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H-1B Tax Relocation Case Study

How We Corrected a Dual-Status Tax Return for an H-1B Professional Relocating from India

H-1B Dual-Status Tax Return: India to U.S. Case Study

The short answer: when someone arrives in the U.S. mid-year on an H-1B visa, their U.S. tax year doesn’t simply start January 1 – or the day they land. This case study covers a real Countsure engagement for an H-1B Professional Relocating from India to the United States, who arrived March 4, 2025 and had already been filed as a full-year U.S. resident claiming the standard deduction. Countsure applied IRC §7701(b) and the Substantial Presence Test and corrected the return to reflect her true dual-status year – nonresident through March 3, resident from March 4 forward – along with every downstream consequence for her Indian income, deductions, and state filing.

Key Takeaways

  • Arriving mid-year on H-1B status usually makes you a dual-status alien for that year, not a full-year resident.
  • The Substantial Presence Test (IRC §7701(b)(3)) - not your arrival date alone - sets your residency starting date.
  • Foreign salary is sourced by where you performed the work, not by when you were paid.
  • Dual-status aliens generally cannot claim the standard deduction and must itemize instead.
  • FBAR and state residency rules run on their own separate tests, independent of your federal income-tax residency period.

The Client Profile

An individual taxpayer, filing status Single, who first entered the United States on March 4, 2025 on an H-1B visa, with no U.S. presence in 2023 or 2024, no U.S. citizenship, and no green card. She continued receiving salary from her Indian employer for pre-arrival services, owned a rental property in India, held Indian bank accounts and fixed deposits, and owned a separate, mortgaged Indian property she occupied personally. Her original 2025 return, prepared elsewhere, treated her as a full-year U.S. resident and required correction.

Determining Residency: Dual-Status Alien Status

U.S. tax residency isn’t set by visa status. With no green card, Countsure applied IRC §7701(b)’s Substantial Presence Test – 31 days of presence in the current year, plus a weighted three-year day count of 183 or more. With zero U.S. presence in 2023 and 2024, 2025 alone had to supply all 183 days, confirmed via her I-94 record showing continuous presence from March 4 onward. Meeting the SPT didn’t make her a resident all year, though: under IRS Publication 519’s residency-starting-date rule, she became a resident alien on March 4, 2025, the first day physically present. That made her a dual-status alien – nonresident January 1–March 3, resident March 4–December 31 – and the original full-year-resident filing both overstated her taxable income and used the wrong deduction method.

Sourcing and Reporting Foreign Income

The client received final Indian-employer salary payments after relocating. Under IRC §861(a)(3)/§862(a)(3), compensation is sourced to where services were performed, not when paid – so pre-arrival India salary remained foreign-source and was excluded from the U.S. return in full. Her Indian rental property required proration instead: as a dual-status alien, worldwide income is taxed only during the resident period, so Countsure prorated the year’s rental income, property tax, and depreciation on Schedule E, including only the resident-period share. Her second, self-occupied Indian property raised a different issue – its mortgage interest is a Schedule A itemized deduction under IRC §163(h), not a Schedule E rental expense – and only its resident-period share was deductible; the nonresident-period share is barred under IRC §873(b), which limits a nonresident alien’s itemized deductions to items connected with U.S. income.

Deductions and Arizona Filing

The original return claimed the standard deduction, generally unavailable to a dual-status alien, who must itemize instead; Countsure substituted allowable itemized deductions, principally the resident-period mortgage interest above. At the state level, Arizona doesn’t use the federal SPT – residency turns on domicile under A.R.S. §43-104. Applying that separate test, Countsure found the client’s Arizona residency also began around the same March date, independently derived rather than automatic. The correct filing was a part-year resident return, Form 140PY, apportioning income by an income-ratio method; Arizona’s standard-versus-itemized choice is independent of the federal choice.

International Reporting and Paper Filing

The client’s Indian accounts and fixed deposits triggered FBAR (FinCEN Form 114) – required for U.S. persons with foreign accounts aggregating over $10,000 at any point in the year, a full-calendar-year obligation not prorated by residency period. Countsure also reviewed her broader foreign-asset disclosure exposure. Mechanically, a combined dual-status return – Form 1040 with an attached nonresident-period statement – generally can’t be e-filed and must be mailed; Arizona’s amended Form 140X likewise requires paper filing, so Countsure built the correction with that constraint in mind from the outset.

Our Approach and the Solution

Countsure worked the facts and the law in order: reconstructed the travel history from the I-94 record; applied IRC §7701(b) and ran the Substantial Presence Test; used Publication 519 to fix March 4, 2025 as the residency start date; traced the disputed India salary under the IRC §861/§862 sourcing rules; classified each item of Indian income and expense by period; recalculated the Schedule E rental proration and depreciable basis; reviewed the self-occupied property’s mortgage interest under the qualified residence interest rules; and independently determined the Arizona filing position.

Based on that analysis, Countsure prepared a full corrective filing: Form 1040-X to amend the original return; Form 1040 as a dual-status return with the required Dual-Status Statement attached; Arizona Form 140PY; updated income reporting that removed the improperly included salary and correctly prorated rental and interest income; itemized deductions in place of the standard deduction; and a full review of FBAR and other foreign-reporting obligations.

The Result

  • An IRS-compliant filing reflecting the taxpayer's actual dual-status year.
  • A defensible residency determination grounded in IRC §7701(b) and Publication 519.
  • Accurate reporting of foreign-source income - correctly excluded and prorated.
  • Itemized deductions correctly substituted for the improperly claimed standard deduction.
  • Improved compliance across the federal and Arizona returns, and reduced exposure to future inquiry.

Lessons Learned for H-1B Professionals Relocating to the U.S.

  • Visa status and tax residency aren't the same - your start date follows the SPT, not your visa date.
  • No U.S. presence the two prior years means you need 183 days in your arrival year alone to meet the SPT.
  • Mid-year arrival usually means dual-status filing, with its own distinct rules.
  • Foreign salary is sourced by where you worked, not when you were paid.
  • Foreign rental income and related expenses generally must be prorated by residency period.
  • Dual-status aliens generally must itemize - the standard deduction usually isn't available.
  • State residency tests are independent of the federal test - don't assume one follows the other.
  • FBAR and dual-status returns often require paper filing - plan your mailing timeline accordingly.

Frequently Asked Questions (FAQs)

The IRC §7701(b) method for determining U.S. tax residency: met when someone is present in the U.S. at least 31 days in the current year and a weighted three-year day count reaches 183.

Someone treated as a nonresident alien for part of the tax year and a resident alien for the rest, typically due to arriving in or leaving the U.S. partway through the year.

No – compensation is sourced to where the work was performed, so pre-arrival foreign salary stays off the U.S. return even if paid afterward.

Generally, no – dual-status aliens are typically required to itemize deductions instead.

Yes, if your foreign accounts aggregated over $10,000 at any point in the year – FBAR runs on the full calendar year, not your residency start date.
Generally, no – a combined dual-status Form 1040 with an attached nonresident-period statement typically must be paper filed.
Not necessarily – states apply their own residency tests, which may or may not align with the federal SPT.
Has it reviewed by a professional experienced in dual-status and international filings before your amendment deadline?

Facing a Similar Cross-Border Tax Situation?

Relocating to the U.S. on an H-1B visa brings a different set of tax rules than most first-time preparers apply by default. If your return needs to reflect a dual-status year, or a previously filed return needs correcting, Countsure’s international tax team can help. Visit https://countsure.com/ to schedule a consultation on U.S. international tax planning and dual-status tax return preparation.

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