H-1B Visa Taxes: Why You Are a Resident Alien

An H-1B worker who lands in March and files a first return the following spring almost always expects to be a nonresident alien. The visa is temporary, the employment is sponsored, the plan may be to go home in a few years. None of that matters. The H-1B category is absent from the statutory list of exempt individuals, so every day of presence counts from arrival. The expensive part is not the rate. It is the reporting regime that arrives with residency, and what it does to a portfolio of home country mutual funds.

Are H-1B Visa Holders Exempt Individuals Like F-1 and J-1 Students?

No. IRC §7701(b)(5) defines exempt individual as a closed list, and H-1B is not on it. The list covers foreign government-related individuals on A or G visas, teachers and trainees on J or Q visas, students on F, J, M, or Q visas, and professional athletes competing in charitable events.

An exempt individual does not count days of presence at all, which is why an F-1 student can remain in the United States for five calendar years as a nonresident alien while filing Form 8843 to document the exclusion. An H-1B worker has no such shelter and files no Form 8843. This jars the large population that spent years in F-1 status and then changed to H-1B: the day H-1B status takes effect, exempt status ends and the count begins. A worker whose status changed October 1 counts 92 days that year, which weight at one third in the following year. Those 30.67 weighted days leave roughly 152 more to accumulate, so the 183-day threshold is crossed around the start of June in year two, not early in it. Either way the residency starting date is January 1 of year two, because residency relates back to the first day of presence in the year the test is satisfied. For counting mechanics and prior-year weighting, see our substantial presence test guide.

The closer connection exception is narrower than most H-1B workers assume, and its threshold condition usually ends the analysis. IRC §7701(b)(3)(B)(i) opens the exception only to an individual present in the United States on fewer than 183 days during the current year, and (B)(ii) additionally requires a foreign tax home and a closer connection to that country. A worker present for a full year of H-1B employment fails the day count outright and cannot use Form 8840, whatever the immigration file shows.

Where the day count does leave the exception open, IRC §7701(b)(3)(C) can still close it: subparagraph (B) does not apply if at any time during the year the individual had an application for adjustment of status pending or took other steps to apply for status as a lawful permanent resident. An individually filed Form I-485 or Form I-539 is the clear trigger. Employer-filed steps are contested rather than settled: the statute is keyed to steps the individual took, a PERM labor certification (ETA-9089) is filed by the employer with the Department of Labor, and current Publication 519 names no specific form at all, saying only that you personally applied, or took other steps during the year, to change your status. Treat an employer-initiated green card process as a fact question worth documenting, not an automatic disqualification.

When Does an H-1B Holder Become a US Resident Alien?

Residency begins on the first day of physical presence in the calendar year in which the substantial presence test is satisfied, under IRC §7701(b)(2)(A)(iii). Not the day the test is mathematically met, and not January 1. It relates back.

That rule produces the first-year dual-status return. IRC §7701(b)(2)(C) softens the edge: up to 10 days of presence may be disregarded in fixing the starting date if a tax home in and closer connection to a foreign country are maintained during those days. Those days still count for the test itself.

The dual-status year carries real cost. A dual-status filer cannot claim the standard deduction, which for 2026 is $16,100 single and $32,200 married filing jointly under Rev. Proc. 2025-32, cannot file jointly, and cannot use head of household rates. The narrow India treaty standard deduction exception runs to students and business apprentices, not H-1B workers. Our dual-status alien return guide covers the splitting mechanics.

Should an H-1B Holder Make the First-Year Choice Under Section 7701(b)(4)?

The first-year choice lets a worker who fails the substantial presence test in the arrival year elect resident treatment for part of that year anyway, converting a full nonresident year into a dual-status year. It is usually worth making only when the worker is married and can pair it with a full-year resident election.

Standing alone the election is rarely valuable, since it still yields a dual-status return with no standard deduction and no joint filing. Its value is as a stepping stone for a married worker, and which statute supplies the second step depends on the spouse's status at year end. If the spouse remains a nonresident, the pairing is an election under IRC §6013(g), which treats that spouse as a US resident for all of the year and, under §6013(g)(3), for every subsequent year until terminated. If the spouse is already a citizen or resident of the United States at the close of the year, the transition-year election under IRC §6013(h) applies instead, and §6013(h)(2) allows the same two individuals to use it only once. Either route restores joint rates, the full standard deduction, and the credits dual-status filers lose. The price is that worldwide income of both spouses for the entire year enters the US return, including pre-arrival foreign salary. The trade is arithmetic: added US tax on pre-arrival foreign income, net of §901 foreign tax credits, against joint rates plus the $32,200 standard deduction.

Do H-1B Workers Pay Social Security and Medicare Tax?

Yes, and it is not elective. IRC §3121(b)(19) excludes from employment only services performed by a nonresident alien temporarily present under an F, J, M, or Q visa while carrying out the purpose of that admission. H-1B is not listed, so H-1B wages are covered wages.

The exclusion turns on visa category and nonresident status together, which produces a result people get backwards: an F-1 student who becomes a resident alien starts paying FICA, while an H-1B worker still nonresident in the arrival year pays it anyway, because the exclusion never reached that category.

Social Security tax is 6.2% up to the annual contribution and benefit base, set at $184,500 for 2026, capping the employee share at $11,439. Medicare is 1.45% on all wages with no ceiling. The Additional Medicare Tax of 0.9% under IRC §3101(b)(2) applies above $200,000 single, $250,000 joint, and $125,000 married filing separately. Those thresholds are statutory and not indexed, so they capture more H-1B workers every year.

One genuine exception exists, narrower than commonly believed. A totalization agreement can keep a worker in the home country system and out of FICA, but it generally requires being sent temporarily by a foreign employer to that employer or a US affiliate, typically for five years or less, with a certificate of coverage. A worker hired directly by a US employer is not a detached worker. The United States also has no totalization agreement with India or China, the two largest sources of H-1B workers, and contributions are not refundable to a worker who leaves before earning 40 quarters of coverage.

What Does Worldwide Income Pull Into a Resident H-1B Return?

Everything. A resident alien is taxed on worldwide income on the same basis as a US citizen: home country bank interest, foreign brokerage dividends, rent from property left behind, gains on foreign securities, distributions from foreign retirement arrangements that are not qualified plans, and salary earned abroad during the resident period.

Two points surprise people. The foreign earned income exclusion under §911 is generally unavailable, because it requires a foreign tax home and an H-1B worker living and working in the United States has a US tax home. Relief comes instead from the foreign tax credit under §901, limited by §904 on Form 1116, which offsets double tax without excluding income. And income that is tax-free at home is usually not tax-free here: interest on many home country savings instruments, tax-exempt provident fund accruals, and locally exempt securities gains are fully taxable absent a specific treaty provision.

• FBAR, FinCEN Form 114. Required when the aggregate maximum value of all foreign financial accounts exceeds $10,000 at any point in the year, under 31 CFR §1010.350. Ten accounts at $1,200 each trigger it. Signature authority over an employer or family account counts without beneficial ownership. Due April 15, automatically extended to October 15. Non-willful penalties are assessed per report rather than per account after Bittner v. United States, 598 U.S. 85 (2023).
• Form 8938 under IRC §6038D. For a filer living in the United States, $50,000 on the last day of the year or $75,000 at any time unmarried, $100,000 or $150,000 married filing jointly. Not indexed. It reaches beyond accounts to foreign stock held outside an account, foreign partnership interests, and foreign pension interests. The penalty starts at $10,000 and escalates after IRS notice.
• Forms 3520 and 5471. A gift or inheritance from a nonresident alien exceeding $100,000 in a year is reportable on Form 3520 even though it is not income, and Form 5471 follows ownership in a foreign corporation, which catches workers who left a family company behind.

Neither the FBAR nor Form 8938 substitutes for the other, and neither substitutes for reporting the underlying income. Our international tax practice handles the US-side form set, and our cross-border tax practice the two-jurisdiction planning underneath it.

Why Are Home Country Mutual Funds the Most Expensive H-1B Tax Surprise?

Because a non-US mutual fund is almost certainly a passive foreign investment company, and the default regime under IRC §1291 is built to be worse than ordinary income treatment, and it attaches to an investment usually made years before the worker considered moving.

A foreign corporation is a PFIC under IRC §1297(a) if 75% or more of gross income is passive or 50% or more of assets produce or are held to produce passive income. A pooled fund holds securities and earns dividends, interest, and gains, so it fails both tests by design. That captures home country mutual funds, unit trusts, SICAVs, OEICs, insurance-wrapped investment products, and non-US exchange traded funds. There is no de minimis exception for small holdings and none for funds acquired before US residency.

Under §1291, an excess distribution (broadly, current-year distributions exceeding 125% of the prior three-year average, plus any gain on disposition) is allocated ratably across the entire holding period. Under §1291(a)(1)(B), the amounts allocated to the current year and to any part of the holding period before the fund's first PFIC year are included in gross income as ordinary income. Amounts allocated to the remaining prior years are taxed at the highest ordinary rate in effect for that year under §1291(c)(2), regardless of the taxpayer's actual bracket, and carry an interest charge under §1291(c)(3) computed at §6621 underpayment rates from that year's return due date. Capital gain rates never apply, and losses on PFIC shares generally cannot offset the inclusion.

The holding period runs from acquisition, not from the residency starting date. A worker who bought fund units eight years before arriving and sells in the third US year allocates the gain across the full eleven-year holding period, the eight pre-arrival years plus the three US years, and the deferred tax and compounded interest charge are computed on that entire base.

The planning answer is almost always the same and almost always unwelcome: dispose of foreign pooled funds before the residency starting date, while the gain sits outside the US tax net, and reinvest through US-domiciled funds afterward.

Can an H-1B Holder Claim Nonresident Status Under a Treaty Tie-Breaker?

Sometimes, and it is frequently a bad idea. A worker who is a resident of a treaty partner country under that country's domestic law while also a US resident under §7701(b) is a dual resident taxpayer, and the treaty residence article applies a tie-breaker cascade: permanent home, then center of vital interests, then habitual abode, then nationality, then competent authority.

Treas. Reg. §301.7701(b)-7 governs the US effect, and its limitation is where people get hurt. A dual resident taxpayer claiming treaty benefits is a nonresident alien for purposes of computing US income tax liability and files Form 1040-NR. For most other purposes the individual remains a US resident, so FBAR, Form 5471, and Form 3520 all survive the claim. Two information returns are the exception: because the position is disclosed on Form 1040-NR with a Form 8833, Treas. Reg. §1.6038D-2(e)(1) relieves Form 8938 and Treas. Reg. §1.1298-1(c)(5)(i) relieves Form 8621 for the portion of the year the taxpayer is treated as a nonresident. The treaty narrows the tax base and drops those two forms, but the rest of the reporting regime stays in place. The Form 8833 disclosure is not optional, and failure carries a $1,000 penalty per failure for individuals under IRC §6712.

Then there is the immigration problem. 8 CFR §316.5(c)(2) provides that a lawfully admitted permanent resident who voluntarily claims nonresident alien status to qualify for special exemptions from income tax liability, or who fails to file returns because he or she considers himself a nonresident alien, raises a rebuttable presumption that the applicant has relinquished the privileges of permanent resident status. Note where that rule sits: paragraph (c) is captioned Disruption of continuity of residence, so in a naturalization case the presumption operates as a defect in the continuous-residence requirement rather than as a freestanding penalty. A parallel presumption appears at 8 CFR §316.5(d)(1)(iii) for an applicant whose Form N-470 has been approved, and it extends to family members listed on the applicant's Form N-472.

By its terms the rule applies only after lawful admission as a permanent resident, so it does not reach an H-1B worker directly. The H-1B exposure is earlier and evidentiary: a Form 1040-NR with a Form 8833 asserting foreign tax residence is a signed federal filing that sits awkwardly against the immigrant intent an adjustment of status requires, and it persists into naturalization, where the presumption becomes live. A worker in a green card process should treat the tie-breaker as closed. The claim also requires actual residence in the treaty country under that country's law, which a worker who has genuinely relocated often no longer has.

What Changes When an H-1B Holder Gets a Green Card?

For income tax, usually very little. For the exit rules, a great deal. A lawful permanent resident is a resident alien under the green card test of IRC §7701(b)(1)(A)(i) from the first day of physical presence in the United States as an LPR, per Treas. Reg. §301.7701(b)-1(b) and §301.7701(b)-4(a). A worker already resident under the substantial presence test simply changes the basis of residency without changing the result.

What changes is how residency ends. Substantial presence residency stops when the presence stops. Green card residency does not. Under IRC §7701(b)(6), an individual continues to be treated as a lawful permanent resident until that status is rescinded or administratively or judicially determined to have been abandoned. Leaving does not do it. A green card holder who moves abroad and files nothing remains a US tax resident, taxable on worldwide income and accumulating FBAR and Form 8938 obligations, indefinitely.

The same subsection ends LPR status for tax purposes if the individual commences to be treated as a resident of a foreign country under a treaty, does not waive the treaty benefits, and notifies the Secretary on Forms 8833 and 8854. That is a deliberate trap door. An individual who has been a lawful permanent resident in at least 8 of the last 15 taxable years is a long-term resident under IRC §877(e)(2), and one who ceases LPR status is treated as an expatriate subject to the mark-to-market exit tax of IRC §877A, covered in our Form 8854 expatriation guide. The count has a statutory gap: the same definition excludes any year in which the individual was treated as a resident of a foreign country under a treaty and did not waive the treaty benefits, so a treaty position taken mid-career can keep the eight-year threshold from ever being reached. Otherwise the clock starts with the year LPR status begins, including a partial year, and the green card is easy to obtain relative to how expensive it can be to give back.

How Does US Residency End When an H-1B Holder Leaves?

Under IRC §7701(b)(2)(B) the residency termination date is the last day of US physical presence in that calendar year, but only if a closer connection to a foreign country is maintained for the balance of the year and there is no US residency in the following calendar year. If either condition fails, residency runs through December 31. The same 10-day de minimis rule applies at the back end, and the closer connection has to be affirmatively supported rather than assumed.

The most common departure-year error is treating the move as a clean break. The year splits, and the pre-departure period carries the full worldwide income and reporting regime.

Bottom Line

The H-1B tax problem is a classification problem before it is a computation problem, and the classification is settled by a list H-1B is simply not on. Days count from arrival, residency follows quickly, and the costs that surprise people sit on the reporting side rather than in the rate: above all the §1291 regime on home country mutual funds, where the holding period runs from purchase and the interest charge compounds from years in which the worker had no US connection at all.

Have questions about H-1B residency status, first-year elections, or foreign fund reporting? Contact TS CPA for a free consultation. We respond within the same day.

Official IRS and Government Sources

• IRS Publication 519, US Tax Guide for Aliens
• IRC Section 7701(b), Definition of Resident Alien and Nonresident Alien
• IRC Section 3121, Definitions for FICA Purposes
• IRC Section 6013, Joint Returns and Elections for Nonresident Spouses
• Rev. Proc. 2025-32, 2026 Inflation-Adjusted Amounts
• Bittner v. United States, 598 U.S. 85 (2023)
• Treas. Reg. Section 301.7701(b)-7, Coordination With Income Tax Treaties
• IRS, Foreign Student Liability for Social Security and Medicare Taxes
• IRS, Instructions for Form 8621
• IRS, Report of Foreign Bank and Financial Accounts (FBAR)
• SSA, Contribution and Benefit Base
• 8 CFR 316.5, Residence in the United States