First US Tax Return After Moving to America

As someone who has moved to the United States on an H-1B, L-1, F-1, or another visa during mid- or later years, this transition alone will make your first US tax return more complicated. The complication generally arises when you move to the USA and have spent part of the tax year in the USA and another part in India, which triggers filing complications.

Your US tax residency and your US immigration status are related, but they are not the same thing. For federal tax purposes, the IRS seeks the SPT substantial presence test or Green Card Test. In fact, in some situations, the specific first-year choice also allows you to exclude U.S. tax residence from the qualifying date upon your arrival year.

In this blog, we will explain the entire process in simple terms and highlight key rules you, as a taxpayer, must abide by.

Why Your First US Tax Year Can Be Different?

Imagine that you have been working in India from January till July and then plan to move to the United States. Upon moving, you did not just immediately become a tax resident of the United States on January 1 just because you moved to the US later that year. Instead, your tax residency will be evaluated under the applicable rules. You may have:

• A period where you will be treated as a nonresident before becoming a US resident.
• A resident period after your residency begins.
• Or, in some cases, the nonresident status for the entire year.

In cases where you are both a resident and a non-resident for the same tax year, you will be considered a dual-status alien. And henceforth, your first tax return will ask for more in-depth analysis than the returns that will be filed later on.

Step 1: Evaluate Your Residency In The US

The very first and foremost step is to determine whether you are a US resident for federal tax purposes. The evelasuiese sis done based on the two tests.

1: Green Card Test

Under the immigration laws of the United States, if you are a permanent resident of the United States, then you are generally treated as a US tax resident.

2: Substantial Presence Test

If you are not eligible for a green card, the substantial presence test helps determine your tax residency.

To pass the substantial presence test, you must have

• You must be physically present in the United States for at least 31 days during the current year.
• And at least 183 days during the current and the preceding tax years.

As someone living in the USA, don't assume that every day you're spending in the USA is automatically counted. Specific individuals, such as trainees, students, and teachers on the M, Q, J, and F visas, may qualify as exempt individuals with respect to day counting under the Substantial Presence Test for a limited period. Being classified as an exempt individual does not mean that the person is exempt from US taxes; it certainly means that the days may be excluded from the residency calculation.

Step 2: Get to Know Your Residency Starting Date

Once you have made it clear about that fact that you are a tax resident in the United States, the next question is:

When Did Your US Residency Begin?

Knowing the date when your US residency begins is important as it will separate your non-resident and resident periods.

As a newcomer, if you are a resident, the Substantial Presence Test (SPT), the date of residency status can depend on the rule for when the individual meets the test. The answer to this is not always just: "the date I entered the US".

Hence, you must keep a precise record of.

• The date you have arrived in the United States.
• Any days when you have left the US.
• Your previous US visits.
• Your entire visa history.
• Your green card status, if applicable
• Your previous days in the US in the past two years.

What Is the First-Year Choice?

Generally, the first-year choice is a special rule that helps people who have moved to the United States during the year.

The First-Year Choice is a special election that can allow an eligible person who does not meet the Green Card Test or SPT in the arrival year to be treated as a U.S. resident for part of that year. This generally results in a dual-status return.

However, this is generally not an automatic election, and it does not simply turn your entire first year into the resident year.

To Qualify, You Must Fulfill the Following Requirements

You must not be a resident under the SPT or the green card test for the current year, as well as the preceding tax year.

You need to be present in the United States for at least 31 days continuously during the current tax year.

You were in the United States for at least 75% of the days in each of the 31-day periods, from the first day of each period through the end of the year, under IRS rules that allow up to 5 days of absence to be treated as days of presence.

In the following, you become a US resident under the SPT.

If you qualify and choose to proceed, your residency will start on the first day of the 31-day qualifying period.

Which United States Tax Return Do You File?

The filing of the United States tax return depends on your tax residency status. The following table demonstrates your situation and the applicable form you must use.

For individuals who were nonresidents at the beginning of the tax year and later became residents, the IRS advises filing Form 1040 marked as a Dual Status Return and attaching Form 1040-NR as the Dual Status statement.

The appropriate filing requirements will vary depending on our circumstances, so do not pick Form 1040 simply on the basis that you have received a Form W-2 from your employer in the United States.

In What Ways Does Your Income Get Taxed?

In the first year return, this is one of the most important parts:

During Your Nonresident Period

In case, during the beginning part of the year, if you were classified as a non-resident of the US, the US federal taxation authorities will eye the income generated from the United States and the income that is effectively connected with the US trade or business, subject to the applicable rules and tax treaties

Hence, the salary you earned in India while living and working there before you attained United States tax residency status will generally not become US taxable income simply because you later moved to America.

However, this does not mean every type of foreign income will be excluded automatically. Meaning the source of the income, your residence status, tax rate, and the type of income can matter.

While Your Resident Period

Once the period of your US tax residency begins, the rules generally become much broader.

US tax residents are taxed on their worldwide income just like US citizens.

That can include the income from:

• Indian salary
• Indian bank interest
• Rental income earned from a property in India
• Capital gains
• Dividends
• Foreign investments
• Other foreign source income.

The essential factor here is the timing of your income and your tax residency period.

What About The Indian Income Earned Before Moving To The United States

For a while, think of someone who has been working in India from January through July and moved to the United States in August.

Now, if someone is a US nonresident from Jan to July, If you were a U.S. nonresident while living and working in India, salary for services performed in India is generally foreign-source and generally isn't subject to U.S. federal income tax merely because you later become a U.S. resident. Other types of income should be reviewed separately because their sourcing rules can differ.

Now, on the contrary, if the person did become a resident of the US on August 1, the income earned and derived during the period they have been a resident will generally be subject to US tax, including foreign-source income.

Hence, it is strongly recommended to keep the income records prepared by the date, and the source is useful.

What Documents Should You Keep Handy

Before you start preparing your first US tax return, ensure you have the following documents handy.

• Your US arrival and departure dates.
• Your passport travel history.
• Visa and other immigration documents.
• Green card information if required.
• Social Security number or the ITIN.
• W-2 Form.
• Form 1099
• Your US bank and investment statements.
• Indian salary records.
• Your Indian bank interest statements.
• Rental income records.
• Foreign investment information.
• Records of the taxes paid in India.
• Foreign account information.
• Information needed to evaluate whether the FBAR or Form 8938 is applicable.

Please note that providing the accurate dates is extremely important because the IRS uses physical presence and residency rules to evaluate your tax status.

Common First Year Tax Mistakes

The following characteristics are generally developed during the first year.

1: Having a Notion That The Visa Alone Is Enough To Determine Tax Residency

In reality, your H-1B, L-1, or F-1 visa alone is not enough to automatically determine whether you are a US tax resident. Your US tax residency must be evaluated with respect to the present US tax rules, including the Substantial Presence Test exemptions.

2: Automatically Using Form 1040

The new immigrant often assumes that everyone living in America files Form 1040 for their US tax return and ends up doing the same. However, this is not always the case; In your year of arrival, you may need to file Form 1040-NR, Form 1040, or a dual-status return depending on your U.S. tax residency status and filing requirements.

3: Treating The First Year Choice As Automatic

Generally, the first-year choice has specific eligibility requirements and further procedural requirements. You shall actively choose whether you are willing to comply and plan to use it.

4: Reporting All The Indian Sources Of Income Without Taking Residency Dates Into Consideration

When you report your every rupee of income earned in India, it may be incorrect if some of it is taxed during non-resident periods. Additionally, failing to report foreign income earned during your US residency can create problems. So what is the solution then? Well, the solution is simple: regarding the residency period's applicability, just separate your income.

5: Ignoring the Previous US Visit

The substantial presence test eligibility tier is based on the current year and the two preceding years. Which type, if any, the previous type to the US has, can affect your SPT calculations.

6: Missing Out On The Foreign Account Reporting

Your first U.S. tax return might just be only one aspect of your compliance responsibilities.

The FBAR and the Form 8938 may also need to be reviewed.

7: Ignoring The State Taxes

Federal and state tax residence are two distinct aspects of the issue.

In the United States, states have their own income taxes and residency rules, so Federal and state tax residency are separate issues. States such as New York and California have their own residency and income-tax rules, while states such as Texas generally do not impose an individual state income tax.

The Only First US Tax Return Checklist You Need!

The following are a few tips to keep in mind while filing your first return in the USA.

• Start by confirming your exact US arrival date.
• Have a look at your US travel history for the current year and the previous two years.
• Evaluate whether you meet the green card test.
• Calculate your days for the Substantial Presence Test.
• Check whether or not any visa-related exclusions are applicable in your case.
• Assess the starting date of your residency.
• Check whether you qualify for the first-year choice.
• Separate the income that you have earned before and after your residency date.
• Collect all together the W-2s, 1099s, bank statements, or the foreign income records.
• Determine whether or not Form 1040, Form 1040-NR, or a dual status return is applicable.
• Review the FBAR and the Form 8938 requirements.
• Check and adhere to the state tax filing requirements.
• Determine whether the US-India tax treaty provisions will affect your situation.

The Bottom Line

After moving to the United States from India, filing your first US tax return can be complicated due to your immigration status, tax residency date, income sources, and prior tax history, all of which can affect the final results. However, the big mistake is assuming the fact that moving to the United States automatically means you file a normal full-year Form 1040.

First, estimate your tax residency, then determine your residency start date. Further, separate your resident and non-resident income, check whether or not the first-year choice is applicable to you, and then review your foreign account reporting requirements.

As an NRI moving to the United States, getting through your first year back can be overwhelming, and to avoid unnecessary taxes or missed reporting requirements, seek professional help. Savetaxs helps NRIs and new US residents ensure their tax residency status remains intact on their first US tax return after moving to America. Further, we help with first-year filing requirements, foreign income, FBAR obligations, and other US-India DTAA tax year considerations.

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