New green card holder - filing US tax return for the first time

[dhurandhar]

Hi there,

My father-in-law recently received his green card and entered US.  We are awaiting to get the green card (for both father and mother-in-law).  The are citizens of India.  All of their income is from India and they file and pay their taxes in India

1) When they file their US tax return - will they be able to get full tax credit for all the taxes paid in India (assuming there is such a provision in the India-US tax treaty)

2) Can the tax paid in India also be used to reduce state tax burden?  

3) They will be spending time in two different US states (California and Georgia).  How will this impact their state tax?  Would state tax be calculated based on the proportion of time spent in either state? (They are planning to spend approximately 6 months in US and 6 months in India)

Thank you for guidance on this topic!

[pk]

@dhurandhar ,  Namaste ji .   

First a caution -- your ID may be very similar to your gmail address -- perhaps you should  consider changing.

My response to your  questions in  italics.

My father-in-law recently received his green card and entered US.  We are awaiting to get the green card (for both father and mother-in-law).  The are citizens of India.  All of their income is from India and they file and pay their taxes in India

Which do you mean -- have they entered the country with a GreenCard or is it that they are in the USA on a visa ( which one ? ) and are awaiting adjustment of status?   Which  US tax year are you talking about ?  When did they arrive  in the USA, when was their  change of status approved ?

1) When they file their US tax return - will they be able to get full tax credit for all the taxes paid in India (assuming there is such a provision in the India-US tax treaty)

Please tell more about the  type of income they have -- active/ business/sale of assets/ pension ( and if so from whom ) ?  Cannot fully answer this without this info.

2) Can the tax paid in India also be used to reduce state tax burden?  

While there is  a tax treaty between US and India , including the "elimination/mitigation of double taxation" clause, the  US states do not usually recognize these treaties.  So not the state(s) will tax this  "foreign source" income as if it was domestic income

3) They will be spending time in two different US states (California and Georgia).  How will this impact their state tax?  Would state tax be calculated based on the proportion of time spent in either state? (They are planning to spend approximately 6 months in US and 6 months in India)

For  immigrant status ( a federal status ) , the states generally will ignore this. You have to meet   each states own residency requirement or you file as a  Non-Resident  covering in state sourced income.

From what you have described , it is a very messy situation.  Generally  States would like to see one fixed domicile and be a resident of that state.  If all they are trying to do is spend time with families ( in California and Georgia ), GreenCard , i.e. permanent resident  may get into trouble.   Strong suggestion would be to talk to an immigration attorney  ( nothing to do with tax par se ) and perhaps be domiciled in one state but visit other state as well as visit abroad.

Don't know what more I can do for you -- but you are welcome to PM me with any additional queries ( if ).

Namsaste ji

pk

[abhinavgulechha]

Responses as follows - 

1) Generally US tax law provisions allow only a "proportionate" credit i.e. in the ratio of India Income/Total Income (India + US) - in your in-laws case if US income is nil or very little, then there is a chance they can get almost full credit. They'll have to file Form 1116 with their 1040. 

2) It depends on the state tax law. To the best I know, California wont give credit to India tax. Georgia also doesnt. Please check with a state CPA for more clarity. 

3) You'll have to check the tax residency laws & tax incidence based on residential status of the state. States like California have domicile requirements instead of no. of days.     

[pk]

@abhinavgulechha 

From your points:

1.  while the term "proportionate "  is correct but it is used as a mechanism to  identity/compute the US tax on that doubly taxed income.   This is because  , while the treaty generally requires US to  recognize / credit taxes paid to a foreign country, it generally  cannot allow  more credit than US taxes on the same income.  Thus the  US  recognizes the full  foreign taxes paid  ( dollar for dollar ) but the allowable credit for the  US tax year  is  the lesser  of the amount paid to the foreign taxing authority and  the US tax on the same  income.

Note that  the doubly taxed "foreign income" is generally the lesser of the foreign source  in come per US laws and the foreign source income per the "other contracting" country.  This  can get quite messy / involved because  while the "gross" income may be the same the adjustments/ deductions to it are computed per the laws of US and  the pother country   ( per the saving clause ).  A classic example of this is for foreign source rental income --- everybody agrees on the  gross rent amount, but the  allowable  deductions including  depreciation, amortization  etc.  vary from country to country.  Therefore , one needs to keep in mind what one is trying to  achieve ---  the doubly taxed income  ( i.e. that portion of the foreign source & gross income that is being "taxed " by both countries  ( mitigation / avoidance of double taxation clause ).

Your points 2 and 3 are  things to be aware of  --- residency per the  state laws and absent direct State to country  (  e.g. Canada & NYS,  Canada & MI ), US states generally do not recognize  US and another country tax treaty conventions/ articles.