RSU Double Taxation included both in Foreign Income and W2

[pankaj4friends]

Hello Team,

I had some  RSUs vested in Feb 2023 ( US tax resident in 2023 ). The income from the RSU was included in my W2. However part of the RSU income was also taxed in India ( for the time I was in India and a India tax resident in 2021 and 2020). I had moved internally from India to US within the same organization. Now I have 3 questions 

1. I have entered the Foreign Income ( RSU income) and the Foreign Taxes Paid ( Tax paid on India RSU) in Turbotax relevant sections. Calculations were provided by my India employer. Is this correct ?

2. However this led to double counting of RSU income ( Both in my W2 + Foreign Income). Can I make a negative entry somewhere in Other Income. Can you tell me where in Turbo Tax 

3. Do  I need to fill Form 8833. My foreign income is 4500 ( RSU income), 4500 ( Other Wages Received), 3000 ( Other Interest Income outside US). Since this totals more than 10,000 will I still get an exemption from 8833, since the double taxation amount is only 4500 ( less than 10,000) 

[pk]

@pankaj4friends , I am not sure that I understand the situation fully and perhaps need some explanation from you.  What I get is that

(a) your employer in India granted RSUs to you  in 2020, while you were employed in India

(b) in 2022 you moved to UJS via an internal company transfer ( H1-B / L-1  or ? ), thus becoming a  US resident for tax purposes in 2023

(c) your RSUs vested  sometime in 2023

(d) your employer ( US) recognized vesting by including the FMV of the vested ( / granted ? ) RSUs in your W-2.

(e) here is my confusion --- thought that at the time of granting RSUs, your employer recognizes this by including as earned income at FMV and grantee recognizes the mark-to-market by including the gains per year and paying taxes thereon OR waits till vesting and recognize the whole gain ( three years ) and payingn the taxes on this.   So how / why did your employer include the  yearly / total gain in W-2?   And if the total gain was being recognized by  your US employer ( US arm of the Indian entity), how does India IT dept get involved -- and if indeed India was due taxes because part of the gain  occurred while you were in India  ( assume  1/3rd of the total three year gain ? ) why are the amounts  that you show become equal?   What are "other" wage income --  etc. etc.

Please can you correct/ explain the situation and/or my understanding ?

I will circle back  once I hear from you 

pk

[pankaj4friends]

The employer grants the RSU at market rate, no tax at allocation since they are not vested.

Those RSUs vest 1/3rd every subsequent year. The employer taxes the entire vesting amount and includes that in the tax return, Feb of every year. Please note that every year will have RSUs vesting from last 3 years (1/3rd each year from last 3 years).

So in 2023 Feb – I got the below RSUs vested

Feb 2020 – 1/3rd - Allocated in India, for my India work and hence my India employer taxes the component, pro-rated for the number of days I was in India post allocation

Feb 2021 – 1/3rd - Allocated in India, for my India work and hence my India employer taxes the component, pro-rated for the number of days I was in India post allocation

Feb 2022 - 1/3rd - Allocated in India, for my India work and hence my India employer taxes the component, pro-rated for the number of days I was in India post allocation

May 2022 I move to US and become a US tax resident.

Feb 2023 when the above 3 vest, US employer says that we see all of this above 3 years as Income and will include this in your W2, even if it means double taxation. Bunch of explanation around required by US rules .

Question : why are the amounts  that you show become equal?   What are "other" wage income --  etc. etc.

Answer : Wage Income is deferred pending bonus which was paid by India subsidiary in Feb 2023 for the year 2022 , the amounts are equal incidentally with RSU, no relation to each other.

I am including that deferred bonus in both my India and US tax returns for 2023. I provided my total foreign income information to give you a break-up of the foreign income I have in 2023 and whether that will require me to file Form 8833 or I can claim exemption from From 8833 (Since the Double taxed amount is less than 10,000) 

[pk]

@pankaj4friends , having read through your posts  ( and even though I don't quite understand why your employer is including vested RSUs   from  prior to your becoming a Resident for tax purposes (  probably in Oct/Nov of 2022-- 183 days  after  your entry  in May 2022, assuming you had no prior stay in the US during two prior years). Leaving that aside , what you are saying is that  your W-2 for 2023 includes  RSU vested  amounts as income i.e. the total allocation at  FMV for 2023 ( yes ? ).  While it does not make a whole bunch of sense to me but I suppose it is what it is.

When  you enter your W-2 for the whole amount ( i.e. your salary plus bonus for 2022 plus  RSU three year total ), US will tax you for the total amount.  You need to file a form 1116  ( TurboTax under "Deductions and Credits "; "i will choose what I work on " ;  choose  " foreign tax credit"; and after a few follow on screens , enter your foreign income  i.e. total amount of  RSU income ( because  your employer added all this to your W-2 as income ) -- this is the sum of all that has been taxed by India;  the  enter the taxed paid during the last three years . And go on from there .  Personally  I think , this is all wrong  ( assuming that your articulation  represents the facts and circumstances )  and  can be construed as  non-factual.   Because of this I would suggest consultation with a tax professional familiar with international taxation.   

That is my view

Is there more I can do for you ?

pk

[pankaj4friends]

Form 1116 needs to filed to get foreign tax credit. That takes care of the foreign income which I declare in this form and that foreign income does not get taxed again in the US. Remember I have to add Foreign income too in the US returns if I have to get the credit because of the limits of the foreign credit calculations. 

It still does not remove the amount added in my W2 and I cannot claim refund of the tax deducted  in India ( because the income was generated when I was in India ) 

I checked with a tax consultant, apparently it is a problem with RSUs when you move to US. Same problem happened with my colleague who moved from Canada to US. They have suggested a negative income to be added in Other Income ( Misc Income) . That does the following 1. Double income from W2 removed 2. By filling Form 1116 I get credit for the taxes I paid in India and do not get double taxed here. 

What I am not clear is whether I have to file Form 8833. I know Turbo tax does not have Form 8833. This is my only pending query now. Since the amount is less than 10,000 USD can I claim exemption from Form 8833? 

Just as an aside if you have capital gains from another country accumulated over the years and you sell after coming to US, the full capital gains will be taxed at US rates.  ( you can still claim foreign tax credit but because of the way US taxes foreign equity, you can never get back the full amount ). This is same for RSUs allocated outside US, they will still be taxed in the US and the payroll team simply adds the full amount. That is why in most relocation contracts there is protection against double taxation. In my case I cannot claim double taxation since the tax team says you can claim it back in US, I am just trying to figure out how. 

[pankaj4friends]

https://ttlc.intuit.com/community/taxes/discussion/double-tax-on-rsus-granted-while-employed-in-usa-...

Also for others wanting to read about this , this post makes a good explanation of how to handle W2 RSU 

[pk]

@pankaj4friends , I have read through your response and the referred article/response from @AmyC .  And also  noted corrective actions  ( such as entering a negative  "other"  income.  My problem all of these steps to make the software/ return  come into compliance  with  the facts as you see it, creates a "perjury" -- you are claiming a negative  income when there actually was none.  It all stems from the  W-2  being stretched  to cover  incomes .   If it were a US entity giving you RSU, they will generally  (a) show the full RSU grant at FMV on the first year and therefore  you pay the taxes on granted amount --- you still own these  just there is a restriction on selling / disposing of these .  Then each year as the units vest you recognize the gain/loss on the vested unis .  This goes on for three years till all are vested.   Some choose not to recognize  the vesting till all are vested and then recognize the gain/loss.

Next point I would like to make here is when you chose to transfer to US  ( intra entity transfer ), surely these  tax implications  of the RSUs were discussed  ( or should have been) -- thus you have to chalk this to part of the cost of moving abroad.

I personally , during my work years, were assigned to foreign service/ countries many time and there were things that created issues  but I took these as part of  moving abroad.

What I want to ;leave you with -- (a) you have answers from multiple experts ( whether employed by Turbo or former tax-professionals volunteering for Turbo and outside tax professional )  generally giving you the same or similar advice;  and (b) if your employer chooses  to policy wise  include the income in  your W-2, unless  you want to rise in  "audit likely" score,  please follow the rules and avoid perjury.

Is there more  one of us can do for you ?

pk

[pankaj4friends]

Thanks PK , I will go back to my company for advice. Looks like from your reply, there is no way of escaping the double taxation short of a corrected W2 ( which my employer will not do) 

[pk]

@pankaj4friends  also note that  how the amount was reported makes a huge difference --- if in box 1 ( usual ) then they would have collected  federal and state taxes  plus FICA on the income.  But they could have placed it in another box.  

Good Luck 

[pankaj4friends]

Is placed in box 1, what’s the implication then? 

[pk]

@pankaj4friends , box 1 income is subject to Federal , State  and FICA taxes -- I am assuming that you were a Resident for Tax purposes  during 2023.