US Tax Obligations for NRIs Moving Back to India

Moving back to India can feel like a fresh start, but for many Non-Resident Indians (NRIs), your US tax obligations don’t automatically vanish. It’s really important to know that US immigration status and tax residency are completely different concepts with their own rules.

Your US Citizenship and Green Card Status

If you are a US citizen, your tax obligations on global income and assets continue until you formally give up your citizenship. Green card holders also keep their US tax residency until they officially surrender their card, usually through Form I-407, or if it’s revoked.

Here’s a key point to remember if you’ve held a green card for a while:

• If you’ve had a green card for at least 8 of the past 15 years and then surrender it, you might be considered a ‘covered expatriate’.
• This status can make you subject to an ‘exit tax’, where all your assets are treated as if they were sold at their fair market value.

Navigating Visa Holder Taxes

For those on H-1B, L-1, or H-4 visas, your US tax residency depends on the ‘substantial presence test’. This test generally requires you to have been in the US for at least 31 days in the current year and 183 weighted days over the current and two preceding years.

The year you leave the US can be extra tricky, especially if you earned income in both countries or received bonuses and Restricted Stock Units (RSUs). You might need to file a special dual-status return.

• This dual-status return involves filing Form 1040 for the resident portion of the year.
• You’ll also file Form 1040-NR for the non-resident portion.
• Experts warn that missing information returns can lead to big penalties, even if you don’t owe much extra tax.

Managing Your US Investments

You don’t always need to close all your American bank or brokerage accounts before moving. However, you must tell your financial institutions about your change in tax residency and provide documentation like Form W-8BEN.

When it comes to your investments, here’s what you should consider:

• You can generally keep US-listed stocks and ETFs.
• The timing of sales can affect your US tax outcomes, as capital gains on these assets are usually not subject to US tax for non-residents.
• India’s tax laws require you to disclose foreign assets once you become an Indian resident.
• US citizens and green card holders must report Indian accounts as ‘foreign’ accounts on FBAR/Form 8938.

Stock Compensation and Retirement Accounts

Stock compensation like RSUs remains taxable based on where you performed services during their vesting period, even if they vest after you’ve moved to India. Make sure you keep all your grant, vesting, and payroll records.

Your retirement accounts, such as 401(k)s and IRAs, don’t automatically need to be cashed out. You have a few options:

• Leave funds in your current plan.
• Roll them into a new employer’s plan.
• Transfer them to an IRA.

Always carefully consider fees, investment choices, and tax implications for these accounts.

US Rental Property and Exit Tax

If you keep US rental property, the income you earn from it remains US taxable. If you sell this property as a foreign person, it falls under the Foreign Investment in Real Property Tax Act (FIRPTA), which means the buyer must withhold 15% of the sale price.

The ‘exit tax’ under Section 877A is another important point for certain long-term green card holders and citizens. It treats all your unrealized gains as if they were sold the day before you formally gave up your status. You’ll need to file Form 8854 to certify compliance with US tax requirements.

Key Numbers to Remember

• 31 days: Minimum presence in current year for ‘substantial presence test’.
• 183 weighted days: Over current and two preceding years for ‘substantial presence test’.
• 8 of the past 15 years: Green card holding period that may lead to ‘covered expatriate’ status.
• 15%: Withholding rate by buyer on sale of US rental property by a foreign person under FIRPTA.