Navigating the H-1B Residency Riddle: Tax Dilemmas for Indian Students in the U.S.
H-1B residency riddle. This tax residency change gives formidably tough competition to Indian students who transit from F-1 visa. The process, normally governed by the SPT is further complicated by the fact that tax laws have different interpretations among U.S accountants, thus giving a confusion to students approaching the end of their F-1 visa benefits.
The F-1 Visa Tax Exemption and Its Limitations
The U.S. tax law allows students who have F-1 visas to be offered a quint rare five-year exemption from the F-1 visa that allows them to pay much less in taxes compared to the U.S. resident, and they do not have to declare their global assets. The tax benefit only exists for five calendar years, and hence, at this end, they are bound to become U.S. tax residents according to the substantial presence test. The SPT is a test devised by calculating the number of days spent within the United States for this year and the previous two years.
A significant tax benefit would be derived by the F-1 visa by students who plan to pursue long-term study, which is postgraduate or Ph.D. studies. However, subsequently, after the five-year exemption period, even though he plans to go back to India, he would be compelled to show his bona fide intention to do so by showing strong ties such as family, property, and permanent homes to retain his non-resident tax status. Otherwise, it would lead to payment of higher taxes and self-reporting of global assets.
The H-1B Visa and Status of Residence: Contrasting Interpretations
The H-1B residency puzzle arises when students apply for an H-1B visa after graduation. Some U.S. CPAs claim that the mere application for an H-1B visa itself can make it implicate a particular intent to become a permanent U.S. resident. Such a conservative interpretation could lead to classifying students as U.S. tax residents before their official visa status changes and thus make students subject to stricter tax rules.
Says Priyanshi Chokshi, an attorney at Adarsha Legal: “The bottom line is whether advance steps have been taken for permanent residency while applying for an H-1B visa. The entire H-1B application process doesn’t guarantee approval and is left for a lottery. However, most CPAs consider even the mere presentation of an H-1B application as such a significant presence to classify students as tax residents of the U.S. and then expect them to report international assets and pay taxes at a higher level.
Compliance issues and conservative approaches
This expansive SPT is creating anxiety among the Indian students who want to complete their studies and stay as tax non-residents in the United States. If the students have to file as residential taxpayers, then they would be subject to more liability, but in the same process, the student would be required to disclose all such international assets, like bank accounts, property, and investments located in India, to the authority of tax in the U.S. For some students, these steps require cutting off all nexus with the Indian assets so that compliance is made with the tax regulations in the U.S., and in this way, the students would be creating far greater trouble for themselves.
Several CPAs, even without such evident guidance from the IRS, are taking conservative positions to not incur any IRS penalties. Such conservatism is causing much stress to students who have to balance between tax filing deadlines and deadlines for submitting visa applications.
Balancing tax compliance and visa uncertainty
In the case of tax filing in the U.S., generally speaking, it is due on April 15. However, in the case of H-1B applications, they can file any time up to June end. Students get into a peculiar double bind about whether or not to apply for the H-1B visa at the time of tax return filing. A student may not have filed for H-1B by April but then decides to file later. In such circumstances, the accountant might still classify the student as a U.S. tax resident relying on the perceived intent to apply for the H-1B visa.
Conclusion
The H-1B residency puzzle is one tricky situation for Indian students in the U.S., especially when conflicting interpretations of tax are presented. While some CPAs err on the conservative side for ensuring compliance with U.S. tax laws, students should be very alert to the financial and legal implications of going from an F-1 visa to an H-1B visa. In order to avoid unnecessary penalties and stress, students must ensure there is no ambiguity left in tax residency rules and seek professional help for such a procedure.
