- 1 H-1B Visas Holder: Income Tax & Offshore Reporting
- 2 What does Taxed on Worldwide Income Mean?
- 3 H-1B Visa for Temporary Workers and U.S. Tax
- 4 How does the Substantial Presence Test Calculation Work?
- 5 H-1B Visas, FBAR & FATCA (Form 8938)
- 6 FBAR & FATCA: Two-Sides of the Same Coin
- 7 H-1B Visa & Offshore Tax Compliance
- 8 We Specialize in IRS Offshore & Domestic Voluntary Compliance
H-1B Visas Holder: Income Tax & Offshore Reporting
Do H-1B Visa Holders File US Income Tax & Report Foreign Accounts? The IRS international tax rules are very complicated. Even when a person is a non-U.S. citizen, they may still be subject to U.S. tax and reporting of foreign accounts, assets and investments on forms such as FBAR & FATCA. While all U.S. Citizens and Legal Permanent Residents (aka Green Card Holders) are subject to worldwide tax and reporting, visa holders may also be subject to these same rules as well.
When an H-1B Visa Holder meets the Substantial Presence Test (SPT), they are treated the same as a U.S. Citizen or Legal Permanent Resident for income tax and reporting purposes.
The Substantial Presence Test is a test used to count the number of days over the past three (3) years (using a specific 1:1, 3:1 and 6:1 ratio) that the foreign person has resided in the United States.
When a foreign national H-1B visa holder meets substantial presence, they are subject to U.S. tax on their worldwide income, and are also required to disclose their global accounts, assets and investment to the U.S government unless one of the exceptions or exclusions apply, or they take a treaty position (if applicable).
Let’s review the basics of H-1B Income tax rules, FBAR & FATCA.
What does Taxed on Worldwide Income Mean?
The United States follows a worldwide income tax model.
This means that U.S. persons are taxed on their worldwide income and required to report their foreign assets and accounts.
U.S. person may include H-1B and other visa holders as well.
In order to qualify as a US person for tax and reporting purposes, the H-1B Visa Holder must fall into one of the following four (4) categories:
- U.S. Citizen
- Legal Permanent Resident
- Foreign National who meets the Substantial Presence Test
- Former US person who did not properly expatriate
Let’s focus on category 3, and the Substantial Presence Test for H-1B visa holders.
H-1B Visa for Temporary Workers and U.S. Tax
When a person is a US citizen or Legal Permanent Resident, their status is considered permanent — until they formally relinquish their green card or renounce their US citizenship (aka expatriation).
Unlike Legal Permanent Residents and US citizens, a foreign national such as an H1B visa Holder is only subject to US tax as a US person in any year that they meet the Substantial Presence Test.
How does the Substantial Presence Test Calculation Work?
The Substantial Presence Test is essentially a math calculation; it boils down to counting days.
The test will directly impact H-1B U.S. Tax and reporting requirements.
Generally, only U.S. Citizens and Legal Permanent residents are required to pay tax on “US Effectively Connected Income.”
However, when a person qualifies for the Substantial Presence Test, then the IRS will tax them on their WORLDWIDE income.
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:
- 1 day = 1 day in the current year
- 1 day = 1/3 day in the prior year
- 1 day = 1/6 day two years prior
Example A: If you were here 100 days in 2016, 30 days in 2015, and 120 days in 2014, the calculation is as follows:
- 2016 = 100 days
- 2015 = 30 days/3= 10 days
- 2014 = 120 days/6 = 20 days
- Total = 130 days, so you would not qualify under the substantial presence test and NOT be subject to U.S. Income tax on your worldwide income (and you will only pay tax on money earned while working in the US).
Example B: If you were here 180 days in 2016, 180 days in 2015, and 180 days in 2014, the calculation is as follows:
- 2016 = 180 days
- 2015 = 180 days/3= 60 days
- 2014 = 180 days/6 = 30 days
- Total = 270 days, so you would qualify under the substantial presence test and will be subject to U.S. Income tax on your worldwide income, unless another exception applies.
H-1B Visas, FBAR & FATCA (Form 8938)
FBAR refers to FinCEN Form 114 — which is used to report foreign bank and financial accounts.
FATCA refers to the Foreign Account Tax Compliance Act.
When an H-1B visa holder meets the Substantial Presence Test, not only are they subject to US tax on their worldwide income, but they are also subject to offshore reporting of their foreign assets, accounts, and investments.
FBAR & FATCA: Two-Sides of the Same Coin
The FBAR and FATCA Form 8938 forms are not mutually exclusive of one another.
In other words, depending on the type of assets and value of the assets, an H-1B visa Holder may be required to file either or both the FBAR and 8938 forms in the same year.
While the two forms have many similarities between them, they are not identical.
For example, while the FBAR is an electronic form that is filed separate from the tax return, FATCA Form 8938 is part of the actual 1040 tax return.
FBAR is required even when a tax return is not filed, whereas the Form 8938 is only filed when a tax return is filed.
While the FBAR is used solely to report maximum account value, the form 8938 has additional income reporting requirements, as well as additional threshold requirements for reporting.
The threshold for reporting the forms depends on the value of the accounts and assets, whether the filer is a U.S. resident or foreign resident, and whether the filer is filing their taxes Married Filing Jointly (MFJ), Married Filing Separate (MFS) or single.
H-1B Visa & Offshore Tax Compliance
When an H-1B visa Holder is out of compliance for prior year tax disclosure and international information reporting, they may qualify for one of the offshore amnesty programs to safely get into compliance.
These amnesty programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs, include:
- Voluntary Disclosure Program (VDP or “New” OVDP)
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Delinquency Procedures
- Reasonable Cause
We Specialize in IRS Offshore & Domestic Voluntary Compliance
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure and H-1B U.S. tax compliance.
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