After a heady new year celebration, it’s time for US residents to put their nose to the grind and file their taxes. If you are an H1B visa holder, you are also required to follow suit, provided you qualify for the substantial presence test.
The tax filing for Indian H1B visa holders process may get tricky as do not enjoy the same benefits as US residents. Here we give you a lowdown on how to go about filing your federal taxes.
Tax Filing for Indians in the US: Who is an H1B Visa Holder?
An Indian who works in the US as a skilled professional in areas like Information technology (IT), architecture, mathematics, science, medicine, accounts, and finance qualifies for an H1B visa. And their stay is sponsored in the US by their employer for three years minimum.
An Indian skilled professional who has spent a minimum of 31 days in the current year and 183 days in three consecutive years is eligible under the substantial presence test (SPT). Under federal laws, they are a tax resident and are required to file federal taxes with form 1040NR.
SPT is arrived at with this simple calculation:
The total number of days present in the US in the current year + 1/3 of days present in the previous year of filing taxes + 1/6 of the number of days present two years before that.
This total should equal 183 days or more.
Types of taxes
Before we dive deep into the tax filing process for Indian H1B visa holders, let’s understand the type of taxes. The salary of an H1B visa holder is subject to Federal, state, and local taxes. They have to pay anywhere between 20% to 40% as taxes depending on their income level and deductions. Plus, they also have to pay property tax, sales tax, gas tax, capital gains tax, inheritance tax, etc.
A tax resident is liable to pay the same kind of taxes but does not enjoy certain deductions like permanent and US residents. If you become a US resident, you do get these benefits, but then your worldwide income is also taxed.
Tax Breakup for Indian H1B Visa Holders
Under FICA (Federal Insurance Contributions Act), the tax resident has to pay around 8% of his gross salary. Around 1.45% of this deduction goes for medicare while 6.2% is for social security. An equal amount is contributed by his employer. They enjoy the benefits accrued from these deductions post-retirement.
The H1B visa holder has to pay 0-10% of their salary as state tax depending on the state they live in. For instance, Alaska, Nevada, Wyoming, Washington, Florida, South Dakota do not levy a separate state income tax. And Tennessee and New Hampshire only charge taxes on interests and dividends earned by him. While California asks employers to deduct 7% of the gross salary as state tax.
Moreover, in certain states, the amount deducted as social security is returned to the employee once they leave the country. This depends on the agreement that the state has with the federal government.
The ex-pats from India also have to pay local taxes on their gross income which amounts to around 4%.
Once you have scored positive in the SPT, you require the following documents to file your tax returns:
- Photo identity card
- Social security number
- Wage documents and salary statements from the employer
- Investment income statement
- Other income statements
- Forms W-2 and 1099 series
- Receipts to back up deduction claims
- Documents related to the name change, dependency, in case of marriage of married individuals.
- If you have a dependent, you have to use the 1040 NR form to claim deductions.
Who is a Dependent?
Any person – parents, relative, children – who live with the H1B visa holder is termed as a dependent. They have to apply for an H4 visa and cannot take up employment. But are allowed to study in the US. A spouse with an H4 visa is not counted as a dependent.
This person also has to file taxes which they can either do jointly or together with the ex-pat. If it’s a joint application, then the H1B visa holder gets to enjoy a greater amount of deduction.
Deductions, exemptions, and tax credits
The tax structure is different for single and married individuals in the US. Married people also get to enjoy certain deductions, exemptions, and tax credits which saves them money. They have to provide receipts to avail of these benefits. Now let us look at this one by one.
1) Deductions: The H1B visa holder has to file under Schedule A of form 1040 to claim certain deductions like US residents. They get to avail deductions on state and local taxes, interest on a home mortgage, dental and health expenses, losses on account of theft, casualty, and others. They need to itemize these in the claim form.
2) Exemption: Unlike US residents, the visa holder does not get exemption on dependents. However, they can request certain exemptions for themselves and their spouse if they are filing taxes separately.
3) Additional tax credits: The H1B visa holder gets limited deductions and exemptions but has respite in the form of tax credits. Some of these include child tax credit, dependent credit, adoption tax, education credit, earned income credit, etc.
After filing your taxes you have to wait for six to eight weeks to get your tax refunds. The IRS (Internal Revenue Services) clears the refund within 21 days of accepting the e-file of tax returns.
If you have adhered to the above points, filing your taxes in the US will be a smooth process. Filing taxes can be cumbersome if you are unaware of the US taxation laws. If you are an H1B visa holder working in the US, contact us to help you file your e-tax returns on time. With over 15 years of experience in this field, backed by efficient accountants, we have helped over 2 lac Indians file their taxes to date.