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Parallel Universes

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. Aarti has been going through a rough time for a few years, and Saroja wonders if she should move to the US, on a Green Card, to spend time with her and help her raise her family. Amla is a US citizen as well, and she might go back there someday, but at the moment she’s engrossed in her work in Chennai.

Saroja and her daughters are trying to figure out tax implications in the event that Saroja does decide to apply for a Green Card.

Luckily, or as US tax laws would have it, her daughters will not have to pay any tax when they inherit their father’s wealth because he was an Indian citizen. Saroja may be subject to US tax laws, but only 8 years after her Green Card is issued and only if her total estate value is under $11.8mm. However, if Saroja were to sell her property after getting a Green Card, she will be subject to Indian taxation rules. Since these properties are Indian locus assets, she would first be subject to Indian capital gains computations.

Unfortunately, things get more complex in the US. As a Green Card holder, Saroja should also declare the capital gains on her US tax returns. The capital gains taxes paid in India can be used to offset the taxes in the US. However, the US uses the FMV on the date of death as the cost basis. This could result in markedly different computations for US vs Indian taxes with Indian capital gains being higher.

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.

All of these factors contribute to significantly different capital gains computation in India and US. There is opportunity for each of Saroja’s properties to be evaluated in isolation and the most optimal reinvestment option chosen in India such that she gets the most utilization of any capital gains tax paid in India as a credit in the US leaving as little as possible to be paid to the US. If Saroja does decide to get a Green Card and spend more time with her daughter Aarti in California, perhaps she should sell the properties with the most gains before she leaves India to reduce her US tax exposure. Also, the US imposes a tax called 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. She might need a real estate professional to help her through this. This is a lot more reality-based nitty gritty to consider in comparison to the philosophy of her Bhagavad Gita classes that she enjoys so much.

Fortunately, the situation with her partnership in her husband’s company is slightly less complex. While her share of income will have to be reported to the IRS, taxes paid by Indian partnership will be allowed as a credit in the US. Essentially, at her income levels, Saroja’s Indian taxes will more than offset the US taxes.

Thinking about all of this from pure financial terms wasn’t the only task ahead, although it was reassuring to Saroja to know that moving to the US on a green card wouldn’t put her finances in jeopardy. However, there’s also her life to consider – is she willing to give up this weather and the routine she worked so hard to create? Isn’t life supposed to be lighter and fun in your 60s and 70s? How does she reconcile that with the need and desire to help her daughter in California, and to some degree, put both her daughters at ease that she can live in the US where they will also spend the greater part of their lives?

Satyam and his children

Satyam had spent most of his life working hard and fulfilling what he saw was his responsibility: providing for his family. He did well, career-wise, and as with most of us with busy lives, time whizzed by. 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 and that has left him with a melancholy longing. Many days are spent admiring his garden while sipping coffee, reading the papers, going for walks in the neighbourhood, and listening to the news. He often feels pangs of sadness, but not quite regret because he doesn’t know how he would do it all differently, when he thinks of the hours spent at work and time with his family sacrificed as a result. How is one supposed to do it all when time is limited?

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.

Considering the financials of the move, Satyam first ran through his assets in his mind. 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, were he to get a Green Card and move to the US? First one would have to look at the size of his investments in each of the buckets to determine FATCA filing obligations. From an Income Tax reporting standpoint, once the Green Card comes through, he would need to file tax returns in the US combining his income in both countries. He might have no additional liability as a result of the effective India rate being higher than the US at those income levels – 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 period, and if 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 as long as the total value is under the prevailing lifetime exemption (today it is 11.2mm, and expected to drop to sub 6mm levels in 2026). It’s probably best that he gets his estate planning in order, Satyam thinks to himself, and considers making settlements in favor of the children, before he leaves India and before he gets the Greencard, to ensure a seamless transfer to the kids after his lifetime with no current income tax obligations.

So all finances pondered, it seems like Satyam’s move to the US won’t hurt him or his sons financially. His kids really want him to move, so now it might be a question of taking the time to process this big change, and move onto the next era of his life.