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My question is: what do I do for my upcoming US tax return? Is this not taxable income the same way it is not taxable income in India?
That amount is NOT reported on your tax return as income - same treatment as in India because if the same will not be finalized - you will be required to refund the money.Such payment is classified as earnest money
see here - DEFINITION of 'Earnest Money' - A deposit made to a seller showing the buyer's good faith in a transaction.
You will report the sale transaction AFTER the sale is finalized and the property is transferred to the buyer.
How will foreign tax credits work now and over time given India is not taxing me on this yet?
If the same income is taxed in the US and abroad - she woudl be entitled to claim a foreign tax credit - thus effectively will avoid double taxation of the same income.
The credit is limited by the US tax liability on the same income - the form 1116 is used to calculate the amount of credit. Means - if tax liability abroad is higher - there will not be US taxes on that income, but if tax liability abroad is lower - in the US you will pay the difference after the credit will be applied.
One more issue which is related to having a foreign bank account - that fact might be subject to FBAR and FATCA filing requirements.
Who needs to file an FBAR? Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2014 generally must file.
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