H-1B and L-1 in the First US Year: The Dual-Status Math, the Full-Year Election, and the Canadian Bonus Paid After You Left

A Canadian who arrives in the US on an H-1B or L-1 visa becomes a US tax resident under the substantial presence test once they have been present 183 days on the weighted count, and the residency start date is the first day of presence in the year the test is met. Arrive in January and the first return is a full-year resident return. Arrive in June and it is a dual-status return, non-resident through May and resident from June, with choices that affect how the Canadian income from January to May and the Canadian bonus paid in July are taxed. The visa itself does not set the tax status; the days do.

Key takeaways

• Residency start: the first day of US presence in the year in which the substantial presence test is met (31 days in the year and 183 on the three-year weighted count). An H-1B or L-1 holder who arrives on June 1 and stays meets the test that year and is resident from June 1 (or from an earlier visit in the year, if any).
• Dual-status return: Form 1040-NR for the non-resident period (US-source income only) and Form 1040 for the resident period (worldwide income). No standard deduction; married filing separately only; itemized deductions limited.
• Full-year election: a married arrival can elect under section 6013(h), or a single arrival who meets the test in the following year can use the first-year choice under section 7701(b)(4), to be a resident for the full year with the standard deduction and joint filing, at the cost of reporting worldwide income for the whole year (including pre-move Canadian income) with a foreign tax credit.
• FICA: Social Security and Medicare apply from the first US paycheque for H-1B and L-1 holders; the totalization agreement can exempt an L-1 transferee on a temporary assignment of up to five years with a Canadian certificate of coverage.
• Canadian income after the move: a Canadian bonus for pre-move work paid after arrival is Canadian-source employment income, taxable in Canada, and reported on the resident portion of the US return with a foreign tax credit.

Setting the date

The substantial presence test is met in the arrival year if the person is present 31 days in the year and 183 days on the weighted count (all days this year plus one-third of last year's plus one-sixth of the prior year's). An arrival on June 1 who stays through December has 214 days: test met, residency from June 1. An arrival on September 1 has 122 days: test not met in the arrival year; the person is a non-resident for the whole arrival year unless they make the first-year choice, and becomes resident from January 1 of the following year (when the weighted count includes the prior year's days) or from the first day of presence in that year.

Earlier visits in the arrival year count. A person who visited the US for two weeks in March and moved June 1 has a residency start of the March visit's first day, unless the de minimis rule (up to 10 days of earlier presence during which the person had a closer connection to Canada) excludes them.

Dual-status versus full-year

Dual-status (default). The 1040-NR portion reports US-source income earned before the residency start (usually none for a new arrival). The 1040 portion reports worldwide income from the residency start. Pre-move Canadian salary is excluded. No standard deduction; a married person files separately. For a mid-year arrival with substantial pre-move Canadian income, this is usually the better result because the Canadian income never enters the US return.

Full-year election. A married arrival whose spouse is also a new resident can elect under section 6013(h) to be treated as residents for the entire year and file jointly: the standard deduction, joint brackets, and credits are available, but the pre-move Canadian income of both spouses is reported with a foreign tax credit. The election is better for an early-year arrival (little pre-move income) and worse for a late-year one (a full year of Canadian salary comes in, and the Canadian credit usually covers the US tax on it but the stacking pushes the US income into higher brackets).

FICA and the totalization agreement

H-1B and L-1 wages are subject to Social Security and Medicare withholding from the first pay. An L-1 employee transferred by a Canadian employer for a temporary assignment of up to five years can remain on CPP with a certificate of coverage from Service Canada, which exempts the employee and employer from FICA. An H-1B employee hired directly by a US employer cannot. The CPP contributions made in Canada and the Social Security credits earned in the US can be combined under the agreement for benefit eligibility.

Canadian income after the move

A bonus paid in July for work performed in Canada through May is Canadian-source employment income under Article XV: taxable in Canada (the Canadian employer withholds as for a non-resident) and, because it is received while the person is a US resident, reportable on the resident portion of the US return with a foreign tax credit for the Canadian tax. The same applies to RSUs vesting after the move for the Canadian portion of the vesting period, and to severance from the Canadian employer.

The Canadian departure return, the departure tax, the RRSP treaty position, the FBAR, and the Article XIII(7) basis election apply as for any Canadian mover.

Worked example

A Toronto engineer arrives in Seattle on an H-1B on June 1, single, earning $140,000 USD from the US employer, having earned $70,000 CAD in Toronto through May and a $20,000 CAD bonus paid in July for the Toronto period.

• Residency start. June 1 (no earlier visits).
• Dual-status return. 1040-NR for January to May: no US-source income. 1040 for June to December: $140,000 USD of wages plus the $20,000 CAD bonus (about $14,600 USD) with a foreign tax credit for the Canadian tax on it. Pre-move Toronto salary excluded. No standard deduction.
• Full-year election. Not available (single, and the first-year choice does not give the standard deduction). Dual-status stands.
• FICA. From the first Seattle paycheque; no totalization exemption (H-1B, direct hire).
• Canada. Final T1 with a June 1 departure date; the bonus reported as Canadian-source income with non-resident withholding.
• Washington. No state income tax.

Official sources

"Generally, an H-1B alien will be treated as a U.S. resident for federal income tax purposes if he or she meets the Substantial Presence Test." — Internal Revenue Service, Taxation of alien individuals by immigration status – H-1B, https://www.irs.gov/individuals/taxation-of-alien-individuals-by-immigration-status-h-1b

"You are a dual-status individual when you have been both a U.S. resident and a nonresident in the same tax year." — Internal Revenue Service, Taxation of Dual-Status Aliens, https://www.irs.gov/individuals/international-taxpayers/taxation-of-dual-status-aliens

"You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that." — Internal Revenue Service, Substantial Presence Test, https://www.irs.gov/individuals/international-taxpayers/substantial-presence-test

Practitioner note

H-1B and L-1 arrivals assume the visa date is the tax date. It is not; the days are. An engineer who visited for a March interview and moved in June is resident from March, and the Toronto salary for March through May is on the US return. We build the day calendar for the arrival year before the first return, and we run the dual-status return against the full-year election for every married arrival.

See also: For the dual-status-versus-full-year election in depth, read dual-status versus full-year election in your first US tax year, and the visa-specific guides for the Canadian on an H-1B and the Canadian on an L-1. Planning the move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the residency start determination, the dual-status or full-year first return, the FICA and totalization analysis, and the Canadian departure return. See cross-border pricing or book a call.