r2i forum

Suba,

I need to look up the taxability rules of NC for a six month resident and more importantly their taxation if any on IRA / 401K proceeds. So I will post more tomorrow or later today if I get time (most probably tomorrow)

Also, in the meantime, I suggest that go to MSN R2I finance sections and look in the documents section, there will be an RNOR calculator. Use that to calculate your RNOR years and post that. The RNOR calculator is in the documents folder which you can access by clicking documents on the left panel of MSN Finance forum or it may be MSN R2iclub (look in both). We will port that document here sometime next week.

Desi,

Please take your time to reply. It's not urgent.

I calculated using the RNOR calculator in r2ifinance website. It says I'm RNOR for 2007, 2008, 2009 (Fiscal year of tax return).

Please remember that my r2i date is a hypothetical date only. I may return a bit earlier or later. It depends on when I get a job. It seems that if I return anytime before July 1 I'll have just two years of RNOR status. So please let me know what the impact would be if I have 2 years vs 3 years of RNOR status.

BTW, I've been going through the r2ifinance threads a lot, but I still don't understand much of the financial stuff. I never knew I could be this dumb :rolleyes:

Thanks

Dont worry about tax dates too much. Worry about other important things. Getting a good job, finding a nice place to live, are more important.

Few hundred $ tax savings should not let you take your eyes off the ball..

Suba,

I had frankly forgotten this. Thanks for reminding.

OK, Here is what I think you need to do.

1. When you R2I, plan to get a REP for yout GC (Re entry permit)

2. Plan such that prior to your leaving USA, you accomplish a direct trustee to trustee (or it is also called custodian to custodian) rollover of your 401K to IRA. For this you need to familiarize yurself with paper work before hand. You may even open an IRA before hand for $1000 with say someone like Vanguard in a say star fund. This way your IRA account is opened and all set.

Next get the paperwork ready to accomplish a rollover of 401K to money market fund in Vanguard. Prior to leaving get this accomplished. Vanguard representatives (call their toll free number) will help you with accomplishing this rollover. Go thru the forms of your company 401K plan too to understand what they need to accomplish this rollover.

Typically you will fill a form with your company closing 401K and requesting a check to be mailed to Vanguard. Vanguard will provide you with the address where your company should mail it and they will provide you with information as to whose name the check should be drawn to. Typically it is "vanguard FBO Suba IRA account" (but check with them or their website. This is called a direct rollover.

If possible, leave a US address (perhaps a friend's) with Vanguard as your mailing address, but log on to website and change your profile to request all communications via electronic means.

Establish a US bank account that can be accessed electronically. Link this account to ICICI Money2India or other such money transfer service.

On Vanguard website, set up such that this account is linked to your Vanguard account. This would mean logging in to your Vanguard account and entering details of your bank account and requesting that the accounts be linked for electronic transfers.

After a rollover is accomplished and fully completed, call up vanguard and tell them you would like to withdraw all ot the earnings and contribution of of the 2007 tax year in the star fund (where you had deposited the $1000). This way you avoid the 10% penalty on this $1000. There is no penalty if the contributions for a particular year are fully withdrawn in the same year together with all corresponding earnings. So withdraw everything in 2007 from the star account.

In January of 2008, request a distribution from your IRA of 50% of the amount in the money market fund. Request no tax witholding. Request an electronic distribution using the website and request that money be transferred to your bank account electronically linked to Vanguard. Once this transfer is complete, transfer money to your indian bank account or get a demand draft whatever you wish using the ICICI or money transfer website.

This money will be taxable for USA during 2008 tax year. Since your earned income in 2008 tax year will be subject to exclusion rules, your only passive income such as bank interest, cap gains etc will be subject to US taxes. Considering that you, your spouse, children on tax return, your taxes will be zero and will just have to pay 10% penalty on the early IRA distribution. You will have to send that check in to IRS.

There should be no Indian taxes on this since you will be RNOR during this period.

Repeat the process in Jan 2009, however this time, you may want Vanguard to withold the penalty amount. In 2008 you will escape the penalty for not having enough witholdings, but in 2009 you will not be able to escape them so during Jan 2009 closing of the account with Vanguard, request that the penalty amount be witheld.

You will note that I have suggested money market for the rolloever IRA money because this is short term money. You may choose short term corporate bond if you like instead of money market.

There is a another approach which involves using checks from vanguad, but I think the approach I have described above should work just fine. This way you will also escape all of North Carolina taxes.

Desi

Regarding the comment below. The TIPRA Act 2005 changes everything for USC's living abroad. Refer this quote here from http://www.usa-international-offshore-expatriate-tax.com/reconciliation_act.asp

"Another significant change, known as a 'stacking' provision, will tax US-source income as if it was earned on top of the excluded foreign income; previously, the excluded foreign income was disregarded in calculating taxable US income. Evidently, this will push many taxpayers into a higher tax bracket for their US-source income, affecting many middle-income people - higher-earning individuals are probably already in top tax brackets."

Also another link explains more in lay terms:
http://www.iht.com/articles/2006/05/26/news/ataxes.php

The bottom line is that now let us say your indian income amounts to USD 50K, and you withdraw say 20K within RRK limits, that 20K is taxed as if your AGI were based on a taxable income of 70K although the 50K itself is exempt. Lousy timing for me!!! RRK limits calculations go for a toss now. And almost not worth it to get USC if you R2I with significant change.

comments and suggestions solicited. This one law in one stroke reduces the effectiveness of a lot of suggestions made in this forum on AAP, RRK Limits, withdrawals etc. Although you cannot fault those suggestionsas the law came and side swiped them!!

Desi;6481Suba,


This money will be taxable for USA during 2008 tax year. Since your earned income in 2008 tax year will be subject to exclusion rules, your only passive income such as bank interest, cap gains etc will be subject to US taxes. Considering that you, your spouse, children on tax return, your taxes will be zero and will just have to pay 10% penalty on the early IRA distribution. You will have to send that check in to IRS.

There should be no Indian taxes on this since you will be RNOR during this period.

[/quote]

Nand,

For most people this will not make much difference. This hurts those in larger brackets.

Let us take the case where someone has say Foreign earned income of $35K and they have IRA distribution of 25K. Their income becomes $60K.

Standard deduction, and personal exemptions for spouse and two children, add upto 23500. That leaves taxable income of 60K-23.5K =36.5K.

The way the foreign earned income exclusion worksheet calculates this is as follows:

Taxes on 36.5K (MFJ) --------------------- $4724
Tax on foreign earned income (35K) -------- $4499

Net tax ---------- = -----------------------$ 225.

Prior to the new law this would have been tax on $1500 which would be $150.

The difference is $225 - $150 = $75.

This is the difference due to stacking.

Yes, that is the law, however the overall impact for most people is small. Each person should do the form 2555 and the worksheet for line 44 to find out their impact.

#81 of http://groups.msn.com/R2INRIFinanceAndInvestments/banking.msnw?action=get_message&mview=0&ID_Message=41515&LastModified=4675537102157303338&all_topics=1

says that there are forms to change the status to NRA with the IRA. Can someone please point to such a doccument wherein I can update my status but maintain a US communications address ?

Thanks

Assume the following:

You have an account with company ABC.

Effective tax year 20yy your status will become NRA from a resident status.

Then you fill out a form W8BEN ( Form W-8BEN -- Rev. February 2006) --- Instruction W-8 BEN (Rev. February 2006) and submit to company ABC, specify the year from which your status changes to NRA to them. At the same time, you can also submit to company ABC that your mailing address is different and is a local US mailing address (for this the company ABC may have their own version of the form or a link to change address on website - you may have to call them and check with them that you want to provide a different mailing address than a home address).

In my case, all my accounts, bank, brokerage, etc have my home address but they also have my mailing address as a PO Box. I contacted each bank account, brokerage individually to change this.

For reporting a change of address to IRS the form #, I think is 8822, but just Google on "Change of Address, IRS".

Desibabu,
I have one question on this comment of yours:-->

There is a another approach which involves using checks from vanguad, but I think the approach I have described above should work just fine. This way you will also escape all of North Carolina taxes.

Does this apply for someone in CA as well? If so, its always suggested to get money electronically and avoid state taxes, right. How can I find more info on this ?


Also another question, which is related to first time homebuyer penalty free withdrawl. I am planning to buy house/apt after R2I, which will be on spouse's name (so she will be first time buyer).
Can we withdraw 10K each from my IRA and her IRA penalty-free, if first time home-buyer, but buying in India?
What kind of documents builder has to provide as a proof to IRS?

R2Idude,

Thanks.

Yes, there are some gothcas, ifs, ands and buts, and if someone is making over $82400 in foreign earned income, then the exclusion is limited.

The post was intended to give an overview of a situation in which many R2Iers will find themselves and not for the cases that are the exception.

The example I gave of course ignored for example interest income, dividend income, child tax credit etc, but the net effect will remain the same as I pointed out.

If someone is planning to R2I and they are concerned, I think it would be a good idea for them to take Form 1040 and form 2555 and fill those up as if they have already R2Ied and by doing so this will give them a better understanding of their position and then they can clarify questions much before hand, than at the last moment of filing taxes.

Glad to help.