As a US expat living in a foreign country, you need to report your global income on your US tax return. Now how should you do this is a major question which most taxpayers face, because of the difference in US and India tax years.
India follows a fiscal year for tax reporting from April to March while US follows the calendar year from January to December.
What is the problem that arises because of the difference in tax years
The problem that arises because of the difference in tax years is that you cannot take the numbers from your India tax return as is and disclose them on your US tax return.
For example, your Indian salary income from April 2016 till March 2017 is Rs. 1,000,000. However your income from January 2016 till December 2017 could be very different. This can happen due to lot of reasons such as bonus received in the month of February 2016 will be considered for US tax purposes for 2016 but not for India tax.
Many individuals feel that it is not necessary to maintain separate books for India and US tax purposes since all their income eventually gets reported to the IRS at some point in time. But this approach is not correct for two reasons:
- The IRS requires you to follow a calendar year for tax reporting.
- Their could be a difference in your US tax liability because of certain deductions and tax credits which you can claim in that particular year.
Thus, you will have to calculate your income from January to December for the purpose of US tax reporting. This will definitely cause some inconvenience. However, you can definitely overcome this problem by organizing yourself in the following manner :
Ways to organize yourself:
- Salary income – Maintain your payslips for every month and hand over your January to December payslips to your CPA for calculating US taxes.
- Business income – Extract your Profit & Loss statement and Balance Sheet from January to December for calculating US taxes.
- Interest income – Maintain bank statements from January to December and calculate the interest income for this period.
- Rental property income, capital gains, any other income – Maintain a excel sheet or statements on a calendar year basis and calculate this income.
This method seems to be a bit tedious, but it is fairly easy to maintain it regularly once you organize yourself.
