Living in the US with a working visa comes with its share of challenges, and navigating the legal terrain can be difficult, especially when it comes to something as complex as filing your taxes. For all money earned in the United States, H1-B visa holders are subject to US income tax legislation. But things start to get critical when filing for tax deductions.
So we’ve created a comprehensive guide to tax filing for Indian H1B visa holders. Read on to learn more about the process and get through it painlessly.
Frequently Asked Questions about Tax Filing for Indian H1B Visa Holders in the US
Below are some of the most widely asked questions about tax filing for Indian H1B Visa holders in the US:
Who does this taxation apply to?
You’re a highly-skilled professional from a STEM background and fall under the category of ’alien’. You hold an H1B Visa, have permission to work in America for the next three years, and have an employer sponsoring you. Ahoy! You are now subject to paying taxes on your income at the same rate as any other US citizen or resident.
However, it’s not quite so simple. To be considered a US resident for tax purposes, the Internal Revenue Service (IRS) relies on the additional criteria of physical presence in the country to determine whether a migrant in the workforce is liable to file taxes. What is known as the Substantial Presence Test (SPT) is used to determine eligibility and comes into effect on a calendar-year-by-calendar-year basis.
To pass the test, an individual must have been present in the US for at least:
- 31 days of the current calendar year and,
- 183 days over the current year and the two years preceding it. More specifically, this count must include all days in the current year, one-third of the days present in the year before the current year, and one-sixth of the days present two years before the current year.
To illustrate, let’s look at the hypothetical example of Suresh, a software engineer who moved to the US in the year 2019.
Suresh has been physically present in the US for 180 days during the 2019-2021 period and would need to count 180 days for the current year (say, 2021), 60 days for 2020 (⅓), and 30 days for 2019 (⅙). Totaling up, Suresh has 270 days of physical presence in the US, which is more than the minimum required to qualify as a resident for tax purposes.
Of course, there are specific guidelines regarding what counts as a day of presence. You can read more about this on the official IRS website.
How much will I be taxed, and which taxes would I have to pay?
H1B taxpayers can expect to lose anywhere from 20% to 40% of their incomes to federal, state, and local taxes, but this depends on income levels and appropriate deductions. These taxes include:
- Federal Income Tax
The taxes charged on your US income as a nonresident H1B holder depend on marginal brackets that vary as per your income. Although tax values are the same as those for US citizens and residents, H1B nonresidents will not qualify for the deductibles available to citizens. You can find out more about an estimate of your tax bracket here.
- Medicare and Social Security (FICA)
Roughly 8% of your income will be deducted and paid towards your Medicare (1.45%) and Social Security (6.2%), each of which will be matched by your employer. In addition, employers are liable to pay the same amount on your behalf to the IRS, which secures provisions for pension funds, among others.
- State Income Tax
Depending upon the state you live in, the tax you pay could range from 0% to 10% of your income. Some states such as Washington, Texas, and Nevada levy no additional charges, while states like California mandate employers to withhold roughly 7% of employee incomes for taxes.
- Local Income Tax
Similar to State Income Taxes, towns and cities may levy additional taxes, and employers could deduct up to 4% of your income for the same.
Am I eligible for any tax benefits?
H1B Visa holders cannot claim the same tax benefits, credits, and exemptions as permanent residents and citizens.
However, specific provisions allow for entitlement to certain itemized deductions and exemptions based on marital status and whether you have dependents.
What documents do I need for H1B tax filing?
Preparing the required documentation can be a daunting task, but the general rule of thumb stipulates keeping the following handy:
- Photo ID.
- Social Security number.
- Valid wage documents and earning statements from all employers in the last financial year (form W-2, W-2G, 1099-R,1099-Misc).
- Receipts for relevant deductions.
Documents related to name changes, dependency, and relocation due to marriage for married individuals.Tax Filing for Indian H1B Visa Holders in 2022 – Next Steps and the Road Ahead
Tax Filing for Indian H1B Visa Holders in 2022 – Next Steps and the Road Ahead
Tax season is approaching, and filing doesn’t happen overnight. How should you prepare?
Step 1: Check your eligibility
Take the SPT, and make sure you meet the requirements for days present in the country.
Step 2: Get organized
Gathering documents and getting them in order takes longer than you think it would. So to make tax filing as seamless a process as possible, make sure you have everything ready to avoid last-minute scrambling. This, of course, means being aware of deadlines and being prepared well in advance.
Step 3: Find professionals who can help you
Taxes are confusing at their best and daunting at their worst – especially for Desis in a foreign land. Getting the best returns possible requires the technical know-how of qualified professionals. And at AOTAX, we’ve been helping our fellow Indians file their taxes in the US for over a decade.
- Tax planning advisory, return, and preparation services. We also help with extension filing and ITIN and FBAR FATCA processing.
- Easy access to an online portal, and free sign-up for new customers.