Indian parents getting US residency? 6 financial implications to consider before applying

It is common for American Indians to ask parents living in India to consent for a green card application. The permanent resident status that a green card provides makes it easy for the elderly parents to travel to the United States at any time and stay for as long as they wish, without the limitations of the visitor visa.

However, that reasoning might overlook im portant considerations that acquiring a green card comes with. A permanent resident status in the US has many implications for social life, finances and healthcare. We will focus on the financial aspects, and try to keep the discus sion as simple as we can, while being aware that some provisions of taxation and their applicability need elaborate professional advice.

‘Global assets’ taxed in the US

First, the green card means that you intend to be a permanent resident in the US. Therefore the ‘global asset’ rule will apply. Wherever in the world you may earn an income, or own as sets, you will be subject to taxation according to the US laws. You can claim foreign tax credit for taxes paid in other countries—lets keep it India for simplicity—but you will file and pay taxes in the US as per their rules, for the entire period you are a green card holder. Be prepared to consolidate all your assets and income, list them, and make decisions about whether you intend keeping them in India, or liquidating and taking the money with you, or passing it on to your children. The tax implications vary for each of these choices, but the general rule is that these incomes and assets will be treated as taxable in the US, soon after you have got the green card.

What to disclose and/or liquidate

Second, investments in bank accounts, mutual funds, shares and other financial assets will have to be reviewed and modified. It is illegal under India’s Foreign Exchange Management Act (FEMA) to hold resident bank and demat accounts after moving abroad on a permanent resident status. All such accounts must be converted to non-resident, and Foreign Account Tax Compliance Act (FATCA) forms disclosing the residential status abroad should be filled up. All government saving schemes should be closed, as non-residents are not eligible to in vest or hold these schemes. Mutual fund investments in India need special attention. They are classified as PFICs (passive foreign investment companies) and subject to a very high rate of taxation in the US. Insurance, equity and mutual fund holdings are subject to taxes on their annual appreciation in value, even if such gain is not realised. Review investments and liquidate as needed, before acquiring green card.

Out-of-pocket healthcare costs

Third, medicare is not accessible without five years of continuous US residency. Private health insurance can be bought during that waiting period. If the seniors do not plan to work in the US (thus acquiring the 40 quarter payroll credit), they may not be eligible for free medicare, even after the five-year period. They will have to provide for monthly payments of premium for the healthcare plan they choose to buy and the premium will vary based on their status and choices. For very senior citizens, the premium can be high. Supportive or assisted care due to age-related disability isn’t covered. Costs of senior assisted care can be high. For seniors, planning for a medicare corpus with the assets they own may be a choice.

All gifts are taxable

Fourth, there is a choice to make with respect to inheritance. In India, gifts to children are not subject to taxes. In the US, gift taxes are payable by the donor, while the donee is no taxed on these receipts. However, as citizens or permanent residents, your children are required to disclose assets they hold in other regimes outside the US, and declare incomes received from these assets and pay taxes on these incomes as applicable.

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There is another aspect to consider. The cost basis for any asset passed on to the American Indian inheritors will vary depending on when the asset was gifted or inherited. If passed on during one’s lifetime, the original acquisition cost will apply for purposes of calculating capital gains tax if the asset is later sold. If passed on after death as inheritance, the assets will get rebased to the fair market value at the time of inherit ance, saving the inheritor precious money in capital gains tax. Consider all your assets and how and when you like to pass them on.

Annual FBAR for assets in India

Fifth, as a permanent resident, you’ll have your own social security number and have to comply with tax laws locally. You must declare incomes over and above the minimum exempt levels (currently at $5,200 per year; modified for inflation annually) and pay taxes as required. The global income rule applies and you will include your pension, rents, dividends, interest, and all other incomes earned in India, converted to dollars using the official conversion rate for the tax year. If you pay income taxes in India, you will claim credit for those taxes and pay any dues that remain. It is also mandatory to file a Foreign Bank and Accounts Report (FBAR), annually if your financial assets in India are over $10,000 in value. There are no taxes to be paid, but penalties for not filing the FBAR are high.

Conditions for financial dependence

Sixth, if you intend to claim dependent status on your American Indian child, you have to satisfy the conditions for financial dependence. These include income levels below the minimum threshold under law, proof that over 50% of your living expenses are borne by your child, and a signed affidavit that the sponsoring child is legally and financially responsible for you. This can raise your medi care premium as the amount will depend on their income, and not yours.

These are the broad contours of financial decisions to be made and compliances to keep in mind, before changing your status from resident Indian to a green card holder. The crucial rule to keep in mind is that permanent residency or citizenship makes you liable for taxes according to the US laws, wherever your assets or income may be. Take the time to evaluate, liquidate, consolidate, and rework the assets, before making the decision. It can be very expensive to pay penalties and interest in the US for failure to disclose assets held abroad; and penalties and interest may apply in India for not disclosing your non-resident status with respect to your assets in India.

The Author is Chairperson, Centre For Investment Education and Learning