Hi,

I was on H1b in the US since 2003 on H1B visa and filing my taxes in the US. As of second week of Oct 2010, I moved back to India and hence would be in India for less than 182 days for india tax year. Also meet the conditions for RONR (if relevant) for future years.

I continued to work for my US employer who is witholding my US taxes as if I am in the US, and may do so till Mar 2011. Would like to get clarity on what my tax liabilities would be in US and India for upcoming years.

1) What would be my tax filing status in US for year 2010? Would I be liable to pay income for the whole year as I was a resident?

2) What will be my tax filing status in India in 2011? Would I have to declare income from working for the US employer and pay taxes on that in India too?

3) What will be my US tax filing status for US in 2011 - say I continue to work till Mar 2011 for my employer? Would I be filing as a non-resident? As the taxes are already withheld from my salary would I get a refund for those taxes when I file?

4) Also what are the implications of DTAA in my case.

Any help in understanding the issues would be greatly appreciated and I believe helpful to many.

Thanks,
ABC

You have a choice:

1) You can file an expatriate dual-status return and pay taxes ONLY on income earned while present in the U.S. The U.S.-sourced income earned while in India has to be reported, but is exempt from U.S. income taxes. I cannot say if it would be subject to Indian taxes. However, you CANNOT file this return jointly if you are married (though you CAN claim your wife and children as dependents). Further, you CANNOT claim the standard deduction.

OR

2) You can choose to file as a resident for all of 2010, but that means you pay taxes on ALL of the income paid to you. If you pay taxes to the Indian government on the income earned while in India, you can file Form 1116 to claim the Foreign Tax Credit. This allows you to claim the standard deduction, file jointly with your spouse if you are married, makes you eligible for various credits, AND allows you to file electronically. By 15 June 2011, you must mail a Residency Termination Statement to the IRS Center in Austin, Texas, that tells the IRS that you are terminating your residency status. Since you were working under both L and H visas, this statement is filed instead of Form 8854.

More than likely, Option #2 is best for you.

Thanks a lot.

Would you also be able to comment on my tax liablity in US for 2011 and the process to go about that. If you have any thoughts on my origial Q3 and 4, that would be very helpful.

For 2011, you have NO tax liability to the U.S. government UNLESS you earned money from a U.S. source AND working within the borders of the United States.

In other words, if you continue to get paid by a U.S. company, but are living and working in India, THAT income is EXEMPT from U.S. income taxes, even if you are working under a W-2. BTW, you need to make this clear to your U.S. employer so they take you OFF the W-2 and have complete Form W-8BEN to keep them from withholding ANY U.S. taxes.

DTAA does NOT apply based on what I said above.

AtlantaTaxExpert, I am somewhat confused about your last reply due to my lack of expertise on the tax rules.

You said below that for my 2011 income that any US wages, I would not have to pay tax on it as I was not in the US borders for even a single day in the year? How will an NRA ever be taxed then for their US source income?

Please help understand better.

Thanks,
ABC

That's the point: you should NOT be taxed for U.S.-sourced income if you do NOT work within the U.S. borders, because, under BOTH U.S. tax law and provisions of the U.S.-India Tax Treaty, you are NOT liable for U.S. income taxes.

You are liable for Indian income taxes ONLY for any income earned while within India's borders, even if the money originates from a U.S. company.

Hi,

I have a follow-up question back on my 2010 tax return. If I choose to file as a full year resident for the Federal tax, can I choose to file as a full-year resident for California state tax also?

Please suggest as this will help me complete my tax returns for this year.

Many thanks,
ABC

Yews, you CAN file as a full-year resident for California, but I see no reason WHY you would want to.

Once you left the state, the state has NO legal standing to tax your income earned after you left the state. File as a part-year resident.

Hi AtlantaTaxExpert and others,

Its been a while and I am asking a follow-up question on my thread. Now its time for me to file for 2011 taxes in US. I was not in the US borders for even a single day. The income I received was a salary on W2 for the first 3 months till March 2011, and some premature 401k withdrawals. Couple of questions and confirmations needed

Federal Filing - Paper Returns only? Do I need to attach the original W2, or would a copy do?
Should I file as full year non-resident, married filing separately, and ask for refund?

California State Filing - Does this also need to be paper returns or can I e-file for refund? I was not in CA for even a single day.

Thanks,
ABC

For 2010, you must file dual status tax return. Your income earned after you left US is not taxable in U.S. It is taxable in India since you were present in India to work.
For 2011, income is not taxable in US. You will claim refund of all the taxes paid in U.S.

Hi MukatA,

I understand that I need to file as a non-resident and claim a refund in 2011. However your response did not answer the specific questions I asked.

Please let me know if you have insights on those.

Thanks,
ABC

Since you are filing as a non-resident alien, the federal return (Form 1040NR or 1040NR-EZ) will be a paper copy which must be mailed. The attached W-2 CAN be a photocopy, as long as it is clear and legible.

As for the refund, if the work was performed IN India, then ask for a full refund. If the income was from work performed in the U.S. then taxes will be assessed. The 401K distributions are considered deferred compensation which are subject to U.S. taxes.

The California return can be efiled. Ask for a FULL refund for the California return.

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