H1B Visa US Income Tax and IRS Substantial Presence 1040

H-1B Visa and U.S. Taxes

The United States tax system is one of the most complicated tax systems across the globe. That is because, unlike most other countries, when it comes to individuals the United States taxes them on their worldwide income when they are considered a US person for tax purposes. As a result, they will become subject to income tax on income generated both in the U.S. and abroad. What can (understandably) make it so confusing for non-permanent residents and non-us citizens is that the U.S. refers to worldwide income as citizenship-based taxation. Yet, citizenship-based taxation is not limited to U.S. citizens. Rather, it includes anybody who qualifies as a US person for tax purposes. Unfortunately, this also includes H-1B visa holders who meet the substantial presence test and are then required to pay U.S. tax on their worldwide income and file various international information reporting forms even though they are neither U.S. Citizens nor Lawful Permanent Residents. This can be financially devastating to taxpayers who may have investments in foreign countries in which the countries do not tax that category of income and thus the H-1B visa holder does not have any foreign tax credits to offset U.S. tax liability. Let’s walk through the basics of H-1B visa holder US tax liability.

Worldwide Income and H-1B

From a baseline perspective, anyone who is considered a US person for tax purposes is required to pay a U.S. tax on their worldwide income. These requirements are not limited to just U.S. Citizens but include U.S. Citizens, Lawful Permanent Residents, and foreign nationals who meet the Substantial Presence Test. If a taxpayer falls into any one of these three categories, then they are subject to citizenship-based taxation which means taxation on their worldwide income.

Substantial Presence Test

The Substantial Presence Test is a catch-all category for taxpayers who are neither U.S. citizens nor lawful permanent residents but reside in the United States for a sufficient number of days to be counted as a U.S. person for tax purposes (a ‘counting days test’). Typically, if the taxpayer resides in the United States for more than 182 days over a three-year period, then they meet the Substantial Presence Test. The test requires counting current year days as 1:1 whereas days in the prior year count 3:1 and days in the two years prior count as 6:1. We have a separate article you can refer to on substantial presence and how the calculation works.

Tax, FBAR, FATCA, 3520 and More for H-1B

Taxpayers who meet the substantial presence test, have two main requirements. The first requirement is that they file their annual US tax return to report their worldwide income. The second requirement is that they file various international information reporting forms to report various foreign assets, accounts, and investments. This may include items such as foreign bank accounts, foreign investment accounts, foreign life insurance policies, ownership of a foreign corporation, ownership, or beneficiary of a foreign trust, and when a person receives a large gift from a non-us person.

Form 8832 Treaty Exceptions (Research) or Certain Elections

Depending on whether the H-1B visa holder resides in a treaty country will impact whether they will have certain treaty elections available to them. Whether or not the treaty election applies, will be determined by whether they are considered to be a resident of the United States or a resident of a foreign country as well as other various requirements about the specific treaty at issue. Technically, a taxpayer could reside outside of the United States for seven months a year and still meet the Substantial Presence Test (and pay tax on their worldwide income) so qualifying for a treaty exception can significantly reduce tax liability.

Form 8843 Exclusions

Some taxpayers may qualify to be excluded from the Substantial Presence Test In this type of situation, the taxpayer may qualify to not have the days counted toward US person status. This is more common in situations in which the taxpayer is an F-1 or J-1 visa holder but there may be some other exclusions as well in the fields of research and teaching for example – as well as illness.

Form 8840 Closer Connection Exception

If the taxpayer meets the substantial presence test but is unfortunately unable to qualify for an exclusion, they may qualify for the closer connection exception. In other words, if the taxpayer can show that they have a closer connection to a foreign country or countries, then they can file a Form 8840 along with a Form 1040-NR instead of a Form 1040 and only pay U.S. tax on their US-sourced income and not their worldwide income.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.