According to The Economic Times, 9.05% of NRIs in the US face significant challenges in accessing taxation documents from abroad and some in understanding double taxation and more.
This leads them to suffer penalties for errors in their tax filings, emphasising the significance of fully knowing the process. Hence, understanding how to file taxes correctly is critical for NRIs to avoid costly mistakes and maintain compliance with American tax rules.
So, let us walk you through the entire process of filing taxes in the US as an NRI, ensuring you understand each step and have all the necessary information at your fingertips to make the process less overwhelming and more manageable.
In this blog, we will cover:
- The first steps to file taxes in the US as an NRI
- Key deadlines for filing taxes
- Documents NRIs need to file US taxes
- Determining tax residency status
- Specific tax forms for NRIs
- Understanding double taxation, capital gains tax, and tax treaties
What are the First Steps to Filing Taxes in the US as an NRI?
The first step to filing your taxes in the US is determining whether you need to file a tax return. As an NRI, you are required to file a tax return if your gross income meets or exceeds certain thresholds, depending on your filing status and age.
- Determine Your Filing Requirement: Check if your income surpasses the threshold for your filing status and age. The IRS provides specific guidelines on this.
- Gather Your Documents: Collect all relevant documents, including your W-2 forms, 1099 forms, and records of any other income. Ensure you have your social security number (SSN) or individual taxpayer identification number (ITIN).
- Understand Your Residency Status: Your tax obligations vary based on whether you are considered a resident or non-resident alien. Use the Substantial Presence Test to determine your status.
What are the Key Deadlines for Filing Taxes as an NRI in the US?
Timely filing is critical to avoid penalties while filing taxes in the US. Here are the key deadlines:
- April 15: Standard deadline for filing tax returns.
- June 15: Automatic extension for NRIs living abroad.
- October 15: Deadline with an extension request filed via Form 4868.
It's always best to file on time to avoid penalties, but remember, this extension is an option if you need more time. You can check out the IRS website which has helpful instructions and resources to guide you through each one.
What are the Documents NRIs Require to File US Taxes?
Having the right documents is crucial for accurate tax filing. Here’s a list of essential documents you will need:
- Form W-2: Wage and Tax Statement from your employer.
- Form 1099: Reports of other income such as dividends, interest, and independent contractor earnings.
- Foreign Bank Account Report (FBAR): If you have foreign bank accounts exceeding $10,000.
- Form 8938: Statement of Specified Foreign Financial Assets for Certain Assets.
- Passport and Visa Details: To verify your residency status.
- Indian Income Tax Return (ITR): This will show your income earned in India.
- Investment Statements: Statements for any US-based investments like stocks or bonds.
- Proof of Income from Abroad (if applicable): This could be paystubs or salary slips if you're working outside the US.
- ITIN (Individual Taxpayer Identification Number) or SSN (Social Security Number): You'll need one of these to file your US tax return. If you don't have either, applying for an ITIN is the first step.
How to Determine Your Tax Residency Status?
The IRS uses the Substantial Presence Test to determine if you are a resident or non-resident alien for tax purposes. This test considers the number of days you were physically present in the US over the last three years.
- Resident Alien: If you pass the Substantial Presence Test or hold a Green Card.
- Non-Resident Alien: If you do not meet the criteria for a resident alien.
Unlike India, which uses a financial year for taxes, the US follows a calendar year (January 1st to December 31st). To be considered a non-resident for tax purposes, you generally cannot be physically present in the US for more than 183 days during a three-year period, with specific calculations applied.
The IRS (Internal Revenue Service) website has a handy tool called the "Dual-Status Residency Calculator" to help determine your status.
What are the Specific Tax Forms NRIs Must Use?
NRIs may need to use different tax forms compared to US residents. Here are the key forms:
- Form 1040-NR: US Nonresident Alien Income Tax Return.
- Form 1116: Foreign Tax Credit, to avoid double taxation.
- Form 8833: Treaty-Based Return Position Disclosure, if claiming tax treaty benefits.
- Form 8938: For reporting specified foreign financial assets.
What are Double Taxation, DTAA, Capital Gains Tax, and Tax Treaties?
Double Taxation
One major concern for NRIs is double taxation. Thankfully, the US has tax treaties with many countries, including India, to prevent this. These treaties essentially determine which country has the right to tax specific types of income.
For example, under the US-India tax treaty, salary income earned in India is generally only taxable in India.
Tip: You can find a list of US tax treaties here to see if your home country has one with the US.
Double Taxation Avoidance Agreement
The Double Taxation Avoidance Agreement, or DTAA, is a tax treaty between India and another country (or any two/multiple countries) that allows taxpayers to avoid paying double taxes on income received in both the source and residence countries.
India has signed Double Taxation Avoidance Agreements (DTAA) with more than 80 countries globally, including the US.
These agreements clarify the taxation rights on income earned abroad, ensuring that NRIs are not taxed twice on the same income.
For example, under the India-US DTAA, income like salaries earned in India is generally taxed only in India, providing relief from potential double taxation scenarios for taxpayers.
Capital Gains Tax
NRIs are subject to capital gains tax on the sale of US assets. The rate depends on the asset type and holding period. Long-term gains (held over a year) typically enjoy lower rates. The US Law has the same period for long-term capital gain as 1 year for all assets.
Short-term gains are added to your total income, while Long-term capital gains are taxed at the rate of 15%.
Tax Treaties
The United States has income tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries may be eligible to be taxed at a reduced rate or exempt from U.S. income taxes on certain items of income they receive from sources within the United States, such as dividends, interest, and royalties.
These reduced rates and exemptions vary among countries and specific items of income. You can ensure you reference the relevant treaty provisions when filing your return with this comprehensive guide.
In Conclusion
Filing taxes in the US as an NRI may seem complex, but with the right guidance and preparation, it can be a straightforward process.
Remember to gather all necessary documents, understand your tax residency status, and be mindful of deadlines. Leverage tax treaties to avoid double taxation and ensure you're using the correct forms.
FAQs
Q.1 How do I obtain a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)?
To get a Social Security Number (SSN), apply through the SSA with Form SS-5 and required ID. For an Individual Taxpayer Identification Number (ITIN), submit Form W-7 and proof of identity to the IRS.
Q.2 Which tax forms do I need to fill out as an NRI filing taxes in the US?
As an NRI, you need Form 1040NR or 1040NR-EZ to file US taxes. Additionally, you might need Form 8833 for tax treaties and Form 8843 for substantial presence exemptions.
Q.3 How can I claim deductions and credits as an NRI filing taxes in the US?
As an NRI, claim deductions and credits on Form 1040NR. Provide documentation for deductions like mortgage interest and use Form 1116 for the Foreign Tax Credit.
Q.4 What are the common mistakes to avoid when filing taxes for the first time as an NRI in the US?
Common mistakes to avoid include not reporting all worldwide income, missing tax treaty benefits, incorrect residency status, and failing to file required forms like Form 8833 for tax treaties. Ensure accuracy to avoid penalties.
Q.5 How do I use tax software or online platforms to file my US taxes as an NRI?
Choose tax software that supports Form 1040NR. Follow the guided steps, enter your income and deductions, and upload the required documents. The software will help you file accurately.
