Taxability in US of foreign income

I and my spouse have recently been granted green card under family sponsored programme. I am about 80 years and my spouse is about 75 years old. We are citizens of India having worked there till retirement. We have an apartment in India and we have investments in bank deposits which earn interest of about $ 26,000 per annum. It includes dividend income from Indian companies of $ 300. We file income tax returns in India individually and pay taxes there. We have no income in the United States. We are staying with our children who are US citizens. We may go back to India next year and by which we do not lose the resident status there. At the same time we satisfy the 183 days rule in the US. We have no earned income in India except that my spouse gets government pension which is equivalent to about $ 3000 and it is included in the aforesaid income of $ 26,000. The total taxes we paid in July 2013 in India amounts to about $ 1000. We have no insurance in the US. We wish to know the following:

(i) Whether the interest, dividend and pension income of $ 26,000 is exempt from tax in the US?

(ii) Have we to file a tax return in the US in 2013 and if so in which form.

(iii) Where should we disclose the foreign income of $ 26,000 in the tax return?

(iv) If there is a tax liability, what is the amount of such liability?

(v) Can we use the currency exchange rate to be notified by the treasury in December 2013 for converting the foreign income?

(vi) Is there is any other obligation apart from reporting our foreign assets to the treasury?

Answer:

1. NO; as you mentioned, QUOTE,” I and my spouse have recently been granted green card under family sponsored programme.”as US residents, you are subject to US taxes, fed and state taxes on your US source and world wide income(I mean your income that you /your spouse earn in India).However, since you paid taxes to Indian taxing authority(ies) on your income that you/your spouse earned in India, you may claim foreign tax credit on your US returns on the taxes that you paid to India. The foreign tax credit is intended to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the US and the foreign country from which the income is derived. Four tests must be met for the tax to qualify for the credit: 

1. The tax must be a legal and actual foreign tax liability;
2. The tax must be imposed on you;
3. You must have paid or accrued the tax, and;
4. The tax must be an income tax (or a tax in lieu of an income tax). Qualified foreign taxes do not include taxes that are refundable to you, that are used to provide a subsidy to you or someone related to you. To choose the deduction, you must itemize deductions on Form 1040, Schedule A. To choose the foreign tax credit you generally must complete Form 1116 and attach it to your Form 1040 . HOWEVER, as long as you are CA full residents, then you can’t deduct capital gain tax that you paid to India on your CA return, so in CA, residents are subject to double taxation on their capital gain income. As you are a cash basis taxpayer you can only take the foreign tax credit in the year you pay the qualified foreign tax unless you elect to claim the foreign tax credit in the year the foreign taxes are...Read more...