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taxmanrog
taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 385
Experience:  Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
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This is my query for filing the Income Tax Return for the year

Customer Question

This is my query 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) Should i show the income / interest earned in India in my US Income Tax Return whether i keep that income / interest in India in Indian Rupees or i get it repatriated it to my US Bank Account in Dollars ?

(2) If i earn some interest or income in India , at which Exchange Rate how will i show it in my US Income Tax Return in the following two situations :

(a) The USD-INR Exchange Rate of that day at which i actually receive that interest or income ?
or
(b) The USD-INR Exchange Rate of the day when i am filing my US Income Tax Return ?

Give me some link from where i can take the exchange rates recognised by IRS .

(3) Will the rule of FBAR even apply in that situation also when i open my NRE or NRO Account in some US Bank branch located at New Delhi , India ?

(4) If my son has an Life insurance policy in India , will it also be considered for FBAR Filing limit ? If yes , then how can we valuate it if a person is paying annual premium of Rs.20,000 from last 8 yrs but policy will start giving return of Rs.25,000 per yr after if that person keeps on paying premium for 12 yrs continously ?

(5) I have $ 0.12 or 12 Cents Interest from one of my Bank Saving Account in a year , $2.16 from another Bank Saving Account in a year , etc. . Do i need to report both or none in my US Income Tax Return ?
Submitted: 1 year ago.
Category: Tax
Expert:  taxmanrog replied 1 year ago.
Welcome to Just Answers! Thank you for giving me the opportunity to answer your questions! I will do my best to help!

(1) Should i show the income / interest earned in India in my US Income Tax Return whether i keep that income / interest in India in Indian Rupees or i get it repatriated it to my US Bank Account in Dollars ? If you are a Green Card holder, or Resident Alien, you need to report your worldwide income, including interest earned outside of the United States, when it is earned. It does not matter if it is ever repatriated or just kept/spent outside of the US. So yes, you would have to report your interest income earned in India.

(2) If i earn some interest or income in India , at which Exchange Rate how will i show it in my US Income Tax Return in the following two situations :

(a) The USD-INR Exchange Rate of that day at which i actually receive that interest or income ?
or
(b) The USD-INR Exchange Rate of the day when i am filing my US Income Tax Return ?
Individuals are CASH BASIS taxpayers, meaning that they pay tax when the interest is paid to them or they have a right to take it. So you would use the interest rate that was in effect on the day that the interest is paid to you. If it is paid multiple times during the year, the IRS allows an annual average exchange rate.

Give me some link from where i can take the exchange rates recognized by IRS. The IRS has no official exchange rate. There are numerous sites available. Personally, I have over 100 clients living and working outside of the US, and for my clients I use www.oanda.com. It allows daily, monthly and annual exchange rates. I have yet to have a problem with the IRS over these rates.

(3) Will the rule of FBAR even apply in that situation also when i open my NRE or NRO Account in some US Bank branch located at New Delhi , India ? That will depend on the bank. If it is Chase Bank, for example, and they actually have a US branch in India, then no, it would not be required. However, it has been my experience that most US banks have "correspondence branches" or local corporations (in this case, India) that handle the local banking. So your Non-Resident Ordinary and your Non-Resident External accounts would be subject to the FBAR rules, and you would have to, depending on the size, file the TDF 90-22.1 and/or the Form 8938.

(4) If my son has an Life insurance policy in India , will it also be considered for FBAR Filing limit ? If yes , then how can we valuate it if a person is paying annual premium of Rs.20,000 from last 8 yrs but policy will start giving return of Rs.25,000 per yr after if that person keeps on paying premium for 12 yrs continuously ? How old is your son? Is he claimed by you as a dependent? The amounts that you pay into the policy give you basis in the policy. If it will start paying you back, it sounds like a type of annuity. You would recapture earnings first, then basis. For how many years would the policy pay the Rs.25k after year 12? Do you still contribute the Rs.20k each year during the years you are receiving the funds? This is important to know, as you need to estimate how much of the return you receive is earnings and how much of it is principal being returned to you.

(5) I have $ 0.12 or 12 Cents Interest from one of my Bank Saving Account in a year , $2.16 from another Bank Saving Account in a year , etc. . Do i need to report both or none in my US Income Tax Return ? Technically, the IRS requires you to report all interest earned. However, anything under $0.50 would be rounded down to zero, and banks are not required to report anything under $10 on a Form 1099-INT. However, if you know that you have $2.16, I would still report it. If you don't, the IRS probably won't catch it, and even if they did, I doubt they would come after you for the tax on it!

I hope that I have answered your questions! If I have, please rate me positively! If you have any more, I would be glad to answer or clarify anything. Just let me know.

Again, thanks!

Customer: replied 1 year ago.

(1) In reference to above Q. # XXXXX , As i understand that in case of an individual like me , interest or income is taxed on cash basis i.e., whenever i actually receive interest , it will be taxed then irrespective of the fact when was it earned or due to me , for example , if i earned some income in 2011 but i received that income actually in 2013 , then it will be taxed in 2013 only and not in 2011 ................................. , am i right ?


 


(2) In reference to above Q. # XXXXX , As i understand that i need to use the USD-INR Exchange Rate of that day on which the income in INR is received by me and not of that day when i am filing my Income Tax Return like if i receive interest in INR on 31st Oct , 2012 ......... then i will use the exchange rate in market on 31st Oct., 2012 ...................... am i right and what if i receive interest in INR (Indian Rupees) again on 30th Nov., 2012 ?


 


(3) In reference to above Q. # XXXXX , FYI : My son's age is 10yrs old , Son is claimed as dependent , I have to pay Rs.20,000 per year for first 12 yrs only and the return of Rs.25,000 per year will start from 13th year onwards and this return per year will continue till the life of 97 yrs age of my son (Note : After first 12 yrs , i will not require to pay any premium and will only receive the return from 13th yr onwards till life) ?

Expert:  taxmanrog replied 1 year ago.
For question #1, the cash basis taxpayer is taxed when he receives OR HAS THE RIGHT to receive the interest. I have had taxpayers not turn in coupons on bonds that are due and try to not claim them as interest. Or not bringing in a passbook to get a savings account updated for interest, or not cashing a dividend or interest check. All are in fact taxable income, the tax is imposed when they had the RIGHT to receive the income.

For question #2, you are correct. You use the exchange rate on the date that you receive or have the right to receive the income.

For #3, where can I get one of these? That is better than any annuity that I have seen! You will put in Rs.240k, and stand to receive well over Rs.2 million! The income stream would be treated as an annuity. As such, the IRS considers your first withdrawals to come entirely from interest and earnings. That means you'll be taxed on all of your withdrawals until you take out all of the interest and earnings. Only after that can the principal be withdrawn without taxes. Given the large amount, and the number of years involved, your withdrawls will be taxable for probably 85 of the 97 years.

I hope this helps and answers your questions! If you have more, please feel free to ask. Also, please don't forget to rate me if this answer was helpful to you!

Again, thanks!
Customer: replied 1 year ago.

In respect of Insurance Policy , i am still not clear about will it be included in FBAR Limit of $10,000 , if yes , then how and at which exchange rate ?


 


So far as i understand that the return of Rs.25,000 (which will start from 12th yr onwards) will be taxed as normal as other income or interest is taxed if i earn in India ................. but still the question is what about the policy amount where i am paying premium of Rs.20,000 each year until 12 yrs ?

Expert:  taxmanrog replied 1 year ago.
The insurance policy should have a cash value amount that is reported to you each year. That is the value that is put on the FBAR. It is reported each year at the exchange rate at the end of the year. The Rs.25k that you get each year, once you start receiving it, is reported at the exchange rate on the date you receive it. If you receive it monthly, it is acceptable to use an annual average.

The Rs.20k that you paid for the first 12 years is considered your basis. You recover basis after all of the earnings are reported as income. That is how deferred annuities, which is basically what you have, are taxed. So first you will pay tax on the Rs.25k that you get each year. If you are paying any tax in India on these proceeds, the Indian tax can be used as a foreign tax credit to offset the US tax on this income, as it is considered foreign-sourced.

I hope this helps! Feel free to ask any more questions if this is not clear. And again, if I was helpful, please rate me highly!

Thanks!
Customer: replied 1 year ago.

Thanks for your clarification . I am going to accept your answer with excellent , please clarify the below also in this regard :


 


(1) Does the Cash Value Amount mean the Cash Surrender Value of the Policy which are listed for each year for the life of the policy ? The policy comes with a list showing different cash surrender value of each year which can be paid to the policy holder if he wants to cancel or surrender the policy before the complete life period of that policy . As i see cash surrender value is nil in first 2 yrs of policy and then it starts with small small amounts on increasing basis each year but it is always far less what we have paid as premium .


 


(2) As i understand that i need to consider this cash surrender value of the policy each year for FBAR filing only and i will pay tax on the return of Rs.25,000 each year from that year when it will start ? If cash surrender value of policy (including all other funds outside US) is less than $10,000 in a year , i dont need to file FBAR and if the policy return of Rs.25,000 + other unearned income in the name of my kid of 11yrs old are less than $950 in a year , i dont need to report it also ................................ am i right ?


 


(3) As i understand that cash surrender value of the policy will be used for FBAR filing at the USD-INR Exchange Rate available at the end of the year i.e., at 31st December of that year ......................... am i right ?


 


(4) I dont understand what does BASIS mean as you told above and does it have any importance in my US Tax Filing because i will pay the premium of Rs.20,000 out of my US after tax salary ? Please clarify these lines above - The Rs.20k that you paid for the first 12 years is considered your basis. You recover basis after all of the earnings are reported as income. That is how deferred annuities, which is basically what you have, are taxed.

Expert:  taxmanrog replied 1 year ago.

(1) Does the Cash Value Amount mean the Cash Surrender Value of the Policy which are listed for each year for the life of the policy ? The policy comes with a list showing different cash surrender value of each year which can be paid to the policy holder if he wants to cancel or surrender the policy before the complete life period of that policy . As i see cash surrender value is nil in first 2 yrs of policy and then it starts with small small amounts on increasing basis each year but it is always far less what we have paid as premium . The Cash Surrender Value is supposed to be your premium less the cost of insurance. This is the amount that is available for "investment" and this should be your basis. It is what is nontaxable when it is returned. However, given the return (the Rs.25k per year), the Cash Surrender Value should be close to the amount you put into it each year, unless they are using some extraordinarily high rate of return!

(2) As i understand that i need to consider this cash surrender value of the policy each year for FBAR filing only and i will pay tax on the return of Rs.25,000 each year from that year when it will start ? If cash surrender value of policy (including all other funds outside US) is less than $10,000 in a year , i don't need to file FBAR and if the policy return of Rs.25,000 + other unearned income in the name of my kid of 11yrs old are less than $950 in a year , i don't need to report it also ................................ am i right ?
You are correct that if the Cash Surrender Value is less than $10k, it is not subject to FBAR. However, if the second part is incorrect. Just because the Rs.25k is less than $950, you still have to report it, it is just less than the standard deduction for your child. He will still need to file a tax return.

(4) I don't understand what does BASIS mean as you told above and does it have any importance in my US Tax Filing because i will pay the premium of Rs.20,000 out of my US after tax salary ? Please clarify these lines above - The Rs.20k that you paid for the first 12 years is considered your basis. You recover basis after all of the earnings are reported as income. That is how deferred annuities, which is basically what you have, are taxed. Basis is something that you invest. It is your cost in the product. For example, if you paid $100 for a share of stock, that $100 is your basis, your cost. If you sell it for $125, you are allowed to deduct your cost, or $100, from the sales proceeds and only pay tax on your $25 gain.

The insurance company that you bought this from should be telling you what the earnings are once you start to receive the yearly amounts. The yearly amounts are taxable, as they are considered "earnings" or "profit" over and above your basis. Each year, while you pull come out, the product will continue to earn. Over the years, as the cumulative amount you have withdrawn increases, the amount left to "earn" will decrease, until eventually there is only your original investment, or "basis" left. At this point the distributions are tax free.

Again, thank you for this question! It is more in depth than the usual question, and I appreciate the opportunity to answer it!




taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 385
Experience: Licensed CPA, MA, MST with 29 year's experience. Teach Accounting and Tax courses at Masters level.
taxmanrog and other Tax Specialists are ready to help you
Customer: replied 1 year ago.

I have accepted your answer . Thanks ............ Please clarify in last :


 


I was told by some CPA few months ago that if the total unearned income of my kid of 11yrs old (assuming there is no earned income) is less than $950 in a year , then neither me as a parent nor my kid is required to report it and it is tax-free and no return is required for it to file ...................... is it not right or what ?

Customer: replied 1 year ago.

I have accepted your answer . Thanks ............ Please clarify in last :




 




I was told by some CPA few months ago that if the total unearned income of my kid of 11yrs old (assuming there is no earned income) is less than $950 in a year , then neither me as a parent nor my kid is required to report it and it is tax-free and no return is required for it to file ...................... is it not right or what ?


Expert:  taxmanrog replied 1 year ago.
The other CPA is technically correct. However, if a return is never filed, the statute of limitations never starts running. Therefore, the IRS could come back years from now and say that the return should have been filed. What if the exchange rates fluctuates such that at the time the interest is received, the amount is under $950, but at the end of the year, or even a couple years later, the amount is over $950? Then it is up to you to go back and reconstruct everything and prove it to the IRS.

It is much easier to just file a return and show nothing due than it is to try to fight something later.

Thank you for the rating! It is greatly appreciated! Have a great week!

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