From F-1 to H-1B: the tax mistakes of the first few years

The first years in the US set habits that are expensive to undo. Most of the avoidable errors come from filing as a resident when you were a non-resident, or the reverse.

While on F-1 or J-1

During the five-calendar-year exempt period you are a non-resident alien for tax purposes and file Form 1040-NR, not 1040. Commercial resident-return software will happily prepare the wrong form for you. The 1040-NR is a different return, and credits such as the education credits are mostly not available on it.

Indian students have a treaty advantage worth knowing: IRS Publication 519 lists a treaty benefit (Article 21(2) of the India-US treaty) under which students and business apprentices from India can claim the standard deduction on Form 1040-NR. Most other non-residents cannot. It is claimed on the return and is often missed.

File Form 8843 every year as well. It carries no tax but records that your days are exempt.

FICA on student and OPT wages

Wages of F-1 and J-1 students, including OPT and STEM OPT, are generally exempt from Social Security and Medicare tax while you are a non-resident alien. If your employer withheld FICA, ask them to refund it first. If they will not, the route is Form 843 with Form 8316 and supporting documents to the IRS. Once you become a resident for tax purposes, FICA applies as normal.

The year the status changes

Moving from OPT to H-1B often means the year of change is still a non-resident year, and the next year is the first resident year. Whether to use a first-year choice, whether the move to H-1B in the same year as the change of employer creates a dual-status return, and which year takes the FBAR and Form 8938 obligations, all depend on exact dates. The sixth calendar year in F-1 status can also turn out to be a resident year.

Social Security for staff posted from India

India and the US have a Social Security agreement (in force since 2011). An employee sent by an Indian employer to the US can remain in the Indian provident fund system and be exempt from US Social Security and Medicare for up to five years, but only with a certificate of coverage issued by the Indian authority. Without it, the US employer has to withhold FICA. Ask for the certificate before you travel; getting it later is slower.

The same agreement lets periods of Indian contributions count toward the 40 credits needed for US Social Security retirement benefits, so you do not lose that history if you leave the US before earning enough credits.

A checklist for the first resident year

1. Confirm the residency start date (see the residency article).
2. Get an SSN, not just an ITIN, as soon as you are eligible. Several credits turn on it.
3. Update the W-4 for two incomes and for the end of student status (withholding).
4. List every Indian account you hold, including ones you rarely use. They are reportable from this year.