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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 3763
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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My query is for filing the Income Tax Return for the year of

Customer Question

My query is for filing the Income Tax Return for the year of 2013 to file sometime in the coming first quarter of 2014 or between 1st Jan., 2014 to 15th April , 2014 . Me & my family are indian citizen living in USA on US Green Card . Please clarify the below :

(1) Suppose if i open a Term Deposit or Fixed Deposit of $8,000 ( in India ) in the name of my kid of 11 yrs old on 1st August , 2013 for the period of 1 year @ 10% p.a. rate of interest , then in which year's US Income Tax Return ( 2013 or 2014 ) should i show this income of interest of $800 i.e., 10% of $8,000 FD in the following 2 situations :

(a) If interest of $800 is paid by bank at the end of 1 year i.e., at 31st July , 2014 ?

(b) If interest is paid quartely i.e., $200 at 31st Oct., 2013 and again $200 at 31st Jan., 2014 and again $200 at 31st April , 2014 and in last $200 at 31st July , 2014 .

(2) Is it right that if the unearned income in the name of my kid (assuming that there is only unearned income in the name of my kid and no any other income) is within $1,000 , then neither me as parent nor my kid is required to report it anywhere to IRS and no tax payment on it and thus it is tax-free as $1,000 is the Standard Deduction given to a kid in a year ($1,000 for 2013) . Thus , no need to report ?

(3) What if the unearned income in the name of my kid (assuming that there is only unearned income in the name of my kid and no any other income) is $2000 or in between $1000 to $2000 ?

(4) What is called Kiddi Tax and is it always 10% ?

(5) There are two things - a) Interest or income earned and b) Interest or income actually received , which one is taxable and in which year ?

(6) Will this limit of $1000 standard deduction for kids go on increasing every year or it might decrease also in some coming year ?

(7) Do parents manipulate their kids saving or investment accounts in such a way that the unearned income ofeach child should remain less than $1,000 in a year so as not to report to IRS and total deposits in kid's account should not cross $10,000 anytime (if account is opened outside USA ) so as to avoid the work of filing FBAR ?
Submitted: 9 months ago.
Category: Finance
Expert:  Rakhi Vasavada replied 9 months ago.

rakhivasavada :

Dear Friend,

rakhivasavada :

Hello and welcome. Thank you for using Just Answer. Kindly remain online while I prepare your reply.

rakhivasavada :

To begin with, the deadline for filing Individual returns would be April 15th 2014. However, IRS would start processing returns from January 30 2014. The following is an excellent reference for you.

http://taxes.about.com/od/Federal-Income-Taxes/qt/tax-deadlines.htm

rakhivasavada :

1. You would include your interest income in 2014 returns. Because, it would be in 2014 that you would actually receive interest. In 2013, it would have just accrued.

rakhivasavada :

However, if the interest is paid out by the bank QUARTERLY, then you would show two quarters interest in 2013 and the another two in 2014

rakhivasavada :

Yes, assuming that there is no other income, unearned income below $1000, neither YOU or the KID is required to report the same.

rakhivasavada :

Yes, that will be no tax payment on it as such and thus it is tax free as $1000 would be the standard deduction given to a kid in the given year 2013

rakhivasavada :

Now, if the unearned income is above 1000 but below $2000 -- For 2013, the first $1,000 of unearned income a child or college student earns will be offset by the $1,000 standard deduction (assuming the child has no earned income), and the next $1,000 of such unearned income will be taxed at the child’s tax rate., i.e. 10%

rakhivasavada :

EARNED income is taxable

rakhivasavada :

The limit of $1000 is not likely to decrease.

rakhivasavada :

I would not call it manipulate. You can certainly call that "Tax Planning". YES, parents can plan investments of kids / each child in such a way that the income remains below $1000 limit.

rakhivasavada :

Are you there ? Is there anything more I can help you with ?

rakhivasavada :

I am sure this would help.

You may please leave a positive rating if this helps as that is the only way we receive credit for assisting you. Alternatively feel absolutely free to revert with more queries if you have.

Warm Regards...

Expert:  Rakhi Vasavada replied 9 months ago.
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Customer: replied 9 months ago.

Thanks , please clarify :


 


(1) So when we actually receive any interest or unearned income , we need to report it in the Income Tax Return of that year only and it does not matter when was this interest accrued or earned like if i open a saving account on 1st Feb., 2013 and its interest is being earned or accrued from Feb. to Dec. month of 2013 but because i get only annual interest at the end of one year and actually i received the interest on 31st Jan., 2014 ............ so it will not be shown or taxed in the Income Tax Return of 2013 but will be shown in the Return of 2014 , ...................... am i right ?


 


(2) As you told above that EARNED income is taxable , so has interest not been earned in 2013 in my above example but we will tax or show it in the return of 2014 when it is actually received in our hands ? .............. i hope Earned or Accrued are the same thing but we show or tax it only when actually Received - There are two things - a) Interest / income earned or accrued and b) Interest / income actually received , which one is taxable and in which year ?


 


(3) What is called Kiddi Tax (is 10% rate of tax ) and is it always 10% ?


 


(4) If i buy some Insurance Plan for my kid in India in which i will need to pay annually around Rs.20,000 a year for 10 yrs and after that my kid will get around Rs.30,000 each year till his life , ............. what will be my tax liability in such situation ?


 


 


 


 

Expert:  Rakhi Vasavada replied 9 months ago.
Dear Friend,

1. Yes.. You are right.

2. Interest actually received would be taxable.

3. Under the kiddie tax, children pay tax at their own income tax rate on unearned income they receive up to a threshold amount ($2,000 in 2013; up from $1,900 in 2012). Yes.. it is 10% today and not likely to change.

4. You will be able to claim them on your taxes, but their proceeds later in the hands of your children would be taxed.

I am sure this would help.

You may please leave a positive rating if this helps as that is the only way we receive credit for assisting you. Alternatively feel absolutely free to revert with more queries if you have.

Warm Regards...
Customer: replied 9 months ago.

Thanks , going to accept your answer .


 


(1) Is income Accrued or Earned the same thing , but it is taxed only when it is actually received irrespective of the time of its accrual or earning ?


 


(2) In respect of my 4th Question Point above , please clarify what does it mean You will be able to claim them on your taxes because as per the policy terms i will have to pay annual premium of Rs.20,000 for coming 10 yrs and from coming 8th year insurance company will give Rs.30,000 each year till the life of kid . So in the coming 8 yrs i will only pay premium for my kid and 9th year onwards unearned income will start for my kid . Is FBAR filing required for this policy taking ?

Expert:  Rakhi Vasavada replied 9 months ago.
Dear Friend,

Hello and welcome again. Thank you for your follow up questions.

1. Yes, that is right. Income accrued is that you are 'entitled" to that income, but you are yet to actually receive it. Once you receive it, it becomes "earned" income. It is taxed when you actually earn it / receive it.

2. Regarding the insurance purchased in India, you will have to file your returns (even if they are NIL Returns) in India and you will claim the premiums paid there. From the 8th year, when the company starts paying you Rs. 30,000, the income will start for your kid. FBAR reporting IS required.

Kindly see the below referred link.

http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements

I am sure this would help.

You may please leave a positive rating if this helps as that is the only way we receive credit for assisting you. Alternatively feel absolutely free to revert with more queries if you have.

Warm Regards...
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 3763
Experience: Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
Rakhi Vasavada and other Finance Specialists are ready to help you
Customer: replied 9 months ago.

 


In respect of your above 2nd answer , i have 0 income in India now and if i have any insurance policy on which i pay regular yearly premium , do i need to file Income Tax Return in India too ?

Customer: replied 9 months ago.




 




In respect of your above 2nd answer , i have 0 income in India now and if i have any insurance policy on which i pay regular yearly premium , do i need to file Income Tax Return in India too ?


Expert:  Rakhi Vasavada replied 9 months ago.
Dear friend,

Thanks for your follow up question.

Yes.. you will file NIL returns in India as a non resident.

I am sure this would help.

You may please leave a positive rating if this helps as that is the only way we receive credit for assisting you. Alternatively feel absolutely free to revert with more queries if you have.

Warm Regards...
Customer: replied 9 months ago.

two years back when i was shifted to USA , my CA there in New Delhi clearly told that as you dont have any income in India , you dont need to file any return in India and moreover indians having less than Rs.1,80,000 income in a year , dont need to file tax return as Rs.1,80,000 is exempted income limit . What is that ?

Expert:  Rakhi Vasavada replied 9 months ago.

Dear Friend,

 

I find it difficult to agree because you would not file any return in India if you do not do any financial transaction. If you would be buying a insurance policy, to the best of my knowledge, you would be required to file nil returns as your income would be below threshold limits. These are threshold limits are of taxable income, not the threshold limits for filing returns.

 

Otherwise, any PAN holder is required to file returns, even if they are nil returns. I am sure this would help.

 

You may please leave a positive rating if this helps as that is the only way we receive credit for assisting you. Alternatively feel absolutely free to revert with more queries if you have.

 

Warm Regards...

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