Tax Implications of Moving from India
Moving to the U.S. from India is a monumental life event, but it also creates a complex “Dual-Status” tax year. In 2026, when you file for your transition year (2025), you aren’t just filing a return, you are splitting your financial life into two distinct chapters.
The way you handle this split determines whether you pay tax on your Indian salary earned before you even landed in America.
1. The “Dual-Status” Split
Most Indians moving mid-year are considered Dual-Status Aliens. Your tax year is sliced into two periods with entirely different rules:
- Non-Resident Period (Before Arrival): You are taxed only on U.S.-sourced income. Your salary from your Indian employer or your Indian bank interest earned during these months is generally invisible to the IRS.
- Resident Period (After Arrival): Once you pass the residency threshold, you are taxed on worldwide income. That includes your new U.S. salary plus any dividends or interest that hit your Indian accounts after your move date.
2. The First-Year Choice Election
Sometimes, it actually pays to pretend you were a resident for the whole year. Under the First-Year Choice, you can elect to be treated as a U.S. resident for the entire 2025 tax year if you meet certain criteria.
- The Benefit: You can claim the Standard Deduction ($15,750 for 2025) and potentially file a Joint Return with your spouse benefits usually denied to dual-status filers.
- The Cost: You must report and pay U.S. tax on your Indian income from January 1, 2025, onwards. You’ll need to use the Foreign Tax Credit (
- ) to offset taxes already paid to the Indian government.
3. No Standard Deduction for Dual-Status
If you do not make a special election and remain “Dual-Status,” the IRS imposes a strict penalty: You cannot claim the Standard Deduction.
- The Strategy: You must Itemize Deductions. For 2026, the SALT (State and Local Tax) cap has increased to $30,000 under the new tax laws. New immigrants can often deduct their state income taxes, charitable donations, and even certain moving-related expenses if they meet specific business criteria.
4. FEMA and the “NRI” Shift
Your tax move isn’t just a U.S. issue; it triggers obligations in India under the Foreign Exchange Management Act (FEMA).
- Account Conversion: You are legally required to convert your Indian savings accounts to NRO (Non-Resident Ordinary) or NRE (Non-Resident External) status once you intend to stay abroad.
- The Tax Impact: NRE interest is tax-free in India but taxable in the U.S. during your “Resident Period.” We often see clients forget to report their NRE interest, leading to IRS notices three years later.
5. The “Sailing Permit” (Form 1040-C)
Technically, the IRS requires most aliens to obtain a “Certificate of Compliance” (also known as a Sailing Permit) before leaving the U.S. to ensure all taxes are paid. While often overlooked for short-term moves, it is a critical step if you are ending a temporary assignment in 2025 to return to India.
How KKCA Secures Your Status
The “Year of Arrival” is the most common time for filing errors. At KKCA, we ensure your transition is seamless:
- Election Modeling: We run the numbers both ways Dual-Status vs. Full-Year Resident to see which saves you more in total tax.
- Statement Drafting: Dual-status returns cannot be fully e-filed; they require a specific paper-filed “Statement” (usually Form 1040-NR attached to 1040). We handle the complex manual filing process for you.
- Foreign Tax Credit (FTC) Maximization: We ensure every rupee of TDS paid in India is correctly credited against your U.S. liability.
Contact
Looking for personalized tax services about your specific tax situation, please contact us. We are here to help you with your specific tax matters.
Disclaimer
This blog is intended for informational purposes only and does not constitute legal or tax advice. Please consult a qualified U.S. CPA or tax attorney for guidance specific to your situation.