Guide to Filing Taxes as an American Expat Living in India
When you move abroad to India, you won’t erase your tax liability to the United States. Be sure to look into your filing requirements and which advantages might be available to you so that you understand your responsibilities as an American expatriate.
Contrary to what you might think, American expats do have to file taxes while living abroad in India. Before you file, be sure to establish your residency in India by passing the bona fide residence test or the physical presence test. Doing so will allow you to claim tax advantages only available to American expats living overseas. In addition to filing your American taxes, you might have other reporting requirements if you hold funds in foreign financial accounts. Not reporting your income and addressing your tax liability to the IRS can have serious consequences, even if you live thousands of miles away in India.
Reach out to our tax accountants for American expatriates at US Tax Help to learn more about what we can do for you by calling (541) 362-9127 today.
Do American Expats Have to File Taxes While Living in India?
Even if you move out of the United States and start living in India, you may have a tax liability to America if you remain a citizen. Depending on your income and your tax liability to the United States, you may also have to pay taxes to the Indian government if you are a resident of the country.
US Tax Liability
In most cases, if you move abroad and retain your American citizenship, you will have to file an annual tax return with the U.S. while living in India. The United States has a taxation system based on citizenship, meaning citizens have to report their income and might have to pay taxes, regardless of where they live in the world.
Your taxable income will be based on how much of your income is from foreign sources and how much is from American sources. For example, you might have a higher taxable income if you work for an American company while you live in India. Our tax accountants for American expatriates can assess your primary sources of income against available tax credits for expats to determine your liability. Typically, expats living in India don’t have to pay state taxes unless they retain property in an American state or have other significant financial ties to a state.
India Tax Liability
In addition to having a tax liability in the United States, you may also have a tax liability to India while residing in the country. American expats considered residents of India will be taxed by the Indian government on their worldwide income, including any money they might make from employers outside of the country. If you are not yet an established resident of India, you will only be taxed on money you make from Indian sources.
Establishing Your Residency in India as an American Expat
If you plan on living in India and want to benefit from possible tax deductions for expatriates, it is necessary to establish your residency in the country. To accomplish this in the eyes of the IRS, American expatriates must pass either the bona fide residence test or the physical presence test.
The IRS uses two types of tests to determine if an American taxpayer is an established resident in a foreign country. The first, the bona fide residence test, is the strictest test for establishing foreign residency. You must be present in India for an entire tax year to pass the bona fide test. This doesn’t mean you can’t take trips out of the country, but any trips you do take must be brief and you have to return to India.
The other option for establishing residency in India as an American expat is passing the physical presence test. To pass the physical presence test, you must physically be in India for at least 330 full days out of the year.
Passing either of these tests allows you to confirm your residency in India and reap the benefits of tax advantages for expats living abroad. It’s important to note that not all American expats can pass the bona fide residence and physical presence tests, as they only apply to expats living in countries with income treaties with the United States.
American Tax Deductions and Credits Available to Expats Living in India
While Americans living abroad in India might have a tax liability to both the U.S. and their current country of residence, they may be able to reduce the amount they owe. Our tax CPAs can determine if you’re eligible for certain tax deductions or credits when filing your taxes by assessing your income against the IRS’s perks. Benefits for expats range from the foreign earned income exclusion (FEIE) to the foreign tax credit (FTC).
Foreign Earned Income Exclusion
The foreign earned income exclusion is the top tax benefit available to expats in India. The FEIE allows you to exclude a portion of your foreign income, including income earned in India, from your American taxes, allowing you to avoid paying too much in taxes. For taxes filed in 2023, the FEIE limit is $112,000. If you earn the equivalent of $112,000 or less than that amount from your Indian employer, you can exclude that amount from your taxable income in the United States. According to current exchange rates, the FEIE limit for expats in India is just over nine million rupees. The IRS adjusts the FEIE limit each year for inflation, meaning it typically increases annually. This can hugely benefit expats in India, where the rupee holds significantly less value than the dollar.
Foreign Tax Credit
Double taxation is a serious concern for American expats living abroad. In light of this, the United States offers the foreign tax credit to expats in an effort to prevent double taxation. In claiming the FTC, our tax accountants can report taxes you’ve paid to the Indian government so that you are not taxed twice on the same income. Only certain taxes are eligible for the FTC, including income, excess profits, and wartime taxes.
Foreign Housing Exclusion
An offshoot of the foreign earned income exclusion, the foreign housing exclusion can help expats in India deduct certain household expenses from their American taxes. To calculate your foreign housing amount, our tax CPAs will evaluate qualified household expenses paid for by employer-provided funds against the base housing amount for your area. This tax advantage might affect the amounts of benefits you are eligible to claim while living in India as an American expat.
Filing Deadlines for Tax Forms Completed by American Expats Living in India
Even if all of your income is from foreign sources and can be excluded from your taxes by claiming the foreign earned income exclusion, you have to file the necessary forms and paperwork by the proper due dates. Taking note of filing deadlines is important, especially if you need to file your U.S. taxes while living on the other side of the world in India.
For most tax forms completed by expatriates, the deadline is Tax Day. You can submit any additional forms for claiming deductions, credits, or exclusions to the IRS alongside your annual tax return.
IRS Form 2555 is used to claim both the FEIE and the foreign housing exclusion. To help you claim the foreign tax credit, our tax CPAs will file IRS Form 116 by Tax Day. You might also have to submit IRS Form 8938 if you have foreign financial holdings in India or other countries that exceed $50,000. This is so that you can comply with Foreign Account Tax Compliance Act (FATCA) while living abroad.
In addition to specific tax forms for expats, you must also file your normal tax return using the proper variation of Form 1040 on or before Tax Day for each year you live in India as an American expatriate.
While most tax forms are due by Tax Day, expats living in India can benefit from an automatic two-month extension if they cannot submit their documents and other necessary materials on time.
Additional Reporting Requirements for American Expats in India
In addition to filing taxes, American expats that live in India must inform the IRS and other agencies of their financial information. The United States has mechanisms and reporting requirements in place to monitor American money overseas, namely the Financial Crimes Enforcement Network (FinCEN).
The Financial Crimes Enforcement Network was created to prevent tax evasion and money laundering from American citizens with foreign bank accounts. While FinCEN might not have impacted you when you lived in the United States, it may once you move abroad to India. Any American expat with at least $10,000 across all foreign financial holdings in India or other foreign countries must submit a Report of Foreign Bank and Financial Accounts (FBAR) annually. Expats must submit the FBAR to FinCEN via its online portal each year they hold above the reporting threshold in their foreign financial accounts.
Foreign bank, securities, and investment accounts, as well as foreign stock certificates and pension plans, may be subject to FBAR reporting. Expats that are required to file the FBAR while living in India and fail to might be subjected to a financial penalty of $100,000 or 50% of the money held across all of their foreign accounts, whichever amount is greater. Although the filing deadline for the FBAR is Tax Day, there is an automatic six-month extension for expats who can’t file on time.
What Happens if You Don’t File Taxes While Living in India as an American Expat?
Moving abroad is a hassle, and getting settled into your new country of residence might take some time. But that doesn’t mean the IRS will let you off the hook if you don’t report or pay your taxes. Although there are many advantages for expats living in India regarding taxation, immunity from IRS penalties is not one of them.
Inability to Claim Deductions
If you don’t claim advantages like the foreign earned income exclusion, foreign housing exclusion, or foreign tax credit while filing your taxes as an expat living in India, the IRS won’t penalize you. That said, you also won’t benefit from those advantages and might be subject to double taxation and increased tax liability.
There IRS has a few penalties for failing to file or pay taxes, which vary on a case-by-case basis. If you don’t file your tax returns by the end of the two-month extension period for expats, which typically falls in mid-June, you will likely be penalized. The initial IRS penalty for failure to file is 5% of your unpaid taxes for each month that you don’t file, up to 25%. Past that point, the failure to pay penalty might apply. The failure to pay penalty is lower at first but also maxes out at 25% of a filer’s unpaid taxes. Both types of penalties come with interest.
If you live on the other side of the globe in India, it might be long before you hear from the IRS about your unfiled or unpaid taxes. The longer American expats go without filing or paying their taxes, the more serious the consequences become. The result might be the seizure of certain assets, dings to your credit, passport revocation, or even criminal prosecution. All of these penalties are preventable by filing your taxes on time and properly claiming deductions with help from our tax CPAs. The alternative might result in severe consequences that negatively impact your finances and your ability to remain living in India as an American expatriate.
Learn More About Filing Taxes as an American Expat Living in India
For help filing your taxes, call the tax accountants for American expatriates at US Tax Help today at (541) 362-9127.