I'm a citizen of India. I have some money in IRA and 401K account that I have to withdraw in 2009. I will loose my resident alien status next year. I'm not planning to roll this 401k money into IRA since I need the money very dearly next year. I must withdraw money in both 401K and IRA.

If I have to file the taxes for US as non-resident alien for this early withdrawal amount,

(a) can I take personal exemption on this amount? I know I'm not allowed standard deduction.
(b) will I be allowed to follow the same tax table as US citizens or 30% flat rate? Not sure what the tax treaty between India and US says on this.
(c) Do I need to pay 10% penalty on top of this?

Thanks in advance for the reply from experts on this field.

1. On nonresident tax return, you don't get standard deduction. You get itemized deductions.
2. The withdrawal will be subject to early withdrawal penalty of 10%. Then the withdrwal will be treated as ordinary income, so tax as per your tax return.
3. Yes.
Read about IRA: Your U.S. Tax Return: Traditional IRA and Roth IRA

Thank you for the reply. My questions remain unanswered.

[1] Are non-resident aliens allowed to claim personal exemptions? I think this amount is like $3400 for 2007 and it will be $3500 for 2008.
[2] Are non-resident aliens (from India) allowed to follow the tax table as given by IRS for US citizens/resident aliens? Or it will be a 30% flat rate? I understand tax rate will be based on the treaty for some of the countries.

Thanks again for the reply and for the anticipated replies.

1) Yes, non-resident aliens ARE allowed to claim ONE Personal exemption.

2) You will follow the tax tables.

AtlantaTaxExpert:

Thanks for the reply.

[1] I can follow the tax table because of the US treaty with India?
[2] I hope tax table can be followed for 401K early withdrawal as well.

Also, please let me know if you are a CPA and you file taxes for non-resident aliens. How can I contact you? I want to speak to you before I leave the US. Is there an email or phone number?

I am NOT a CPA, just a tax consultant that specializes in tax for foreign nationals, both as resident aliens and non-resident aliens.

My email address is [email protected].

I want to add an option to the discussion and get the experts' take on this. By the Substantial presence test, if you can file as resident for that year, then you can claim the standard deduction. How about if we leave the country in Feb, such that the SPT is satisfied for the year, and make a 401k withdrawal, wouldn't that reduce the taxes and penalties a lot.

A 401K withdrawal, if an early distribution, is taxed as ordinary income PLUS a 10% Early withdrawal Penalty is assessed.

Assumptions:

- Couple in 2010 in 25% marginal tax bracket
- Couple leaving for India with $30K in 401K,
- leaving US on Feb 17th 2011 with $10000 of salary income so far in 2011
- SPT for 2011 satisfied
- married filing jointly.
- No India income in 2011

The first $19000 of income is not taxable due to std ded, and exemptions.
Since total is $40K, out of the remaining $21K, first $17K will be taxable at 10%.
The next $4K will be taxable at 15%.
In addition, 10% penalty on the whole 30K in 401K.

In essence, they would pay $2100 tax + $3000 penalty. Now, the penalty is a given and cannot be avoided. But by adjusting your schedule, you can manage to claim the standard deduction in the year you return.

My point is if you are planning a return anyway, wait till the next year starts, and plan to go back in Feb after doing the math to make sure SPT is satisfied to possibly save on tax.

ATE, would you agree that this makes sense?

I would also add that this schedule manipulation can keep you in the 15% tax bracket, and make you eligible for a 5% capital tax gain rate on any other investments. So, if you can pull the plug like this, you can leave with a bigger portion of your money than otherwise.