Good-bye Bush, New Tax Rates For Indian-Americans

22 Dec 2012


Taxman is just about to knock at the doors Indian-Americans. They maybe in for increased tax rates with the Bush era tax concessions coming to an end with the end of 2012. Unless the US Congress votes against these concessions, what they are in for include:

  • The 10% tax bracket is expiring, reverting to 15%
  • The child tax credit will be reduced from $1,000 to $500
  • Long-term capital gains tax for middle- and upper-income people would rise from 15% to 20%
  • Qualified dividends earned by middle- and upper-income people and the related tax would rise from 15% to ordinary wage tax rates
  • Tax brackets are changing: the 25% tax rate would rise to 28%; 28% to 31%; 33% to 36% and 35% to 39.6%

Considering the stakes, the Indian-Americans may have to consult their tax consultants. Shares that could be disposed of be better sold for consideration of taxation at 2012 rates.

It is good time to review your Indian portfolio, if you have one. Long-term capital gains are tax free in India but are taxed in US for citizens and Green Card holders. If you have a portfolio of Indian securities, you may take advantage of capital gains tax in India. Those in the IT sector consultancy may have to receive their bonuses before the year-end, because bonus payment is flexible for them.

Now is the good time to opt for Roth IRA. You will stand to benefit from conversion should tax rates go up.

In regard to Estate Tax and Gift Tax, the scenario is in for drastic change. At present the exemption limit is $5.12 million and tax rate beyond the limit is 35%. In case of a change, here's what to expect:

  • Estate tax exemptions will fall to $1 million
  • The generation-skipping transfer tax exemption will fall to $1 million
  • Tax rate is likely to go up to 55% from 35%
  • Gift life-time tax exemption will fall to $1 million and the rate to rise to 55%

Those who plan to make gifts or inheritances of assets in India may remember while India does not tax inheritances and gifts, the US tax laws levy tax on a donor.

Most NRIs have understood the serious implications of non-compliance and have begun reporting their income wherever in the world. The incomes include rents on property, interest and dividends on bank accounts and securities, capital gains and so on.

The US IRS requires additional compliances like the Form 8938, which is 'Statement of Foreign Financial Assets' and the Foreign Bank and Financial Account Report (FBAR). Therefore, individuals need to collate values of their financial assets as on the last date of the year. Those with foreign mutual fund holdings need to make additional disclosures in the PFIC (Passive Foreign Investment Company) report. 

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