As a higher number of young Indians seek to migrate to foreign countries such as the United States of America to attain higher education from accredited universities, it is imperative that they familiarize themselves with the applicable law. Understanding the tenets of the US Taxation System and how it functions in tandem with the Indian System will be highly beneficial to those seeking to study or work in the USA.
Both India and the US employ a ‘Progressive Tax System’ which, in simple terms, computes the tax amount payable by a Taxpayer in direct proportion to the Income earned by the Taxpayer. Although both the US and India employ a Progressive Tax System and are composed on the basis of a ‘Common Law System’, the Tax slabs are computed on different bases.
Income Taxes in India are determined on the basis of the Status of ‘Residency of the Taxpayer’. Indian Residents are taxed on the Income earned by them, locally and globally. Individual Taxpayers are categorized into:
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Additionally, the amount Indian taxpayers are required to pay is determined by the tax slabs they fall under and the age group to which they belong:
In the US however, besides the Income based ‘Tax Brackets’, Taxpayers are categorized based on their Marital Status
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The US has a Tax system that comprises Federal, State and Local Taxes at different levels.
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Direct Taxes are those that are paid directly by a Taxpayer and the liability for the same cannot be passed onto any other individual/body by the Taxpayer. Income Tax, Property Tax, Estate Tax and Capital Gains Tax are some examples of Direct Taxes.
Indirect Taxes do not require Taxpayers to individually pay the taxes levied on the availing of any goods or services, rather they are included along with the price to be paid by the Consumer while purchasing the same. Ultimately, the consumer still pays the tax, albeit indirectly. Sales Tax, Excise Tax and Customs Duties are forms of Indirect Taxes levied in the US.
Taxes in the US are applicable to:
US Citizens: Similar to the Tax System in India, citizens of the USA have to pay taxes on their worldwide income
Resident Aliens: Non-citizens who meet the substantial presence test are treated similarly to US citizens for tax purposes. This includes students who stay in the US long-term.
Non-Resident Aliens: These individuals are only taxed on their US-sourced income, such as wages from a job in the US or investments in the US.
Indian Students in the US generally fall under the “Non-Resident Alien” category unless they have previously lived in the US and meet the requirements under the ‘Substantial Presence Test’. The Substantial Presence Test is a method used to determine whether a foreign national qualifies as a resident or non-resident for taxation purposes in the US.
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The US and India entered into a Tax Convention which came to be effective on 1st January, 1991. A Double-Taxation Avoidance Agreement (DTAA) is one of the key features of the Bilateral Treaty. The Intent of the Treaty is to ensure that individuals and businesses are not made liable to pay taxes on the same income in both countries. The DTAA facilitates better trade and investment opportunities between both the member countries.
The DTAA covers various kinds of Income received by a business or individual in either country, while ensuring relief from double-taxation in a manner that is non-discriminatory and clear.
Article 21 of the DTAA pertains to ‘Payments Received by Students and Apprentices’. The DTAA permits tax exemptions on grants, scholarships and remuneration from employment undertaken by students who receive scholarships or fellowships during the course of their education or training in both member countries.
Students who stay in the US as part of research or teaching assistantships may also be exempt from a portion of their income.
However, the benefits availed by Students are subject to change once their education is over.
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About 29 states in the US provide Education Savings Bank Accounts, education choice tax credits, or education tax scholarships. About 37 States and the District of Columbia permit taxpayers to deduct interest on student loans when calculating their taxable income, depending on various other financial parameters.
Tax Credits are legislative enactments that permit Taxpayers to avail credits by means of various parameters, which can then be used by them to reduce their Tax burden. Examples are the American Opportunity Tax Credit and Lifetime Learning Credit awarded to those pursuing higher education in the US.
State Tax Credits further assist students with education credits that can be availed for education related expenses including tuition fees, textbooks and other supplies.
Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming are the US States that levy no Income Tax on its Residents. Students migrating to any of these US States for higher education need only worry about Federal taxes.
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In conclusion, it can often be an arduous process to understand the tax obligations of oneself, even more so while migrating to another country such as the United States of America. Given the Treaties and other Conventions in place between India and the USA, it is a preferable option for Indians to migrate to the US in pursuance of higher education and subsequent employment opportunities.
Benjamin Franklin, Founding Father of the United States of America once opined “…but in this world nothing can be said to be certain, except death and taxes”. So, if you are someone who is looking to take that first step towards a new chapter, be brave and go live a little. All the very best!
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