For an Indian, an H1-B visa is a passport to their great American dream! You gain money, respect, and an international experience on your résumé. You do, however, earn in dollars and pay taxes in dollars.
If you’re unfamiliar with the H1-B holder tax filing process, we’ve put together a step-by-step guide to help you get it right.
An H1B visa is granted to Indians (as a nonimmigrant classification) who work in specialized fields such as medicine, science, mathematics, accounting, and information technology (IT) firms or spaces in the United States.
Furthermore, your American employer who sponsors you covers your three-year stay in the United States under this visa. This means they pay for your visa fees and fill out the form on your behalf.
Substantial Presence Test (SPT)
Passing the SPT is essential for becoming a tax resident in the United States. You must have spent at least 183 days in the United States over the previous three years to pass this test. Under the SPT, even the days for each year are subdivided further.
You should have spent 31 days in the United States during the year in which you do your H1-B visa holder tax return. Then it’s 1/3 of days for the previous year and 1/6 of days for the earlier two years. So the total number of days in the three years should be at least 183.
6 Types of Taxes you Pay During H1-B Holder Tax Filing
According to the US tax code, when you qualify for the SPT for H1B holder tax filing, around 25% to 35% of your income will be taxed. Therefore, you will pay the same taxes as any other US tax resident, but you may not receive the same benefits.
However, the following taxes you will pay during the H1-B holder tax filing:
1) Social Security
Contributing to social security is similar to putting money down for a rainy day fund that will pay off in your golden years. In addition, it will assist you in obtaining a pension when you retire. As a rule, you must contribute 6.2% of your gross salary to this account. In addition, your company will make a matching contribution to the social security fund.
This tax, like your pension, covers medical expenditures after you retire. Medicare costs 1.45 % of your gross wage, and your employer contributes an equal amount.
Whether or not you stay in the United States after retirement has no bearing on your Medicare and Social Security taxes payment.
3) Federal income tax
As an H1-B visa holder, you will pay a federal income tax of 25% to 28% on your taxable income. It is determined by your annual income and your filing status (married or single).
Furthermore, you will be taxed the same as a US resident if you file as a non-resident foreigner, but you may not be eligible for the same tax incentives.
However, if you choose to file as a resident, you will receive some tax benefits. As a result, assess the benefits and drawbacks before proceeding with H1B holder tax filing.
4) State income tax
The state of residence in the United States has a significant influence in determining whether or not you are tax liable. In California, for example, state taxes range from 6.5 % to 10% of one’s gross income.
While Alaska, Florida, Nevada, Wyoming, Washington, and South Dakota do not have a separate income tax for non-residents. In addition, you will be taxed on the interest and dividends you earn in the United States in states like Tennessee and New Hampshire.
5) Local taxes
Indian H1B visa holders must pay local taxes of 4% of their gross income. This tax depends on where you stay in the United States. Some towns and cities incur local income taxes.
Please note, though, that in most cases, your local taxes will be covered in your paycheck by your employer as long as you’ve updated the address in your W4 form. However, if you accidentally put the wrong address in the W4 form, you may pay the wrong local taxes.
Under Obamacare, your US company will cover the cost of your healthcare. For now, this is a compulsory tax you, as an Indian H1-B visa holder, will be paying; however, this might change.
H1-B holder tax filing: Documents required
It’s critical to get your papers before initiating the H1B holder tax filing procedure. Keep the following documents ready:
1) Social security number
2) W-2 tax form
3) A photo identification card
4) Other sources of investment income
5) Form 1040 NR if you have dependents
6) Receipts that can be used to claim tax deductions
7) If you or your spouse relocated due to your marriage, fill out Form 8852.
8) If you changed your name after marriage, you’ll need to fill out Form SS-5.
9) Complete Form W 4 to report a change in income after marriage.
It’s time to look for ways to save money on taxes when you go for H1B holder tax filing. Following is the list of deductions and tax credits to help you save dollars.
1) Tax deductions: When you choose to pay taxes as a resident of the United States, you can deduct expenses such as your mortgage, health care, and dental care. Please submit the necessary receipts to claim them.
2) Investments: If you’ve made stock market, fixed deposit, or retirement plan investments, you’ll be able to claim tax deductions.
3) Medical deduction: File Form 1040 with Schedule A to claim the medical deduction. If your medical costs were more than 7.5 percent of your adjusted gross income, you may be eligible for this benefit.
4) Charitable donations: Giving to social causes and charities can help you save money on taxes.
5) Moving expenditures: You can claim a tax deduction on your moving expenses if you relocate from India to the United States or any other state in the United States.
6) Dependents: You can claim your family as dependents and deduct your taxable income except for your spouse. They will, however, be obligated to file taxes, either jointly or separately, with you.
7) Medicare on OPT: If you are on OPT (optical training test) and have an H1B visa, you can claim the Medicare amount withheld by your employer.
The H1B holder tax filing is not as complicated as you think. If you follow the above steps, it’s possible to file your taxes on time and be in the good books of the IRS (Internal Revenue Service).In case you are an Indian who is new to H1B visa holder tax filing, you can connect with AOTAX for guidance. Our team of tax planners and advisors will help you pay your taxes on time and save some serious dollars in the process. Thanks to the 25-years of being in your service, we know our work!
What is Recovery Rebate Tax Credit for 2020 all about?The pandemic COVID-19 had created a huge adverse impact on the financial lives of the Americans. Initially, the US Government had issued a huge round of Stimulus Checks or Economic Impact Payments up to $ 1200 for each qualified adult in a household plus $500 for each qualifying dependent. Later on, another round of Stimulus Payments has been issued for the Americans according to which each qualified individual in a household would receive Stimulus Payment of up to $600.The eligibility of Americans to receive these Economic Impact Payments is based mainly on their AGI. The IRS would mainly have a look at the tax returns of the Americans for the year 2018 or 2019 for determining their eligibility to receive the Stimulus Payments.Under the CARES (Coronavirus Aid, Relief and Economic Security) Act, a different type of credit known as “Recovery Rebate Tax Credit” has been authorized. This implies that if an American is eligible to receive the Stimulus Payment or the Economic Impact Payment, but has not received the payment or has received an amount which is less than the total amount in the form of an advance payment for the tax year 2020 then it would be feasible to claim Recovery Rebate Tax Credit on the tax returns of 2020.Who would qualify for a Recovery Rebate Credit?In general, an individual would be eligible to obtain Recovery Rebate Credit if
The individual was a US citizen or a resident alien of the US in the year 2020.
The individual was not claimed as a dependent in the year 2020
The individual has a valid Social Security Number issued for employment before the due date associated with the 2020 tax returns.
The amount of Rebate Recovery Credit to be obtained can be calculated by the IRS in the same method which was used to calculate the Stimulus payment.
Any eligible taxpayer who has not received either one or both of his Stimulus payments would be able to claim the Recovery Rebate Credit while filing their tax returns for 2020 in 2021.
There might be some individuals who would have experienced a life-changing event after the first round of Economic Impact Payment was made such as unemployment or birth of a child etc.
If an individual is single and has an adjusted gross income of less than $75000 and his Stimulus obtained is less than $1200.
If an individual is married and is filing his tax returns jointly with a gross income, not more than $15, 00, 00 and his Stimulus payment is less than $2400 then he can claim Recovery Rebate Credit.
If an American has not received $500 for every qualifying energy then he can claim the Recovery Rebate Credit.
Information required claiming Recovery Rebate CreditIn case, you have not received the full Economic Impact Payment and wish to claim more by the Recovery Rebate Credit on the taxes of 2020 then you would have to inform about the amount of Stimulus payment that was issued in the tax year 2020. A Notice 1444 is being issued by the IRS which reflects the amount that an individual was issued before any offences had happened in 2020. While filing your tax returns, an individual can have this form in front of him and do his taxes.Can a college-going student claim the Recovery Rebate Credit?If an individual is able to meet the basic eligibility criteria and has not been claimed as a dependent on his parents or anyone else’s tax returns of 2020, then he can claim the Recovery Rebate credit if he has not received the Stimulus Payment. If a college student has worked in 2020 and has federal taxes withheld from his pay, then he can get some of his withholding back either as a tax refund, claim the education tax benefits also increase their refund by the help of Recovery rebate credit.Recovery Rebate Credit – Way to claim the additional stimulusIf you have not been able to claim the extra $500 for each qualifying child in your first Stimulus Check or have not been able to claim the additional $600 for each qualifying child in the second Stimulus Check then the additional amount can be claimed by the Recovery Rebate Credit.ConclusionHence, in these challenging times of Coronavirus, the Recovery Rebate Credit would be a helpful means in increasing the amount of tax refund to be obtained by an individual or in decreasing the tax owed by an individual. Recovery Rebate Credit can be claimed on Form 1040 or Form 1040-SR in the year 2020.
The tax laws in the US are quite complicated but the taxpayers make quite simple mistakes while filing their tax returns.
Let us have a look at the most common tax mistakes which are made by the US taxpayers and can be avoided during this tax year.
Not filing tax returns on time
According to the estimates made by the IRS, 20% of the US taxpayers would wait till the last date for filing their tax returns. However, waiting till this last minute can cause them to miss the deadline. Even if the taxpayers are filing a request for an extension in the deadline to file the tax returns there would be the need to pay any tax that is owed by the actual deadline. In case, the tax payments are not made by the due date then the taxpayer would be charged interest by the IRS.
This is one of the most common mistakes made by the taxpayers while filing their tax returns. Some of them either leave some boxes blank or some make a typo error while filling important details like Social Security Number.
One of the easiest methods by which you can avoid this is by importing the tax return which has been filed in the previous tax year. By this, you can avoid any typo error associated with manual entry of the filing information.
Not aware of the latest tax laws
The US tax laws are not only complicated but are subject to minor changes every year. It is imperative for the taxpayers to know in detail about the changes that have been made into the tax laws so that they do not miss the details on the tax deductions and credit.
Filing status errors
The filing status of a taxpayer would determine the tax rate of a taxpayer and his eligibility to avail the tax deductions. If a wrong filing status is being chosen by a taxpayer then he would have to either underpay or overpay the taxes which would have its own implications on the cost. For instance, married couples who are filing tax returns jointly have different rules than those who are filing their returns separately.
Making wrong choices about itemizing
While filing your tax returns, you can either choose between itemizing or claim a Standard deduction. If you are itemizing then you would not be able to claim Standard Deductions. Out of the two, you can choose either one out of the two choices.
There are certain deductions which you can claim easily without the need for any itemizing. These deductions can be making contributions into the IRA or the deduction related to the Student loan interest. However, some deductions can only be claimed if itemized which gives up the right for claiming the Standard Deduction.
Not getting any help while tax filing
Tax filing is complicated and should not be done on your own. You can take the help of various software programs which are designed with the aim of making tax filing easier and simpler. You can answer a series of simple questions which would help you in identifying your deductions and credits and thus, simplifying your process of filing the returns.
Moreover, taxpayers can also take assistance from tax professionals then it would be a great option to avoid any mistakes while tax filing.
No copy of the return
Usually, the tax experts and professionals would advise on keeping a copy of the tax return filed for a period of at least two years. That’s a general time period for which the IRS would be able to legally audit the taxpayers for the gross under-reporting of their income.
Not reporting all income
If taxpayers are not reporting all of their income, then the probabilities are quite high that the IRS would know about them. As the IRS receives forms like Form W-2s and Form 1099S for the entire income you earn, it is quite easier for the IRS to know even if you are not reporting.
The IRS can carry criminal prosecutions for any wrong or non-reporting of income by the taxpayers. Taxpayers can be penalized for the non-reporting of all income and it is always advisable to report the correct income to the IRS.
So, now since the taxpayers have an idea about the erstwhile tax mistakes it is wiser to be careful, avoid these mistakes and rule out the possibilities of being penalized.
Do you get a tax benefit from your health expenditure?
It is very common to dislike paying medical bills even if you have very good insurance and a low deductible. One of the very bright sides of big medical bills is the chance you get to claim your medical expenditure as a deduction on the federal tax return. If your medical bills are more than 7.5% of your total tax years * the adjusted gross income (AGI) then it is quite feasible to itemize your deductions. The deductions on medical expenses are applicable for self, your spouse and for the medical expenditure of your dependents as well. In case, your medical bills are more than 7.5% of the income you obtain you must follow the below-mentioned rules for maximization of your tax refund.
Medical bills are not just ‘Medical’
The IRS would permit deductions on tax for vision and for dental care as well and also for the medical expenses too. This would imply that it is feasible to deduct the expenses incurred in the eye tests, dental-related visits, braces, contact lenses, glasses, root canal, etc.
Some other expenses which are covered under the category of medical expense deduction are psychological treatment, surgeries, medical devices such as hearing aids, medicines which have been prescribed, preventative care, etc.
Even the cost involved in your monthly payments of health insurance can be deducted if taxes have not been deducted by plans provided by the employer. The deduction for medical expenses would include the bills that have been incurred for yourself, your spouse and your dependents.
You must have a complete idea about what is not tax-deductible before you have filed the tax returns. Any expenses which have been reimbursed either by the insurance provider or by your employer cannot be claimed as tax deductions. Moreover, if you are using a pre-payment plan for your medical expenses or are using a medical reimbursement plan then those expenses cannot be claimed as deductions. Some other non-deductible items would include your every-day supplies like toothpaste, soap, vitamins, etc.
Medical expenses can be deductible only if they are paid in the tax year in which you are filing the tax returns. Medical expenses can be claimed from the previous year or from any other future years. If a credit card has been used for the payment of medical bills in a tax year then it would be counted as being paid in a year and would be deductible as well.
Medical expenses can be deducted if your tax deductions are itemized
If you wish to receive the benefits obtained from the deductions obtained from medical expenses you must qualify for itemizing your deductions obtained on your taxes. Some of your itemized deductions such as property tax, State Income tax, home mortgage interest, etc. along with those medical expenses which are deductible need to be more than the Standard Deduction for the year 2020. In case you are self-employed, you would be able to deduct your premium for health insurance even if you are not able to itemize your deductions.
You can track the medical mileage for the year 2020 and it is 17 cents for each mile. There can be travels related to the prescription pick up, emergency visits, appointments for the dentist and other medical check-up and follow up appointments.
Hence, if you have had medical expenditure during a particular tax year it would be completely worth it by maximizing your deductions and opting for itemized deductions. This would be helpful mainly when your itemized deductions are more than your standard deduction.
New to the US – Here’s what you need to know about filing your taxes as an NRI in the USIf you are a US resident or a US citizen i.e. an NRI, PIO or OCI you must have to pay taxes to the US Government on the global income which you have earned. A person would be defined as a US resident only if he is able to meet either of the below-mentioned tests.
Green Card Test
If during any period of a particular calendar year, according to the laws of immigration you were a permanent resident of the United States and this status has not been abandoned by the law then you would be considered to have passed the Green Card Test.
Substantial Presence Test
The Substantial Presence Test states that you should have been present in the United States physically for a period of at least 31 days during a particular year and 183 days during the three year period which would include the current tax year and the 2 years immediately before the current year. If you have a green card, then you would be considered to be a US resident for the purpose of tax irrespective of the place where you are living. In case, you are a Visa holder then there are more complicated rules associated with the Universal Taxing Jurisdiction.If a taxpayer is having income or receiving a salary from India, then that has to be reported by filing Form 1040. Also, the taxpayer would fill up form1116 if he is claiming the tax credit. By the Double Tax Avoidance Agreements (DTAA) NRIs would be eligible to receive credits for the tax that has been paid in India. This would help in providing protection from paying taxes in both nations. FBAR InformationThe FBAR Form can be considered as a reporting form for those US citizens who hold $10,000 or even more in a foreign financial account. Moreover, it is necessary for you to include the instruments like mutual funds, life insurance plans, accounts where you are considered as the signatory authority only. FATCA Reporting – Form 8938Certain taxpayers from the US who are holding some specific foreign financial assets with an aggregate value that exceeds $50,000 must report information about the assets on the Form 8938. This form must be attached to the annual income tax return of the taxpayers. Those US taxpayers who are residing abroad or who file a joint tax return can have the privilege of a higher asset threshold.Foreign Tax CreditsForeign Tax Credit is a non-refundable tax credit for the income tax which has been paid to the foreign Government due to the foreign income tax withholdings. This credit is mainly available for a taxpayer if he has either worked in a foreign nation or has some income from investments into foreign sources. There are some qualifying factors which would help in understanding if a taxpayer would be eligible to obtain a tax credit or not. Foreign Earned Income ExclusionThere is a concept of Foreign Earned Income Exclusion by which those citizens who are working outside can avail the advantage of the reduction in their taxable income. Taxpayers can also get the benefit of excluding their house expenses; however, this can be availed with the limit. There are certain rules as to who would qualify for this tax exclusion.ConclusionSo, now with these important facts related to the taxation associated with the NRIs, it would be easier to have a clear understanding of the tax norms for the NRIs.
How Much Will Future Retirees Receive in Lifetime Social Security and Medicare Benefits?
Millennial couples who would retire around 2060 would approximately be receiving around $2.2 million in the form of lifetime Social Security and Medicare Benefits. This amount would be approximately double of the amount that a couple who would be retiring this year would receive. The total Social Security and Medicare benefits are expected to rise even more for those generations which are born after the year 1995 if these programs would provide the continued benefits.
The Lifetime Social Security and Medicare Benefits and Taxes are mainly based on the reports for the Social Security and Medicare trust funds. According to the projection of this trust, a single male that is earning an average amount of wage is working every year and is retiring at the age of 65 years would receive benefits of around $570,000. In case of those couples who are going to retire this tax year with one of the spouses having a higher wage and the one earning lower wage the amount that would be received as Lifetime Social Security and Medicare benefits would be around $1,113,000.
With the rise in Social Security and Medicare benefits, the gap which is present between the benefits and the payroll taxes the employees owe will keep on growing. The main reason behind this is that the low cost of Medicare was designed in such a manner that it would only provide cover for the hospital costs; but the program now would provide cover for visits made to doctor, outpatient procedures, drugs prescribed and other categories of medical costs.
The increase in benefit amounts
The amount of Social Security and Medicare Benefits would be seeing a significant increase in future retirees. The most important cause behind this is that there is an increase in Social Security Benefits and the Medicare expenses are increasing due to modern health care services. Moreover, when life expectancies are higher it would imply that the Americans who are going to retire in the future would receive many more years of this benefit.
However, the major cause behind the financing gap which is prevalent between the benefits obtained and the taxes is the decrease in the birth rate starting in the mid-1960s. There has been a resulting shrinking in the number of the workers relative to the retirees and this has a special force in the period in which the Baby Boomers had started collecting these benefits in between the tax year 2008 and the mid of 2030s.
These issues would very soon come under the supervision of one head as the Congressional Budget Office Projects. The Government would not be able to pay complete benefits out of the funds of the trust for Social Security by the tax year 2031.
The new President Biden has also recommended a further increase in the benefits available for the retirees i.e. approximately 9% on an average for those retiring by the year 2065. Moreover, the work of the Urban Institute reflects the fact that these changes would be able to extend the life span of the Trust funds for Social Security by only 5 years.
Many workers at present have to face an implicit trade-off irrespective of their level of income. The Government has promised higher Social Security and Medicare Benefits at an older age, but it has also set a small portion of its budget for the younger people and families for other programs such as student loan balances, children fall, and other programs not related to retirement.
A large scale budget is the only solution to this trending problem related to Social Security and Medicare Benefits.
So, it is necessary to understand the issues that have been present across several generations related to retirement and health benefits along with the taxes which would be applicable across the country.