Tax Tips for H1B Visa Holders

H1B Visa

If you are on H1B in the U.S., here are a few simple, yet important, tax tips that you should consider:

  • As most of us know, tax return preparation starts with basic document called “Form W-2”.  W2 is a document that details your payroll for the year and the taxes withheld from that payroll. At the end of the year, be sure to obtain your W2 from your employer. If you worked for different employers during the year, get a W2 from all of them because you are most likely to get an IRS notice for not reporting W2 income on your tax returns. There are other different forms of interest from the payer of income depending on income type like form 1099 for interest income from U.S. banks, 1099-B for stock sales etc. Be sure to gather these documents at one place so when you have to file the taxes, you have them all handy.
  • If you worked for multiple employers in different states during the tax year, then you need to file state income tax returns in all those states in addition to the federal return in form 1040/1040NR as the case may be, depending on your residential status. Most of the times, you get refund of the state taxes withheld from your payroll by merely filing the state income tax returns.
  • If you are on H1B visa and a resident of U.S. as per the U.S. tax laws, which most of the people are, then you generally are subject to U.S. Income taxes on your worldwide income. This includes, but is not limited to, any interest income from bank accounts in a foreign country, income from rental property, and dividend income.
  • One very important and often overlooked provision applicable to U.S. tax residents is that if they have financial interest in or possess signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of financial account, he/she is required to file Form TD F 90-22.1 with the IRS by June 30 each year if aggregate value of the financial account(s) exceeds $10,000 at any time during the year. Remember, there is no extension to file this form and penalty for noncompliance is $10,000 per year.
  • If you had some income in a foreign country and there were some taxes withheld in foreign country on that income, then you could claim the credit of those taxes paid on your U.S. tax returns.
  • The spouse of a person on H1B visa can be treated as resident for tax purposes by filing a declaration along with the tax returns even though he/she might not admitted to the United States. The advantage of doing so is that you are able to claim additional spousal exemption on the tax returns which directly could result in tax savings.
  • Dependents of U.S. resident, despite not being admitted to the United States, can be claimed as dependents on U.S. tax returns if the rules that apply to U.S. citizens are met. There are specific rules for qualifying child/qualifying relative for claiming as a dependent.
  • For the purposes of claiming the exemption for spouse or dependents, ITIN (income tax identification number) needs to be applied along with the tax return. This can be done by filing a simple form “Form W-7” along with the tax returns.
  • If for half of the year you were on OPT and half of the year on H1B, then there should not be any withholding for social security and medicare out of your payroll for the period you were on OPT. If your employer has withheld money for these, you can ask refund for withholding of social security and medicare for the OPT period. The exemption from social security and medicare taxes for services performed in U.S. is available as long as such services are allowed by the USCIS, and are performed to carry out the purposes for which the student visa was issued.
  •  An important possible tax deduction could be moving expenses for people who came to U.S. during the year from a foreign country or moved from one U.S. location to another during the year for employment. You may be able to deduct moving expenses on your tax returns if you meet a specified distance and time test. You can deduct the cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home. For the purposes of moving expenses, the term “personal effects” includes, but is not limited to, movable personal property that the taxpayer owns and frequently uses.
  • Few things that you could consider to save or defer your taxes.
    • Make investments in retirement accounts to defer the taxes like 401K, traditional IRA.
    • If you invest in security, plan to hold it for at least one year to make the gain/loss long term which is tax favorable.
    • Consider buying a home because you could deduct mortgage interest deduction, & real estate tax deduction. If you already have home, pay your mortgage payment of next year’s first month early. (E.g. instead of 1 Jan, pay 31st Dec). This way you can get deduction in current year. Also pay real estate taxes early.
    • Be generous, donate your clothing and household items to charity.
    • If your employer has flexible spending account benefits for any medical or dental or dependent care cost, consider using that.
    • You can deduct Medical expenses only if it exceeds 7.5% of your adjusted gross income (AGI). So keep track of your dental and medical expenses from start of the year to get this deduction.

Introduction to the types of business entities, their formation and taxation

Business-Entity-Types-Screensaver_1

“Nobody likes taxes, but they’ve been around forever. Taxes date back all the way back to the year one, when baby Jesus was visited by two wise men and an IRS agent, who demanded half the family’s frankincense.” -Jimmy Kimmel.

So there is nothing much we could do about existence of taxes and the fact that they are going to remain forever but what we could do is trying to know more about various options available when we start our business as to type of business structure available, their tax impact so that we go for one that best suits our circumstances. To start with, it will be interesting to go through the following to understand the types of business entities that are available.

  1. Sole Proprietorship – Sole proprietorship refers to the form of business when someone in his/her individual capacity engages in to business activity. There are no legal formalities required to start sole proprietorship except that registration may be required with city or county. All the income from business as a sole proprietorship is reported on individual tax returns of the owner as income from business. The main advantage of this form of business is that it is simple to start. The disadvantage is that the individual is personally liable for the liabilities of the business.
  2. Partnerships – When two or more person join together to do business then it is called a partnership. Like sole proprietorship there are no legal formalities required to start a business in partnership. Typically partners enter in to a formal agreement that specifies the terms of the partnership. Partnerships are flow through entities which means that the income of the partnership is not taxed at partnership level and flows to individual tax returns of the partners for their respective share of income where they pay taxes for their respective share though partnership does need to file a separate tax return which is an information return. Partners are jointly and severally personally liable for the liabilities of the partnership. There are two kind of partnerships; general and limited partnership. In general partnership all the partners have unlimited liability whereas in limited partnership, which needs to have one general partner at least, only general partners have unlimited liability. Some states do permit LLP (limited liability partnerships) to protect the liability of general partners.
  3. Limited Liability Companies (LLC’s) – LLC is formed under the State law by filing charter of the Company with the Secretary of State. The owners of the LLC’s are called members. Some states allow one member LLC to be formed.  One member LLC is a disregarded entity as per the tax laws that means LLC does not file any separate tax returns and all the income of the LLC is reported on member’s personal tax returns. Two or more members LLC’s are taxed like partnerships i.e. they are flow through entities which means that the income of the LLC is not taxed at the corporate level and flows to individual tax returns of the members for their respective share of income where they pay taxes for their respective share though LLC does need to file a separate tax return which is an information return. LLC, with one or more members, can choose to be taxed as a C-Corporation by making a specific election with the IRS within the specified time limit. The liability of the members is limited.
  4. C Corporation – C-corporation is formed under state law by filing charter of the company with the Secretary of the State. The owners of the Corporation are called stockholders. The income of the C-Corporation is taxed at a corporate level and if any distribution is made to stockholder after tax paid income that also becomes subject to taxes as dividend income. The stockholder of C-corporation has limited liability.
  5. S Corporations- S Corporation is initially formed as a C-Corporation under state law by filing a charter document with the Secretary of State and thereafter, an election if filed with the IRS requesting the entity to be taxed as S Corporation. The owners are called stockholders and have limited liability. S Corporation is a flow through entity which means the income of the S Corporation is not taxed at corporate level and flows to individual tax returns of the partners for their respective share of income. S Corporation needs to file a separate return which is an information return.

2012 Corporate Income Tax Rates

If Taxable Income Is: The Tax Is:
Not Over $50,000 15% of the taxable income
Over $50,000 but not over $75,000 $7,500 plus 25% of the excess over $50,000
Over $75,000 but not over $100,000 $13,750 plus 34% of the excess over $75,000
Over $100,000 but not over $335,000 $22,250 plus 39% of the excess over $100,000
Over $335,000 but not over $10,00,000 $113,900 plus 34% of the excess over $335,000
Over $10,00,000 but not over $15,00,000 $3,400,000 plus 35% of the excess over$10,00,000
Over $15,00,000 but not over $18,33,333 $5,150,000 plus 38% of the excess over $15,00,000
Over $18,33,333 $6,416,667 plus 35% of the excess over $18,33,333

2012 Estates and Trusts Tax Rates

If Taxable Income Is: The Tax Is:
Not Over $2,400 15% of the taxable income
Over $2,400 but not over $5,600 $360 plus 25% of the excess over $2,400
Over $5,600 but not over $8,500 $1,160 plus 28% of the excess over $5,600
Over $8,500 but not over $11,650 $1,972 plus 33% of the excess over $8,500
Over $11,650 $3,011.5 plus 35% of the excess over $11,650

2012 Federal Individual Income Tax Rates

Filing Status: Married Filing Jointly and Surviving Spouse

If Taxable Income Is: The Tax Is:
Not Over $17,400 10% of the taxable income
Over $17,400 but not over $70,700 $1,740 plus 15% of the excess over $17,400
Over $70,700 but not over $142,700 $9,735 plus 25% of the excess over $70,700
Over $142,700 but not over $217,450 $27,735 plus 28% of the excess over $142,700
Over $217,450 but not over $388,350 $48,665 plus 33% of the excess over $217,450
Over $388,350 $105, 062 plus 35% of the excess over $388,350

Filing Status: Head of Household

If Taxable Income Is: The Tax Is:
Not Over $12,400 10% of the taxable income
Over $12,400 but not over $47,350 $1,240 plus 15% of the excess over $12,400
Over $47,350 but not over $122,300 $6,482.50 plus 25% of the excess over $47,350
Over $122,300 but not over $198,050 $25,220 plus 28% of the excess over $122,300
Over $198,050 but not over $388,350 $46,430 plus 33% of the excess over $198,050
Over $388,350 $109, 229 plus 35% of the excess over $388,350

Filing Status: Unmarried Individual (Other than Surviving Spouses and Heads of Households)

If Taxable Income Is: The Tax Is:
Not Over $8,700 10% of the taxable income
Over $8,700 but not over $35,350 $870 plus 15% of the excess over $8,700
Over $35,350 but not over $85,650 $4,867.50 plus 25% of the excess over $35,350
Over $85,650 but not over $178,650 $17,442.50 plus 28% of the excess over $85,650
Over $178,650 but not over $388,350 $43,482.50 plus 33% of the excess over $178,650
Over $388,350 $112,683.50 plus 35% of the excess over $388,350

Filing Status: Married Individual Filing Separate

If Taxable Income Is: The Tax Is:
Not Over $8,700 10% of the taxable income
Over $8,700 but not over $35,350 $870 plus 15% of the excess over $8,700
Over $35,350 but not over $71,350 $4,867.50 plus 25% of the excess over $35,350
Over $71,350 but not over $108,725 $13,867.50 plus 28% of the excess over $71,350
Over $108,725 but not over $194,175 $24,332.50 plus 33% of the excess over $108,725
Over $194,175 $52,531 plus 35% of the excess over $194,175