Double tax on RSUs granted while employed in USA later vested in India after international transfer

[sateesh752]

Hi,
While working in USA I received RSU grants later after 6 months I transferred to India in the same company.
Since this is a continuation of employment my RSUs vested while being in India payroll after 6 months.
As I understand, for Federal taxes, RSUs are taxed based on time of employment being in USA; in this case 50% time the RSUs are on USA payroll.

While withholding taxes on RSU vesting, for Federal taxes my company considered 50% as taxable RSU income and withheld shares accordingly only.
Whereas for India 100% is  considered as taxable RSU income, and taxes withheld accordingly but by subtracting/adjusting my USA/Federal taxes as a credit.

However in the USA W-2, I see that RSU income is reported is 100% RSU value, which makes me to pay double taxes for the full RSU income (in USA once and in India once).
What are the options I have in this situations?
1. Can I ask my employer to correct to reflect the taxable RSU income rather than the actual received value?
2. While filing the taxes can I adjust the RSU taxable income though W-2 has different.
3. Do I need to file as it is and claim for foreign tax credit either in USA or India (I am tax resident in both, this time).

Thanks in advance.

[AmyC]

1. Yes, your employer can issue a corrected w2 with the correct amounts. 

2. You can do anything you want but you should not

3. You can file for the foreign tax credit but getting a new w2 is simplest.

[sateesh752]

Hi Amy,
Thanks for your response.
So far my payroll support team saying that as per IRS, W-2 can contain only "reportable income" which is full value of RSUs vested. But, no clarification why taxes are not withheld on full RSU income.
Seems like this case wont suit for foreign tax credit also.

If Empoyer says they dont need to correct, while filing USA taxes how can I show true taxable income? Are there any ways?

Regards,
Satish.

[AmyC · Accepted solution]

The US and India have a tax treaty, India - Tax Treaty Documents | Internal Revenue Service  includes article 25 relief from double taxation. In Claiming Tax Treaty Benefits most people need to file form 8883. 

The payee does not have to file Form 8833 for any of the following situations:

1. The payee can claim a reduced rate of withholding tax under a treaty on interest, dividends, rent, royalties, or other fixed or determinable annual or periodic income ordinarily subject to the 30% rate.
2. The payee can claim a treaty exemption that reduces or modifies the taxation of income from dependent personal services, pensions, annuities, social security and other public pensions, or income of artists, athletes, students, trainees, or teachers. This includes taxable scholarship and fellowship grants.
3. The payee can claim a reduction or modification of taxation of income under an International Social Security Agreement or a Diplomatic or Consular Agreement.
4. The payee is a partner in a partnership, or a beneficiary of an estate or trust and the partnership, estate, or trust reports the required information on its return.
5. The payments or items of income that are otherwise required to be disclosed total no more than $10,000.

For recent changes to the requirements for filing Form 8833, refer to the instructions attached to the Form 8833.

Either way, let's get the income out of your tax return. You need to determine the non-taxable US portion and enter it under Other Income as a negative with a description. Follow these steps:

1. Log into your return
2. Federal
3. Click on Income
4. Scroll to the bottom section,  Less Common Income
5. Select Miscellaneous income, 1099-A, 1099-C, start
6. Select Other Income
7. Did you receive other wages? Yes
8. Continue
9. Household employee? Continue
10. Sick or disability pay? Continue
11. Any other earned income or wages?  Yes
12. Enter source of Other Earned Income
13. Select Other
14. Continue
15. Enter description RSU double taxed or something that makes sense.
16. Enter amount being double taxed as a negative

If you meet one of the exceptions above, you can efile your tax return as is. 

If not, you will need to mail your return and attach Form 8833. TurboTax does not directly support Form 8833  but you can use TurboTax to prepare your tax return to print and mail with Form 8833 attached.  (You can access the form HERE.) You may need to prepare the form for your state return as well.

Best wishes!

[sateesh752]

Thank you Amy! The details you provided are very helpful to me. Appreciate your help.

[pankaj4friends]

@AmyC  I have a question about Form 8833 . I have a similar situation with my RSU. My RSU when they vested were added in my W2. I have added a negative income you described above and filled Form 1116. 

I am a US tax resident for 2023 ( unlike the OP) and was a India tax resident ( during the initial years when the RSUs were granted). My Foreign Income for 2023 is about 11,000 ( Foreign Interest Income + RSU all in India) but my RSU income is only 4,500. Can I claim exemption from Form 8833 ? 

[AmyC]

I think you are saying:

• the 1116 includes the RSU income and you are claiming a credit for paying taxes in India on the income
• the RSU is in your W2
• You have subtracted the extra from the W2 under Other Income.

This would not be right. You can't have credit for income not being taxed. Options are:

• You could subtract the income and not claim the foreign credit or 
• claim the foreign credit and not subtract the income. 

If you have the 1116 covering the income and foreign taxes, it is easier to not subtract the income and not worry about the 8833.

[pankaj4friends]

Hi Amy, Thanks for the response . Just to explain my situation better, details below 

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 Laws.

1. I have entered the Foreign Income ( RSU income) and the Foreign Taxes Paid ( Tax paid on India RSU) in Turbotax relevant sections ( Form 1116) . Calculations were provided by my India employer. Is this correct ? If I do not make the entry in Foreign Income, then I cannot claim foreign tax credit . 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) 

[pankaj4friends]

Hello @AmyC  any help on the above question would be appreciated.

[ThomasM125]

You shouldn't enter the foreign income in the Foreign Income section in TurboTax, since you already entered the income when you entered your W-2 Form. You do enter it when asked for in the Foreign Tax credit section, but that won't add it to your income on your tax return. It's just used to determine the amount of foreign tax credit that is allowed. Indicate in that section that all foreign income is not reported on 1099 forms when asked and you will have an option to enter your foreign income.

As far as the treaty is concerned, you need to file it as is and use the foreign tax credit to reduce or eliminate double taxation caused by the foreign tax. So, I don't see the treaty applicable.