Filing taxes in the US can be overwhelming – especially for NRIs (Non-Resident Indians) juggling income from both the US and India. Many prefer to handle their tax filings themselves, thinking it’s simple. But when foreign income, tax credits, and reporting rules come into play, things get tricky. Missing out on key tax benefits or failing to report certain income can lead to unnecessary tax bills or even penalties. Here’s what you need to know to stay on top of your US taxes. Let’s understand the complex US taxation for NRIs.
Are You a US Tax Resident?
The IRS uses the Substantial Presence Test (SPT) to determine whether you qualify as a US tax resident. If you have been in the US for at least 183 days over the last three years (with a weighted formula), you are classified as a tax resident and must report your global income to the IRS.
- US tax residents pay tax on worldwide income, including Indian earnings.
- Non-residents are taxed only on US-sourced income, such as salary, rental income, or dividends from US investments.
Misclassifying your residency can lead to misfiling taxes or missing deductions, so it’s crucial to determine your status correctly.
How Different Income Sources Are Taxed
Salary & Self-Employment Income
If you are employed in the US, your salary is subject to federal, state, and local taxes. Additionally, self-employed individuals must pay Self-Employment Tax (15.3%) for Social Security and Medicare contributions. Any salary earned in India is also taxable in the US if you are a tax resident.
Investment Income (Stocks, Dividends, Capital Gains)
NRIs actively investing in US markets should know:
- Dividends from US stocks attract a 25% withholding tax, but under the India-US DTAA, you may be eligible for a reduced rate of 15%.
- Short-term capital gains (for stocks held under one year) are taxed as regular income (10%-37%).
- Long-term capital gains (over one year) are taxed at 0%, 15%, or 20%, depending on total income.
Many NRIs don’t claim tax credits on foreign investments, leading to double taxation.
Rental Income from US & Indian Property
If you earn rental income in the US, it is subject to 30% withholding tax unless you elect for net taxation (filing Form 1040NR with deductions). Rental income from Indian property must also be declared and is subject to US taxation, but you can offset Indian taxes paid by claiming the Foreign Tax Credit (FTC).
Bank Interest & NRE/NRO Accounts
- US bank interest: Taxable for residents, exempt for non-residents.
- NRE account interest: Tax-free in India but taxable in the US for tax residents.
- NRO account interest: Taxable in both India and the US.
Not reporting these correctly can trigger IRS audits and FATCA non-compliance issues.
How to Avoid Double Taxation with FTC & DTAA
The Foreign Tax Credit (FTC) allows you to offset taxes paid in India against your US tax liability. To claim it:
- File Form 1116 with your US tax return.
- Submit Form 67 in India while filing your ITR.
The India-US DTAA (Double Taxation Avoidance Agreement) prevents taxation on the same income in both countries. For example:
- Dividends: US tax reduced from 25% to 15%.
- Capital gains: May be taxed only in the country of residence.
Without FTC and DTAA, NRIs often overpay taxes unnecessarily.
FATCA & FBAR: Foreign Income Reporting Requirements
If you hold Indian bank accounts, mutual funds, or stocks, the Foreign Account Tax Compliance Act (FATCA) and Foreign Bank Account Report (FBAR) rules apply.
FATCA (Form 8938)
- If you hold foreign financial assets worth $50,000 or more, you must report them to the IRS.
- FATCA ensures global financial institutions share your account details with the IRS.
FBAR (FinCEN Form 114)
- If your foreign bank account balances exceed $10,000 at any time in a year, you must file an FBAR.
- Failure to comply can lead to penalties up to $10,000 per violation.
Many NRIs unknowingly violate FATCA/FBAR rules, leading to penalties. Seeking CPA assistance can ensure full compliance and avoid costly mistakes.
Also read: Gift from USA to India: Taxation and Exemptions
Should You File Taxes on Your Own?
If you only earn income from a US salary, self-filing may be straightforward. However, for NRIs with Indian income, foreign assets, or cross-border investments, taxation becomes complex. Common mistakes include:
- Not claiming Foreign Tax Credits (FTC) and overpaying taxes.
- Failing to report Indian bank accounts (FBAR/FATCA compliance issues).
- Incorrectly filing DTAA benefits, leading to higher tax liability.
Many NRIs miss out on legal tax savings and end up paying more than necessary simply because they aren’t aware of all the tax treaties and deductions available to them.
How a CPA Can Help Simplify NRI Taxes
Understanding the US-India tax system is complicated. A CPA specializing in NRI taxation can:
- Ensure correct filing based on US & Indian tax laws.
- Help you claim FTC benefits and prevent double taxation.
- Guide you on FATCA/FBAR compliance and avoid penalties.
- Assist in tax-efficient investment strategies to reduce tax liability.
With the right CPA, you can save money, reduce stress, and stay compliant while making the most of tax benefits.
Final Thoughts
US taxation for NRIs is full of complexities, and the cost of errors can be high. Understanding your residency status, income taxability, and compliance rules is key to avoiding penalties and maximizing savings. If you’re juggling income in both India and the US, it’s best to seek expert guidance to ensure proper filing and avoid unnecessary tax burdens.
Need help with your US taxes? Our CPA specialists can make tax filing easy and help you claim every deduction you’re entitled to. Let’s simplify your taxes—connect with our CPA today!
