On an H-1B with funds back home? PFIC reporting starts with residency

An H-1B is an immigration status. It does not, by itself, say whether you are a U.S. tax resident — and that is the question every other answer on this page depends on, including whether the mutual funds you still hold in India, or anywhere else, need Form 8621.

Step one: are you a U.S. tax resident?

A non-citizen is a resident alien for U.S. tax purposes for a calendar year when either test is met:

• The green card test — you were a lawful permanent resident of the United States at any time during the year.
• The substantial presence test — you were physically present in the U.S. for at least 31 days during the current year, and 183 days during the three-year period made up of the current year and the two years before it, counted with the weighting below.

1. Leave out the days that do not count — days as an exempt individual, among others (next section).
2. Count every remaining day you were present in the U.S. in the current year.
3. Add one third of the days you were present in the first year before it.
4. Add one sixth of the days you were present in the second year before it.
5. Compare the total with 183 days, and check that the current year alone reached 31 days.

Someone who arrives on an H-1B and lives in the U.S. for most of the year generally meets the test for the first full calendar year, and often for the arrival year itself. The example above is the frequent traveller's case, where the weighting decides it.

Days that do not count

Some days are excluded from the count. The IRS lists, among others, days as an exempt individual — which includes F, J, M or Q students and J or Q teachers and trainees, for a limited number of years — days commuting from Canada or Mexico, transit of less than 24 hours between two foreign points, and days you could not leave because of a medical condition that arose while you were in the U.S. For a former F-1 student on OPT who moves to an H-1B, this is usually why the first resident year is later than the arrival year: the student days stop being excluded when the exemption runs out or the status changes.

Two further rules can move the answer. The closer-connection exception can treat someone who meets the substantial presence test as a nonresident, but it requires presence on fewer than 183 days in the current year and a tax home and closer connection in another country — which rarely fits someone living and working in the U.S. The first-year choice works the other way: someone who does not meet the test in the arrival year but meets it the next year may, under conditions, choose to be treated as resident for part of the arrival year. Both are choices with consequences, made on the facts.

The arrival year: dual status

The year you arrive — or the year a green card is granted — is often a dual-status year: nonresident for part of it and resident for the rest. A year spent entirely as a nonresident is filed on Form 1040-NR, which generally reaches U.S.-source income and income connected with a U.S. trade or business rather than worldwide income. The resident part of a dual-status year, and every full resident year after it, is where worldwide income — and the PFIC rules — come in.

Once you are resident: funds from home are generally PFICs

A U.S. tax resident is a U.S. person, and a U.S. person who holds shares of a non-U.S. fund generally holds a PFIC. That reaches the mutual funds and ETFs you bought before moving — Indian schemes, but equally a Canadian mutual fund, a UK unit trust, a European UCITS ETF or a fund from any other country. Each is classified on its own facts, and each generally needs its own Form 8621 for a year with a filing requirement.

• Indian mutual funds and SIPs — Indian mutual funds and U.S. tax covers schemes, folios, SIP lots, switches, SWP and STP, and the documents to collect.
• European and UCITS funds — PFIC treatment of UCITS ETFs.
• Canadian funds — Canadian funds and the PFIC rules.

Units bought before you became resident do not drop out of the analysis. When they are redeemed in a resident year, the purchase dates and the date you became a U.S. person both feed the computation, and how the years before residency are treated in it is one of the questions to settle on your facts. Redemptions and switches are dispositions; under the default §1291 regime, the rule is: gain/excess distribution taxed at the highest ordinary rate for each allocated year, plus an interest charge.

The small-holdings exception may excuse the annual report for a year with aggregate PFIC value of $25,000 or less on the last day of the year ($50,000 MFJ). Exception is narrow — it covers §1291 funds only (no QEF or mark-to-market election) and is lost in a year with an excess distribution or a gain on a disposition.

The accounts are reported separately: the FBAR when your foreign accounts' combined peak exceeds $10,000, and Form 8938 for a single filer living in the U.S. above $50,000 at year end or $75,000 at any time.

Treaty tie-breakers: unusual here, and a question for review

A tax treaty can contain a tie-breaker that treats someone resident in both countries as resident in only one; relying on it is a treaty-based return position, disclosed on Form 8833. For someone who lives and works in the U.S., it is unusual for the tie-breaker to point away from the U.S., and claiming nonresidency this way has consequences that reach beyond one year's tax. If you are considering it, treat it as a question for professional review rather than a default — this page does not advise on it.