[chethan_seshadr]

Hi,

I worked in the US from Jan 2000 to May 2007 on H1-B. Moved back to India in June 2007. In March 2008, I withdrew my 401K as well as pension from Fidelity after filing W8-BEN. They did not withhold any tax on my 401K and I received a sum of $65566/- for the same but for the pension amount of $14696 they withhed $4096 at 30%. Fidelity has sent 2 1042S for the same with income code as 14 in both. At the same time, I had some stocks from HP in Computer share which I sold for long term capital gains of $6000... again in 2008.

I am filing my tax now and am already 2 days late. I guess I have to file 1040NR if I am not wrong. I have the following questions...

1. First and foremost, do I have to pay taxes for the early 401K withdrawal and if so at what tax rate? Pub 901, (page 33 - 36) mention that if you are a resident and national of India, you do not have to pay U.S taxes for pensions from U.S Government. What does U.S Government penions mean? Is 401K considered as a U.S. Government pension? Am I really exempt from this tax? Can I pay it to the Indian government? If not do I also have to pay the 10% early penalty fee?

2. What about the pension? Seems like it is already taxed at 30%? If the answer to question 1 is "YES", is this also exempted?

3. For capital gains, page 28 of 1040NR instructions (point #4) mentions that tax is exempt if the period of stay in U.S. is less than 182 days. Since I never stayed in the U.S for the entire 2008 year, am I exempt from paying taxes for this?

Thanks in advance and looking forward to your answers at the earliest.

Chethan

[AtlantaTaxExpert]

1) A U.S. government pension is a pension that is paid by the U.S. government; your 401(k) does not qualify, so, yes, you must pay taxes AND you must pay the 10% Early Withdrawal Penalty.

2) The withholding is a down payment designed to encourage you to file a tax return to recover the refund. I cannot say off-hand whether you are due a refund or if you owe more money.

3) Assuming you purchased the stock during your seven-year stay, you have to pay capital gains tax on the profit from the stock sale.

[MukatA]

Yes, the instructions to Form 1040NR, page 28, under Exceptions (to withholding) it does state that capital gains for nonresident is not subject to the U.S. tax if stay in the U.S. was less than 183 days during the year.

[chethan_seshadr]

Thanks for the reply. Very helpful. One more clarification that I needed was...

1. Can the 401K and pension come under "Income Effectively connected with U.S Trade/Business". In my opinion, according to publication 519, page 11 and 12 and Table 2-1, it comes under Personal Services income and hence is "effectively connected". Am I correct here? What about the capital gains from the stocks that I had purchased during my seven year stay in US while working for HP?

2. If it is effectively connected, then I guess I need to fill them up in page 1 of 1040NR and not on page 4. Is that correct too?

3. "MukatA", are you agreeing that I do not have to pay tax for capital gains since I didn't stay in the US in 2008 for 183 days? Or does it apply for stocks bought and sold in 2008 only as these stocks were bought sometime in 2005 and 2006 while I was in the US.

4. And finally, regarding the exmptions on page 1, can I claim my son as an exemption or not?

Once again, thanks a lot for your very helpful responses.

[AtlantaTaxExpert]

1 & 2) Yes, that is correct, it IS effectively-connected income, so it must be reported on Page 1 instead of page 4.

4) You will file a dual-status return for 2008, so, yes, you CAN claim your wife and child as dependent on the dual-status return.

[chethan_seshadr]

Thank you so much once again for your answers. Sorry to continue on this but the final couple of questions would be...

1. Do I consider myself as a Non Resident Alien or Resident alien for this tax purpose. In
Pure sense, I guess, I would be considered as a Non Resident Alien but since the
Income is from the period when I was a Resident Alien in the US would I be considered
A RA for filing this tax? This leads to the following questions...

a. I read in one of the forms/publications that a NRA cannot take standard deductions.
In my case would be able to take it?
b. Do I file the 1040NR or just the 1040?

2. Also, do I have to file the California state taxes (540/540NR) as the income was during
My stay in CA?

Once again... thanks.
Chethan

[AtlantaTaxExpert]

1) You are a non-resident alien. You CANNOT take the standard deduction, and you must file Form 1040NR.

2) No; since you departed California in 2007, no California tax return is required for 2008.