Are you considering whether to travel to the U.S. on an H-1B visa but reluctant to because of the possible tax implications? Here is a short guide to help you determine whether it makes sense to make the move to the United States on an H-1B visa.
Generally, the tax liability for a foreign national will depend on whether the person is considered a “resident alien” or a “non-resident alien.” First, we will examine whether you may be considered a resident or a non-resident alien and then we will discuss the tax implications for both categories.
Who are Resident Aliens:
A person will be considered a resident alien if he or she meets what the U.S. government calls the “substantial presence test.” Individuals will meet the substantial presence test if they are physically present in the United States at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting
- All the days you were present in the current year, and
- 1/3 of the days you were present in the previous year, and
- 1/6 of the days you were present in the year before that.
Substantial Presence Test applied to those with H-1B’s:
Because most people on H-1B’s need to be present in the United States for the majority of the year to meet their job requirements, most will meet the presence requirements of the substantial presence test in the first or second year they are here. Therefore, most individuals on H-1B’s will be considered resident aliens in their first or second year in the United States.
Who are Non-Resident Aliens:
An individual is considered a non-resident alien if he does not have a green card and does not
meet the substantial presence test.
An Example Applying the Substantial Presence Test:
To give an example of how the substantial presence test works to determine if you are a resident or a non-resident alien, consider Mr. B:
1. Mr. B is awarded an H-1b visa in India and travels to the United States on November 18, 2012. This is his first time in the United States. It’s now January 2013 and Mr. B. is considering his tax liability for tax year 2012 (the U.S. tax year starts in January and ends in December). Will he be considered a resident alien for U.S. tax purposes?
Requirement #1 of the Substantial Presence Test: Has Mr. B been present in the United States for more than 31 days in tax year 2012? Yes, he was in the United States for 44 days in tax year 2012. He therefore meets the first requirement of the substantial presence test.
Requirement #2: Has Mr. B been present for 183 days during the previous 3 year period? No, because he just arrived in the United States on November 18, 2012, he was only present in the United States a total of 44 days in the current tax year 2012. He does not meet the second requirement of the substantial presence test and is therefore considered a Non-Resident Alien for tax purposes.
2.Now, it’s January 2014 and Mr. B is considering his tax liability for 2013. He has now been in the US for over a year. Is he a resident alien yet?
Requirements #1: Yes, Mr. B has been present 31 days in tax year 2013.
Requirement #2: Has he been present in the US for 183 days, looking at the past year and two months since he arrived in the United States? Under the substantial presence test, we count the entire 365 days he was present in the US in 2013. We also count the time he was present in the US in 2012, but only count one-third of those days. He was in the US for 44 days in 2012, so we will count 15 of those days for the test. In total then Mr. B. has been present in the US for 380 days since he arrived in the US and therefore, he is now considered a Resident Alien.
Tax liability for Resident and Non-Resident Aliens:
If considered a Resident Alien:
Resident aliens’ income is generally subject to tax in the same manner as a U.S. citizen. This means that their world-wide income is subject to U.S. tax and must be reported on a U.S. tax return. They must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on their U.S. tax return. A resident alien must report these amounts whether from sources within or outside the United States.
If considered a Nonresident Alien:
Non-resident aliens must report the two following types of income:
- Income that is “effectively connected” with a trade or business in the United States, which would include active income earned by providing your services. Income that is effectively connected with a trade or business in the US is subject to US tax at the same (graduated) tax rates as for US citizens.
- Income from “fixed, determinable, annual, or periodical sources” in the United States (eg. passive income such as dividends, interest, and royalties) Such income is generally subject to a withholding tax at the source of payment, generally at a maximum rate of 30% unless reduced by a tax treaty.
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