Departing the US: Your Final Tax Obligations

Leaving the US after your H-1B ends involves more than packing your bags. You have filing obligations for your final year, potential departure clearance requirements, and decisions to make about retirement accounts. Getting these right prevents IRS problems that can follow you across borders.

Final Tax Return: Dual-Status Year Filing

The year you leave the US is typically a dual-status year: you are a U.S. tax resident from January 1 through your departure date, and a nonresident for the remainder of the year. This requires special filing:

• Dual-status return: File Form 1040 for the resident portion and attach a statement (Form 1040-NR) for the nonresident portion. The Form 1040 is the primary return.
• Resident period: Report worldwide income earned from January 1 through your last day of U.S. residency. You can claim all deductions and credits available to residents.
• Nonresident period: Report only U.S.-source income earned after departure (e.g., continued RSU vesting, U.S. rental income, 401(k) distributions). You cannot use the standard deduction for the nonresident portion.
• Filing status limitation: Dual-status filers cannot file as Married Filing Jointly unless the spouse elects to be treated as a resident for the full year. See our MFJ vs MFS guide for details.

Departure Permit (Sailing Permit / Form 2063)

Under IRC section 6851, departing aliens may be required to obtain a certificate of tax compliance (commonly called a "sailing permit") before leaving the US. In practice:

• Form 2063 (U.S. Departing Alien Income Tax Statement): The short form, used if you can demonstrate that all taxes have been paid and your return is current. Most H-1B workers with W-2 income and proper withholding qualify for this simplified form.
• Form 1040-C (U.S. Departing Alien Income Tax Return): Required if you have outstanding tax liabilities or if Form 2063 is not sufficient. This is essentially a preliminary final return filed before departure.
• Practical enforcement: The IRS rarely enforces the sailing permit requirement at airports. However, not obtaining one does not relieve you of the obligation to file your final return. Some tax professionals recommend obtaining Form 2063 to create a clean compliance record.

To obtain a sailing permit, visit your local IRS office with your passport, visa, most recent tax return, current year W-2 or pay stubs, and documentation of any outstanding tax obligations.

401(k) and IRA: Options When Leaving the US

Your U.S. retirement accounts do not disappear when you leave. You have several options, each with different tax consequences:

• Leave the accounts in place: You can keep your 401(k) and IRA in the US indefinitely. The accounts continue to grow tax-deferred. Required Minimum Distributions start at age 73. This is often the simplest option.
• Roll 401(k) to an IRA: Consolidate into a self-directed IRA for more investment flexibility. No tax consequences for a direct rollover. You can manage the IRA from abroad, though some brokerages restrict accounts for non-US residents.
• Withdraw (cash out): Distributions to nonresidents are subject to 30% federal withholding (or the reduced treaty rate — the India-US treaty reduces this to 15% for periodic pension payments under Article 20). You also owe a 10% early distribution penalty if under age 59 and a half.
• Roth IRA considerations: Roth distributions are generally tax-free if qualified. However, India does not have a Roth-equivalent concept. If you return to India, Roth earnings may be taxable in India depending on how Indian tax authorities classify the account.

Ongoing US Tax Obligations After Departure

Leaving the US does not end all U.S. tax obligations. As a nonresident, you must still report and pay tax on U.S.-source income:

• RSU vesting: If RSUs from your former U.S. employer continue to vest after departure, the portion attributable to U.S. services is U.S.-source income subject to withholding. Your employer should withhold at the nonresident rate (typically 30% or the treaty rate).
• U.S. rental income: If you own U.S. real estate, rental income is taxable. File Form 1040-NR annually. You can elect to treat rental income as effectively connected income (ECI) under IRC section 871(d), which allows you to deduct expenses and pay tax at graduated rates instead of the flat 30%.
• Capital gains on U.S. real property: Sales of U.S. real property are subject to FIRPTA withholding (typically 15% of the gross sale price). File Form 1040-NR to reconcile the withholding against your actual tax liability.
• Retirement distributions: 401(k) and IRA distributions to nonresidents are subject to withholding as described above. You must file Form 1040-NR to report these.

State Tax: Final Returns and Residency Rules

Each state has its own rules for determining when your tax residency ends. Common patterns:

• California: Considered a resident until you establish domicile elsewhere. California is notoriously aggressive about maintaining residency claims. Close bank accounts, cancel driver's license, and document your departure thoroughly.
• New York: Part-year resident return required. New York taxes income earned while domiciled in the state. The 184-day/permanent place of abode test applies.
• Texas, Washington, Florida: No state income tax. No final state return needed.
• New Jersey, Illinois, Massachusetts: File a part-year resident return for the portion of the year you lived in the state. Report only income earned during that period.

Regardless of state, file your final state return by the regular deadline. Some states require you to prorate income based on the number of days you were a resident during the year.

FBAR and FATCA: When Obligations End

Your FBAR and FATCA obligations are tied to your U.S. tax residency status, not your physical presence:

• FBAR (FinCEN Form 114): Required for U.S. persons with foreign accounts exceeding $10,000 in aggregate. Once you become a nonresident, you are no longer a "U.S. person" and the FBAR obligation ends. File your final FBAR for the year of departure, covering accounts held while you were still a resident.
• FATCA (Form 8938): Attached to your income tax return. File it with your final dual-status Form 1040 for the year of departure. In subsequent years, if you file Form 1040-NR for U.S.-source income, Form 8938 is generally not required for nonresidents unless you have U.S.-source income exceeding specific thresholds.
• Outstanding FBAR filings: If you missed FBAR filings in prior years, consider the Streamlined Filing Compliance Procedures before departing. It is easier to resolve these issues while you are still in the US.