INTRODUCTION
This case study meets Saroja and Satyam, both Indian citizens and widows with children in the US. We will discuss some of the factors that they will consider while deciding to move to the US on a Green Card.
From Saroja’s Perspective
What Saroja loved most about her life in Chennai, aside from her family, was her activities; her morning walks in the neighbourhood during which she’d catch up with many neighbours, leisurely cook her lunch, and her afternoon Bhagavad Gita classes. Her husband had passed away two years ago and she misses him, but she decided to live a full life and made room for friends and hobbies. On Sundays, she drives out to her farm where she lovingly tends to her plants while the smell of fresh earth reminds her of her childhood and the decades after. Nostalgia is bittersweet.
Saroja is a passive partner in her husband’s firm, and she owns a few properties in India (including that beautiful farm), fixed deposits that earn interest – overall, around $4mm in assets and another $100,000 in annual income.
Saroja’s younger daughter, Amla, lives in Chennai and her older one, Aarti, lives in California. Saroja is thinking of moving to the US on a Green Card to spend time with Aarti and help her raise her family. Amla is a US citizen too, and she might go back there someday, but she’s engrossed in her work in Chennai.
Problem
Saroja and her daughters want to figure out the tax implications if Saroja does decide to apply for a Green Card.
Solution
Saroja is subject to US tax laws only 8 years after her Green Card is issued and only if her total estate value is under $11.8mm. She should sell her properties with the most gains before she leaves India to reduce her US tax exposure.
Saroja should also declare her Indian capital gains on her US tax returns, which can offset the US taxes. Also, while her share of income from her husband’s company will have to be reported to the IRS, taxes paid by Indian partnership will be allowed as a credit in the US, offsetting the US taxes.
From Satyam’s Perspective
Satyam had spent most of his life working hard and fulfilling what he saw was his responsibility: providing for his family. Now, at 70, Satyam finally gets to enjoy some of the fruits of his life by slowing down and observing time more mindfully. Sadly, his wife Meenakshi passed away a year ago. Many days are spent admiring his garden while sipping coffee, reading the papers, going for walks in the neighbourhood, and listening to the news.
Satyam has two sons who live in the US and who are keen on him joining them there, especially after the passing away of their mother. Satyam does like the idea of spending more time with them and their families, but living in India is all he has ever known, and it’s tough to make an adjustment at the age of 70.
Problem
Satyam needs to consider the financials of the move and his assets. He has taxable investment income in India with his investment portfolio consisting of equities, mutual funds and FDs. He has some real properties in India, so what would the financial repercussions be if he were to get a Green Card and move to the US?
Solution
First, he would have to look at the size of his investments in each of the buckets to determine FATCA filing obligations. Once the Green Card comes through, he would need to file tax returns in the US combining his income in both countries. He should have no exit tax obligations for the first 8 years that he holds his Green Card, after which he will be liable to pay an exit tax if his net worth is USD 2mm.
He should make settlements in favour of his children before he leaves India and gets the Green Card to ensure no current income tax obligations after his lifetime.
EXPLANATION
If Saroja sells her property after getting a Green Card, she is subject to Indian taxation rules and capital gains computations.
It’s important to note that capital gains computation, for US purposes, allows one to use the exchange rate that was prevailing on the date of purchase and date of sale respectively. This, indirectly, is recognition for the loss in exchange rate while computing the capital gains.
However, the US uses the FMV on the date of death as the cost basis. The US also imposes the Net Investment Income tax that will kick in after one year with a significant sale. This is 3.8% additional tax to the feds that cannot be credited with any tax paid in India. All these factors contribute to significantly different computations for taxes and capital gains in India and US.
Since the effective India rate is higher than the US at his income levels, Satyam might have no additional liability. In fact, it almost always is the case as Indian tax slabs accelerate rapidly than for the corresponding income in the US.
As far as estate and exit tax consequences go, Satyam should have no exit tax obligations for the first 8 years that he holds his green card (exit meaning a surrendering of the green card). If he exits post that time and his net worth is USD 2mm, he will be liable to pay an exit tax to the IRS computed on the net unrealized gain on his assets over approximately 700K at long term capital gains rates. And after his lifetime, Satyam’s assets will pass to his children free of estate tax if the total value is under the prevailing lifetime exemption (today it is 11.2mm and expected to drop to sub-6mm levels in 2026).
Contact Ventura Pranas, for such customised solutions to complicated tax-related issues.
