A senior citizen-single-retired - is living overseas since more than 2 years....she made some income from stock market (capital gains) and some interest income that too overseas accounts.
She did not make any income in the USA last year accept those stimulus checks.
She is preparing to file tax return in India and she has to pay some taxes (not sure how much as of yet) India & USA has tax treaty.
I have following questions.
1. Which form she needs to file in USA ? is it 1040 I guess so but what about foreign income?
2. She has two options 1. Foreign earned income exclusion 2. Foreign tax credit. -which one she should prefer ?
3. Which Turbotax product is best fit for this type of tax situation?
4. She has paid $200 when she filed form 4868 - automatic extension of time to file
@curious4913 , assuming that this senior is a citizen of USA or a Green Card holder, US taxes her on her world income ( i.e. irrespective of source country). Because she has income from her country of residence ( India in this case ), she will have to meet the tax laws/regulation of that country.
US-India Tax treaty will apply in this case
1. For the US return ( note that because of the tax year differences, she will have to prorate both the income and foreign taxes for US purposes ) she will file a form 1040.
2. to ameliorate double taxation, she has three options:
(a) she can use foreign earned income exclusion , if she meets the Physical Presence Test ( at least 330 days abroad in any 12 month period ) -- this is generally the least complicated and most tax benign option; however this applies ONLY to active earnings ( employment or self-employment.
(b) she can use itemized deduction for the foreign taxes paid -- if it is beneficial for her to use itemized deduction but SALT limitation currently applies;
(c) she can use foreign tax credit -- this is complicated because you would need to use one for passive category and another for active employment earnings. Also if the earnings are all passive then there is a safe harbor ( direct/full amount) amount of $300 per filer -- do not need to use form 1116 and allowable limitations ( allowable amount is based on a ratio of foreign income to world income )
3. My personal favorite for such returns is TurboTax Home & Business and using the downloaded/CD version.
4. The Economic stimulus payments are not taxable income , Social Security may be and foreign passive also may be . Suggest you run her incomes through TurboTax and see where she comes out -- she may be below the threshold for "required to file" and the taxes on her income in India may be just a lost cause -- note foreign tax credit just reduces your US tax liability ( Non-Refundable Credit )
Is there more I can do for you ?
1. I almost forgot about proration - I understand - Financial year in India is from April 1st 20 to March 31st 2021 and in USA it is Jan 1 2020 to Dec 31 2021.
Wow - we have to calculate partial income from previous financial year (of India) i.e from Jan 1st to 20 to March 31st 20 (from Indian financial year 19-20) and deduct form Jan 1st to March 31 2021 - This will really complicated. Do we have go give any proof to IRS - because our calculation could have errors. To make this calculation easy do u have any suggestion? Because banks in India interest certificate at the end of the year. so not sure how we will figure this out.
2. What do u mean by passive income - is stock market investment (capital gain) considered -active income? I am positive interest income is passive income ..She had only 2 income 1. capital gain 2. interest income. Because she did not have any employment income - she can not choose Foreign earned income exclusion?
3.I believe she has to choose foreign tax credit option - her passive income alone is more than $300. in that case she needs to file 1116 correct? I guess so but question is - can she deduct all of the Indian tax paid as foreign tax credit? or there are some complications?
4. What do you mean when you said - taxes on her income in India may be just a lost cause ?
5. If her Indian tax payment is less than taxable income in India - she still should file return here ..correct?(as of now I am not sure if her income will be more than $14050?
@curious4913 , please accept my apologies for not providing complete answers and for the delay. I will try covering your comments & questions per your reply. For comment
#1 --- yes proration and the reporting regime by the banks in India make it a challenge but luckily US allows US persons abroad on 4/15 to file by 6/15 without any extensions request -- however the payment date still remains the same ( 4/15 ). Generally there is no requirement to submit proof of the incomes ( being reported/recognized ) but it is always a VERY good idea to keep contemporaneous notes as to how you arrived at the figures you claimed on the return -- the foreign income, the taxes etc. both in foreign currency and in US dollars. What you are trying to prove here is that you followed a method using available information to arrive at the reported amounts --- that it was deliberate, best effort and disciplined and that there was no knowing dis-regard of the law.
Thus , for the tax year 2020, by April 2021, you would have had the paperwork from the Indian banks/ brokers covering the investment incomes for the year 2020/2021 and also for the year 2019/2020. The pro-ration is generally on a straight line i.e. all earnings are assumed to be earned at the same rate over the period ( of US interest ) Jan 01/2020 through 3/31/2020 shown on paperwork for year 2019/2020 ( Indian ) and the nine months 04/01/2020 -- 12/31/2020 shown on 2020/2021 reporting. The only thing you have to careful about is the exchange rate used to convert the INR to US$ --- the safest is to use monthly average exchange rates but you may be able to getaway with yearly average published by the US Treasury.
#2 All incomes other that self-employment and/or wages is generally considered passive income. For Tax purposes, interest/dividend etc are Passive and taxed as ordinary. Barter/Exchange/Sales of assets generally fall under capital gains ( but still Passive but segregated/ reported differently ) because of Capital gains treatment eligibility. Rental income is treated like self-employment but is passive or active depending on the owner's involvement in the investment.
You are right in that foreign "earned" income exclusion is available ONLY for active income. Thus her interest/dividend income would be Passive Ordinary income while sale of capital assets would be Passive Capital income;
#3 if her total foreign tax ( paid to India and pro-rated to the 2020 ) is within the safe-harbor amount ( US$300 ) then she can claim the foreign tax credit directly , for the whole amount and not have to use the form 1116 ( where limitations apply ) Note that this is ONLY for foreign taxes on Passive ordinary income such as Interest , Dividend and other passive income ( sale of stocks for short-term holding ).
#4. Suppose her world income is US$20,000 of which only US$5,000 is from foreign sources and she paid $400 in taxes to India. In such a case if she chooses to report the full $500 as foreign taxes paid for credit , she has to use form 1116 which will ( and I am using the simple straight line method -- not reality ). If her total US tax ( including the foreign income is US$800, the her allowable foreign tax credit would ( again I am simplifying things and rounding up/down ) would be approx 5.000/20000 times 800 =US$200. The disallowed amount of US$100, would be carried over ( forward or backward ). If instead she recognized ONLY US$300 as the foreign taxes paid ( even though she paid $500 ), she would have gotten all $300. TurboTax will work this for you and you will have to try different scenarios to see which is best for your particular case ( facts and circumstances ).
#5 I do not understand what you mean here -- can you please expalin
hope this answers your query(ies) --- again apologies for my tardiness
Thanks again for response,
1. She had only 2 types of income 1. interest income from savings and fixed deposits accounts 2. Capital gains from stock market (brokers accounts) - I understand even though interest income is passive - it still taxed as ordinary income but stocks capital gains is taxed as passive income.
2. But to offset risks she chose to have about 8 accounts with different banks and I believe 2 different brokerage accounts. When she fill in entries for interest and capital gains income - does she need to enter each of the different accounts or she can sum up all interest income and give a blanket name as payer like 'various Indian banks' and that is how she can report it.. I am asking because its too much to write each name separately. And I don't think IRS wants to know each of the Indian bank's name.
3. I have the same question when she fills out 1116 (foreign tax credit form) ..does she need to mention each account separately? it will be difficult or impossible to do so because banks/brokers did not deduct tax or gave any 1099 statements - so how do we know which amount tax we paid for each account separately? Can she just mention combined tax for all the income?
4. Her total gross income will be just above std deduction of $14050 and for that she owes only about $1500 tax (after all Indian deductions etc) ..just because her income is slightly above $14050 - she does need to file taxes and even though technically she will not owe any taxes to USA - she should still need to file form 1116 (foreign tax credit) correct? if yes what will happen to foreign tax credit ?
5. She is not in USA currently - so when I asked a tax preparer - she said she can not file for her because she is not here to sign - is that true ? does that mean she can login to turbotax in India and file return from there?
6. Even though she is US citizen but not residing in USA / neither she was resident as of 31st Dec 2020 - does she need to file as 1040-non resident ?
7. How do we specify that either interest income or capital gains income is not at all from the USA but its from India..in TurboTax - I did not see any option under wages/income to specify that.
@curious4913 , instead of answering point by point, I will try covering the general areas of questions and see if that covers everything you talked about:
(a) For a tax preparer to prepare a return for another ( for money ), he/she must be able to verify the identity of the taxpayer --- thus the need for presence and driver's license / passport etc. If the taxpayer is not present or cannot be present, it puts the prepare at a difficult situation but not impossible. I have prepared returns for clients for years -- I needed their driver's license, their signature on form, talk to them directly to verify and more importantly I came to know them through somebody whom I knew by face. If you vouchsafe for the lady in India, a preparer may be willing to prepare, print out the whole thing and let the taxpayer sign/date and file --- the preparer will still have to sign and therefore must have enough confidence that this is not a fraudulent return. The penalties can be quite still for the preparer. Since you now her , you can prepare for her, send the docs to her in India and let her sign/date, then you or she can mail these to the IRS and the state ( ?);
(b) the TurboTax you will need is higher than the free version because of foreign earnings and foreign tax credit. Personally I prefer to use downloaded/ CD version of Home & Business -- this covers all situations and it is left on my machine.
(c) For Interest and dividend reporting, it is strongly recommended ( esp. since you will not have any information returns --- like 1099-INT or 1099-DIV--- provided to the IRS ) that you enter each bank name/ and amount line by line -- this is tedious but it creates a good paper-trail if challenged.
(d) For gains for sale of stocks/bonds, it is mandatory to enter each stock name, number of shares, etc. in detail -- else IRS may assume the transaction is short term and the basis is ZERO. While Indian banks / financial institutions have started sharing data with IRS / treasury for all US citizens, there may not be enough detail and in time --- so it is best that you have proper records and enter as much detail as possible.
(e) Because she is a US citizen ( and even for Green Card holders ) , one must file using form 1040 and NOT 1040-NR. She is a resident / citizen of USA even if her tax home is abroad.
(f) for form 1116, you just need gross foreign income and amounts paid to each foreign country - no more detail is required.
(g) Note that foreign tax credit can only reduce one US tax liability not more. Thus if her US tax liability before foreign tax credit is only $200, then her foreign tax credit be at most $200, assuming that all her income is foreign . In her case , because she also had US income, it will probably be less. The rest of the foreign tax credit is "suspended" i.e. carried over to the next year for use. That is why I had hinted earlier that depending on facts and circumstances, the taxes paid to India may be a lost cause. In your particular case you have to work out and see if this is worth it.
(h) when you enter the interest income -- think one of the boxes allows you to put the amount under foreign category. If you cannot find it , don't worry. The tax treatment is same --- just have to enter the income on form 1116 to make sure it is binned correctly. Same thing applies to stock sales --- you have to remember that this foreign income for purposes of form 1116.
I think I have answered all the questions you had raised.
1. You said I can prepare for her and than she can mail to IRS but instead - can I prepare for her online on TurboTax and than share user name password and with can make a final submission from India ? if so should she use VPN implying that she in the USA ? She is/was resident of WA before she moved to India so I guess she is not suppose to file state tax return ..correct me if am wrong. Also in case online submission from India is not allowed and she has to mail to IRS - 15th October date is postmark date or return has to be delivered to IRS before 15th October?
2. You suggested - enter each bank name/ and amount line by line - just to clarify - (because she did not receive any informational return ) I am adding her interest + capital gains income as other income - as advised by other experts on this forum.
3. You also suggested = for gains for sale of stocks/bonds, it is mandatory to enter each stock name, number of shares, etc. in detail ---but in her case its more than 80 different stocks - all purchased in small batches at different purchase prices. --- is there any way we can avoid reporting to IRS in detail - yes we will keep the records.
4. She did not have any US income - only stimulus payments. I made an error in calculation - Her total income from Jan 20 to Dec. 20 less than $14050 (std deduction) - it will be about $13750 and tax liability in the India would be about $950 only after all Indian deductions
@curious4913 On your response ---
I beg to disagree with "adding her interest + capital gains income as other income - as advised by other experts on this forum." It is plain and simple willful disregard of law --- IRS requires the same treatment of categories of income as you would if these were US sourced. "OTHER" category is for income that is not categorized under wages/ self-employment / Interest/Dividend/ supplemental incomes ( such as rental, oil-lease or similar, copyright etc. etc. ), income from barter/exchange, non-incorporated business income etc. etc.. Thus incidental income from wager/bets/ hobby etc. are generally grouped under "Other" income. Please don't follow these "experts" just because the source of income is foreign does not make it "other"
The assets / stocks acquired and sold only need to be reported when sold -- not while holding the stocks. Thus if she bough 80 different stocks at different time -- you need to have record of all those transactions . When you sell one of more of your holding you report that to the IRS ( you will require, name of asset, number of shares, price you paid , how much you sold it for , when you acquired and when you sold -- thus determining whether it gets long term ( capital ) or short term ( ordinary ) rates on the gain.
Also note that economic stimulus is not taxable income. However, her Social Security income and any other pension(s) may be ( does she not get Social Security and if not why not ? )
From your questions and responses , I suggest you use the services of a tax professional, either in the USA or in India -- there is lot of unknowns in what you have described so far. At least for the first year ( how did she file for 2019 ? ). I am perfectly willing and happy to help but I am not familiar with on-line version and its capabilities. I can answer tax law questions but you have to open up the situation a lot more and this is not good in an open forum like this.