Starting a new chapter in the United States — whether for a new job, to start a business, or to join family — is an incredibly exciting journey. However, one of the biggest shocks for new arrivals is navigating the US tax system, which operates very differently from most other countries.
The most critical concept to understand is that the US taxes its residents on their worldwide income. A simple oversight of the rules that determine your tax residency can lead to significant, unexpected tax bills and severe penalties related to your assets back home.
Who is a US resident for tax purposes?
Your immigration status (your visa) and your US tax status are often different. The IRS determines US tax residency primarily through two tests:
- The Green Card Test: you are a US tax resident from the first day you are physically present in the US after becoming a Lawful Permanent Resident.
- The Substantial Presence Test (SPT): this mathematical test relies on your physical days in the US. You generally meet the SPT if you are present for at least 31 days in the current year, and at least 183 days over a three-year weighted period. The calculation is: all days in the current tax year + 1/3 of days in the prior year + 1/6 of days in the second prior year.
- Visa-specific day counting: certain visa types, such as F-1 and J-1 student visas, may exempt your days from counting towards the SPT for a limited period (for example, your first five calendar years as an "exempt individual"). However, for H-1B, L-1, and O-1 visa holders, days typically count from your first day of presence.
Reporting your global assets and income
Becoming a US tax resident means your global financial life comes under IRS scrutiny. You are required to report worldwide income and disclose foreign assets, with substantial penalties for non-compliance.
- Worldwide income: you must report interest from your Indian FDs and PPF accounts, dividends from Indian stocks, and rental income from property in India on your US tax return.
- FBAR (Foreign Bank Account Report): if the combined balance of your foreign financial accounts exceeds $10,000 at any time during the year, you must file FinCEN Form 114. Non-wilful penalties start at over $10,000 per unreported account.
- Form 8938 (FATCA): a separate IRS filing for foreign financial assets with higher reporting thresholds but equally severe penalties for non-compliance, starting at $10,000.
- And other complex forms such as 8621 (PFIC), 8865 (foreign partnership), or 5471 (foreign corporation).
Consider tax treaties before concluding your residency status
Even if you meet the Substantial Presence Test, US tax treaties, such as the US–India tax treaty, can significantly alter your tax obligations. These treaties are designed to prevent double taxation and offer specific exemptions.
The "tie-breaker" rules are particularly important if you could be considered a resident of both the US and India, as they establish a single country of residence for treaty purposes and can prevent double taxation on certain types of income.
If you are an Indian student or trainee/business apprentice temporarily in the US for education or training, Article 21 of the India–US tax treaty provides that you are generally exempt from US tax on payments received from abroad for your maintenance, education, or training. Students can generally claim this exemption for up to five years. Additionally, Indian students are allowed a standard deduction (as if they were resident aliens) on their non-resident tax returns — a provision that does not exist in other US tax treaties.
The complication of part-year residency
Often, a person on a work visa meets the SPT mid-way through their first year in the US. This creates a "dual-status" tax year where you are a nonresident for part of the year and a resident for the other part. This is complex because your tax and reporting obligations change on your residency starting date.
Making the election to be a full-year resident
In some cases, a dual-status taxpayer or a nonresident married to a US citizen or resident may choose to be treated as a US resident for the entire year. This election, made under IRC §6013(g) or (h), allows the couple to file a joint tax return.
- The trade-off: the primary benefit is the ability to file jointly and claim certain tax deductions (such as the standard deduction). However, the major consequence is that your worldwide income for the entire year becomes subject to US taxation, not just from the residency start date.
Where this leaves you
Your move to the US is a major life event. Don't let complex tax rules create unexpected problems. Getting professional help before you immigrate can unlock tax planning opportunities and significantly reduce surprise tax consequences. The international tax team at AlignMyTax specialises in helping individuals navigate their US tax and reporting obligations during their immigration journey.
Disclaimer. This article is for informational purposes only and does not constitute legal or tax advice. International tax rules turn on the specific facts and circumstances of each case, and thresholds and procedures change. Please consult a qualified tax professional before acting on anything here. Reading this does not create a client relationship.