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6 Types of Taxes Every H1-B Visa Holder Pays in the US

by aotax | Apr 23, 2022 | taxes

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.

What is an H1-B Visa?

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.

2) Medicare

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.

6) Obamacare

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.

H1B Income Tax Savers

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!

How to File US Taxes as an Indian H1B Visa Holder?

by aotax | Jan 28, 2022 | tax filing

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.

Eligibility

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.

Source: Substantial Presence Test | Internal Revenue Service (irs.gov)

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

FICA

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.

State tax

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.

Local taxes

The ex-pats from India also have to pay local taxes on their gross income which amounts to around 4%.

Checklist:

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.

Refund process:

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.