H1B Taxes: Should You File Form 1040 or 1040NR?

Understanding which tax form to file can be challenging for H1B visa holders in the U.S. The choice between Form 1040 and Form 1040NR depends on factors that determine tax residency status, which influences how income is reported and taxed.

Residency Criteria

Determining tax residency is essential for H1B visa holders as it dictates the correct tax form to file. U.S. tax residency is assessed through three primary criteria: substantial presence, possession of a green card, and classification as an exempt individual. These rules are outlined under the U.S. tax code, specifically Internal Revenue Code (IRC) Section 7701(b).

Substantial Presence

The substantial presence test determines tax residency based on physical presence in the U.S. An individual must be in the U.S. for at least 31 days in the current year and a total of 183 days over the past three years. This total includes all days in the current year, one-third of the days in the first preceding year, and one-sixth of the days in the second preceding year. Certain days, such as those spent commuting from Canada or Mexico, may be excluded. This test ensures individuals who spend significant time in the U.S. are classified as tax residents, subject to reporting worldwide income.

Green Card

Holding a green card automatically classifies an individual as a U.S. tax resident under IRC Section 7701(b)(1)(A)(i). This status remains until the card is formally relinquished or revoked. Green card holders must file taxes on their global income, similar to U.S. citizens. Tax treaties between the U.S. and other countries may provide credits or exemptions to prevent double taxation on certain income types.

Exempt Individuals

Certain individuals, such as teachers, trainees, and students on specific visas like J or F visas, may be exempt from the substantial presence test and considered nonresidents under IRC Section 7701(b)(5). For example, students on F-1 visas are exempt for five calendar years. Proper documentation is crucial for individuals claiming an exemption, as exceeding the allowable time can change tax residency status and obligations.

When to File Form 1040

H1B visa holders who qualify as U.S. tax residents must file Form 1040. This form is used to report worldwide income, including wages, dividends, interest, and other income, regardless of where it was earned. The U.S. tax system requires residents to disclose all income, unlike nonresidents who report only U.S.-sourced income.

Form 1040 allows access to deductions and credits unavailable to nonresidents. Resident aliens can claim the standard deduction—$13,850 for single filers and $27,700 for married couples filing jointly as of 2024—and credits like the Earned Income Tax Credit and the Child Tax Credit. These benefits highlight the importance of correctly determining residency status to maximize tax advantages.

When to File Form 1040NR

H1B visa holders who do not meet U.S. tax residency criteria must file Form 1040NR. This form is for nonresident aliens and focuses exclusively on U.S.-sourced income, such as wages from a U.S. employer or interest from U.S. bank accounts. This streamlined reporting simplifies tax obligations for those with limited U.S. ties.

Nonresidents are generally ineligible for the standard deduction but can itemize deductions directly related to U.S. income, such as state and local taxes, charitable contributions to U.S. organizations, and certain business expenses. Nonresident aliens may also benefit from tax treaties, which can reduce withholding rates on dividends or exempt certain income from U.S. taxation.

Dual-Status Considerations

H1B visa holders transitioning between nonresident and resident alien status within the same tax year may face a dual-status tax year. This requires filing two separate returns: Form 1040NR for the nonresident portion and Form 1040 for the resident portion.

Income allocation between these periods is critical. U.S.-sourced income is reported during the nonresident phase, while worldwide income is declared once residency begins. Dual-status taxpayers are often ineligible for the standard deduction but may itemize deductions related to their respective residency phases. Tax treaties may also affect reporting obligations and tax liabilities during a dual-status year.

Filing Deadlines and Extensions

The standard deadline for filing federal income tax returns is April 15 of the year following the tax year. If April 15 falls on a weekend or federal holiday, the deadline shifts to the next business day. For 2024, the deadline is April 15.

Taxpayers can request a six-month extension by submitting Form 4868, extending the filing date to October 15. However, this extension applies only to filing, not payment. Unpaid taxes after April 15 accrue interest and may incur penalties. State-specific deadlines may differ and should also be considered.

H1B visa holders with foreign income or assets may face additional deadlines. For example, the Foreign Bank Account Report (FBAR) is due April 15, with an automatic extension to October 15. Similarly, individuals with foreign financial assets exceeding certain thresholds must file Form 8938 under the Foreign Account Tax Compliance Act (FATCA).

Potential Penalties for Incorrect Filing

Filing the wrong tax form or failing to meet tax obligations can result in significant penalties. The IRS imposes penalties for late filing, late payment, and inaccuracies. The late filing penalty is 5% of unpaid taxes for each month the return is late, up to 25%. Late payment penalties are generally 0.5% of unpaid taxes per month, also up to 25%.

Errors in filing—such as failing to report worldwide income when required or incorrectly claiming deductions—can trigger accuracy-related penalties, amounting to 20% of the underpaid tax due to negligence or substantial understatement of income. Misclassifying residency status, such as filing Form 1040NR instead of Form 1040, can lead to audits and additional penalties. Willful noncompliance, such as failing to report foreign accounts under FBAR or FATCA, can result in penalties of up to $10,000 for non-willful violations or the greater of $100,000 or 50% of the account balance for willful violations.

H1B visa holders should maintain detailed records, including W-2s, 1099s, and documentation of foreign income and assets. Consulting a tax professional experienced in nonresident and resident alien taxation can help avoid costly mistakes. Promptly addressing IRS notices can also reduce penalties through abatement requests or payment plans.