Is an H1B Holder a Resident Alien for Tax Purposes?

An H1B visa allows foreign nationals to work in specialized occupations within the United States. For individuals holding this non-immigrant work visa, understanding their tax residency status is important for meeting U.S. tax obligations. Tax residency is a distinct concept from immigration status, meaning one’s visa type does not automatically determine how they are taxed. Correctly identifying whether an H1B holder is a resident alien or a non-resident alien for tax purposes directly impacts their tax responsibilities, applicable deductions, and available credits. This distinction can significantly alter how income is reported and taxed by the Internal Revenue Service (IRS).

Understanding Tax Residency for H1B Holders

Determining whether an H1B holder is a resident alien or a non-resident alien for tax purposes relies on specific IRS criteria, primarily the Substantial Presence Test. A resident alien is taxed on their worldwide income, similar to a U.S. citizen, while a non-resident alien is taxed only on income from U.S. sources. The Green Card Test is another method, though less common for initial H1B tax residency determinations.

The Substantial Presence Test (SPT) is the most common way an H1B holder becomes a resident alien for tax purposes. This test requires an individual to be physically present in the United States for at least 31 days in the current year and 183 days over a three-year period. The 183-day calculation involves counting all days of presence in the current year, one-third of the days present in the first preceding year, and one-sixth of the days present in the second preceding year.

A key aspect for H1B visa holders is that they are not considered “exempt individuals” under the SPT. This means their days of physical presence in the U.S. count towards the 183-day threshold. Unlike certain F, J, M, or Q visa holders who may be exempt for a period, H1B holders’ days are fully counted from their arrival, making it common for them to meet the SPT within their first few years in the U.S.

The “closer connection exception” allows an individual who meets the SPT to still be treated as a non-resident alien if they are present for less than 183 days in the current year and can establish a closer connection to a foreign country. This exception does not apply if an individual has taken steps toward becoming a lawful permanent resident. H1B holders often pursue permanent residency, making this exception less applicable.

The Green Card Test is a simpler criterion: an individual is a resident alien for tax purposes if they are a lawful permanent resident of the United States at any time during the calendar year. This means holding a green card. While many H1B holders eventually apply for green cards, this test applies after a change in their immigration status, not for their initial H1B tax residency determination.

Tax Obligations Based on Residency Status

Once an H1B holder’s tax residency status is established, their tax obligations and filing requirements differ significantly. This distinction dictates which income is taxable, what deductions are available, and the appropriate tax forms to use. The IRS provides specific guidance for both resident and non-resident aliens.

A resident alien is taxed on all income from all sources, worldwide. Resident aliens are eligible to claim the standard deduction or itemize deductions, similar to U.S. citizens. They can also claim most tax credits available under U.S. tax law, which can reduce their overall tax liability.

Resident aliens have more flexibility in filing their tax returns, including the option to file jointly with a spouse if they are married and meet eligibility requirements. The primary tax form used by resident aliens is Form 1040, U.S. Individual Income Tax Return, along with any necessary schedules. This form is comprehensive and covers various income types, deductions, and credits.

In contrast, a non-resident alien is taxed only on income from U.S. sources. This includes wages earned for work performed in the U.S., as well as certain types of investment income. Non-resident aliens face limitations on deductions and credits; for instance, they generally cannot claim the standard deduction and may only be able to claim specific itemized deductions.

Non-resident aliens have restrictions on their filing status and cannot file jointly with a spouse. The common tax form used by non-resident aliens is Form 1040-NR, U.S. Nonresident Alien Income Tax Return. This form is specifically designed to report U.S.-source income and account for the limited deductions and credits available to non-residents.

The tax treatment of Social Security and Medicare taxes, often referred to as FICA taxes, also differs. Non-resident aliens are exempt from these taxes on certain visa types, though H1B holders are subject to them.

Navigating Initial and Changing Tax Status

An H1B holder’s tax status can transition in their initial year of arrival or in subsequent years due to meeting residency tests or changes in their immigration circumstances. Specific elections and filing procedures apply to these transitional periods. Understanding these options is important for proper tax compliance.

The “First-Year Choice” under Internal Revenue Code Section 6013 allows certain individuals who become resident aliens during a tax year to elect to be treated as resident aliens for the entire tax year. To qualify, an individual must not have been a resident alien in the preceding tax year, must meet the Substantial Presence Test in the subsequent year, and must be present for at least 31 consecutive days in the current year. This election can be beneficial for H1B holders who arrive late in the year but anticipate meeting the SPT in the following year, as it allows them to claim the benefits of resident alien status for the full arrival year.

A separate election permits a non-resident alien who is married to a U.S. citizen or a resident alien to be treated as a resident alien for the entire tax year. If this election is made, both spouses must agree to be taxed on their worldwide income. This can simplify tax filing for couples and potentially allow for joint filing benefits.

When an individual is both a non-resident alien and a resident alien in the same tax year, they are considered a “dual-status alien.” This often occurs in the year an H1B holder first arrives in the U.S. and meets the SPT partway through the year, or in the year they depart permanently. Dual-status aliens file Form 1040 with Form 1040-NR attached, or vice versa. The tax return typically includes a statement explaining the change in status and how income and deductions are allocated.

In the final year of U.S. residency, before an H1B holder permanently departs the country, they may also be considered a dual-status alien. Their tax obligations will depend on whether they meet the Substantial Presence Test for that final year and when they leave the U.S. Proper filing in the year of departure ensures compliance with U.S. tax laws and accurate reporting of income earned during their final period of U.S. residency.

References

Internal Revenue Service. Publication 519, U.S. Tax Guide for Aliens.
Internal Revenue Service. Substantial Presence Test.
Internal Revenue Service. Resident Aliens.
Internal Revenue Service. Nonresident Aliens.
Internal Revenue Service. First-Year Choice.
Internal Revenue Service. Dual-Status Aliens.