications in both countries. Is it as easy to meet your tax filing obligations as it is to move between countries? This article touches on some common considerations for professionals traveling to USA for the first time.
Amit was in high spirits as he had just been selected to work at a client’s office located in the US. He was thrilled to get this opportunity and was expecting that his stint would also give him the opportunity to earn higher salary as he would be paid in US Dollars. Much to his dismay, when he received his pay check he realized that he was paying taxes in both US and India. The American dream had turned sour due to taxes. But does it have to be so? Did he actually have to pay taxes in both places? Was there something he could do to avoid double taxation?
The answer to the above is – yes, there are options available to mitigate double taxation. However, there will be some level of taxation that cannot be avoided. Also the tax implications will depend on the specific circumstances of the individual.
Various factors come into play while determining the tax impact of employment in the US. The most important factor would be the number of days spent in both the countries. The nature of employment (temporary or permanent), the presence of a permanent office of the employer, the type of compensation received (salary or allowance) are also some determining factors. It is important to note that a US citizen or Green card holder is taxed on world-wide income and is always treated as a resident for tax purposes. This article focuses on the tax status of the professionals traveling on visa to the US.
The tax year for US is from January to December while Indian tax year is from April to March. This creates possibilities that the taxpayer can be treated as a resident for both countries for the same year. In the US, the taxpayer is a resident if
1. He/she has been present for 31 days or more in the current year and
2. 183 days or more in the past 3 years (taking all days in the current year, 1/3rd days present in previous year, 1/6th days present in year before).
So for a first time traveler to the US, if they reach US on or before July 2nd and they remain there for the rest of the year, they will become residents for US tax purposes. In other cases, they will be non-residents. This is because they will fulfill the criterion to be a resident as they will complete 183 days from 2nd July till 31st December.
Why is it so important to determine whether one is a non-resident or resident? If you are a non-resident, you will report and pay taxes only on the US source income. As soon as you attain residency status, your world-wide income becomes taxable in the US, plus you are liable to comply with manifold reporting obligations. However, you are also entitled to better tax rates and better deductions as opposed to a non-resident. You are also allowed to take a foreign tax credit for any taxes paid in India on the Indian income.
If Amit earns $30,000(converted) in India from Jan-June and then moves to the US earning $55,000 from July-Dec, depending on his move date, his taxable income will be as shown below –
Move date: July 4th
Taxable Income = $55,000 (since in this case he will be a non-resident in US)
Move date: July 1st
Taxable Income = $85,000 (since in this case he will be a resident in US and hence worldwide income is taxable
At first glance it looks like it is beneficial to be a non-resident. However, it is usually better to file as a resident.
It is advantageous to be a non-resident in the following cases:
– Taxpayer has had higher income in India.
– Taxpayer had other sources of income like rent, interest, capital gains etc. in India.
– Taxpayer has multiple bank accounts, mutual funds or other financial accounts in India.
– Taxpayer is in US for a short period and will maintain residency in India.
It is more beneficial to be a resident in the following cases:
– Taxpayer is married and/or has children who have moved with him to the US.
– Taxpayer has no other sources of income in India.
– There are not many financial accounts located outside US.
In certain cases, you may also file as a dual status taxpayer for the same tax year to avoid reporting your Indian income for the period in which you were non-resident in the US. Again the specific circumstances need to be assessed before choosing this status. One should select an option that is the most tax beneficial for him.
The US-India tax treaty also lays out certain circumstances wherein the income earned in US can be exempt from US taxes and taxable only in India.
As per Article 16 of the Treaty, the income will be taxable only in India, if all of the three conditions are met:
1. The individual is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year.
2. The remuneration is paid by, or on behalf of, an employer who is not a resident of US.
3. The remuneration is not borne by a permanent establishment or fixed base that the employer has in US.
So if a professional is sent by an employer on a contract job to a US client location for less than 183 days, and he is paid by the Indian employer only – he can exempt this income from US taxes. Note: he does need to file the US tax return to avail this exemption.
If he goes to the employer office located in US and/or is paid by the US branch – he does not fulfill these conditions.
The due date to file the tax returns is April 15th of the following year. Any individual, who has US source income, must file the tax returns if he crosses the income threshold for the year. State tax returns are also required to be filed for most of the US States at the same time.
Non-residents are required to file the 1040NR form which cannot be e-filed. It is a frequent mistake made by first time filers who use online software and e-file the return. This means that the taxpayer has filed a “resident” return which is inaccurate. A resident return would require you to report all your income worldwide, so in effect you would be under reporting your income – inviting potential penalties.
Some taxpayers do not file their tax return as they think that tax has already been deducted, so it is not necessary. This is a fallacy. One must file their return irrespective of whether they get a refund of taxes. There may be penalties levied for not filing a tax return. They are also important for visa applications, employment interviews, green card process and in many other places.
This article has covered the basic aspects of tax impact for professionals going to the US for the first time. There are many other issues to be considered. It is always advisable to consult a qualified tax professional.
About Author/ Resource Box:
Anshu has been involved with H&R Block for more than 5 years, first as a tax advisor in the US and then in India. She is a CPA from US and her special focus is on US taxation of individuals, especially US expatriates / GC holders in India.
H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for filing their Income Tax Online.