Comprehensive Tax Filing Process for US-Based NRIs

 For Non-Resident Indians (NRIs) residing in the United States, tax filing can be a complex process due to multiple compliance requirements. Understanding the key steps ensures compliance with the IRS regulations and helps NRIs take advantage of deductions and tax credits. Here is a step-by-step guide to the tax filing process.

Step 1: Determine Tax Residency Status

The IRS classifies individuals as either resident aliens or non-resident aliens based on the Substantial Presence Test (SPT):

• If you have been physically present in the US for 183 days or more over a three-year period (including all days in the current year, 1/3 of the previous year, and 1/6 of two years prior), you are classified as a resident for tax purposes and must report global income.

• If you do not meet the SPT, you are a non-resident alien (NRA) and only need to report US-sourced income.

Step 2: Collect Required Tax Documents

Having all relevant documents ready can streamline the tax filling process for us nri. Essential documents include:

• Form W-2 (for salaried employees)

• Form 1099 (for freelance income, interest, and dividends)

• Form 1042-S (for income earned as a foreign individual in the US)

• Bank statements and investment summaries

• Foreign bank account details (for FBAR and FATCA compliance)

• Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)

Step 3: Determine Taxable Income

NRIs must classify and report their income as per IRS regulations:

• Resident Aliens: Must report worldwide income, including salary, rental earnings, capital gains, and dividends.

• Non-Resident Aliens: Only US-sourced income is subject to taxation.

Step 4: Utilize Tax Deductions and Credits

NRIs can claim various deductions and credits to minimize their tax liability:

• Foreign Earned Income Exclusion (FEIE) - Form 2555: Excludes up to $120,000 of foreign income (as per 2023 limits).

• Foreign Tax Credit (FTC) - Form 1116: Offers credit for taxes paid to foreign governments, reducing double taxation.

• Standard or Itemized Deductions: Helps lower taxable income based on expenses.

Step 5: Report Foreign Accounts and Assets

NRIs must disclose overseas financial holdings in compliance with IRS regulations:

• FBAR (FinCEN Form 114): Required for foreign accounts exceeding $10,000 at any point in the year.

• FATCA (Form 8938): Mandated for foreign assets over $50,000 in total value.

Step 6: Select the Correct Tax Form

NRIs must file the appropriate tax form based on their residency status:

• Form 1040: For resident aliens reporting worldwide income.

• Form 1040-NR: For non-residents reporting only US-sourced earnings.

• State Tax Returns: If applicable, NRIs must file state tax returns in their state of residence.

Step 7: File the Tax Return

There are multiple ways NRIs can file their taxes:

• IRS Free File (for those with income below $73,000)

• Online Tax Filing Services (TurboTax, H&R Block, etc.)

• Professional Tax Consultants (recommended for complex cases)

Step 8: Meet Tax Deadlines

To avoid penalties, NRIs should be aware of IRS deadlines:

• April 15: Standard filing deadline.

• June 15: Automatic extension for NRIs residing outside the US.

• October 15: Extended deadline if Form 4868 is submitted.

Step 9: Pay Taxes Owed

NRIs can make tax payments through:

• IRS Direct Pay

• Electronic Federal Tax Payment System (EFTPS)

• Bank Wire Transfers

Step 10: Maintain Records for Future Reference

Keeping copies of tax returns, supporting documents, and payment receipts for at least three to six years is important for compliance and potential audits.

Conclusion

The tax filing process for NRIs in the US requires careful planning and adherence to IRS regulations. Professional assistance can help optimize tax benefits while ensuring compliance. Dinesh Aarjav & Associates provides expert tax advisory services tailored to the needs of NRIs.