Dual Status Taxpayer and Taxes

Dual Status Taxpayer
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 What is Dual Status?

 

If you are a resident alien AND a non-resident alien within the same tax year* then you achieve dual status. This normally happens when you are arriving or departing from United States in the same tax year. This is with reference only to your residence in the U.S and NOT your citizenship. You are considered a resident alien if you pass either of the below mentioned tests and a non-resident alien if you fail them. Let’s see what the two tests are:

Green Card Test

 

If by immigration laws, you are given the privilege of residing permanently in the US as an immigrant at any time during the calendar year, then you are a lawful permanent resident and you pass this test

Substantial Presence Test

 

Counting 31 days in the current year, 1/3rd of days of the first preceding year from current year and 1/6th of days of the second preceding year from current year, if you have been physically present for a total of 183 days during this 3 year period, then you pass this test.

*Tax Year:

If the tax payer has not established a fiscal year, the tax year is the Calendar year period of 12 consecutive months ending on Dec 31st. If established by the tax payer, it will be for a period of 12 consecutive months starting at any point during the calendar year.

There are exceptions to the Substantial Presence test. You are considered present in the United States on any day if you are physically present in the US at any time during the day. However, you cannot count the following days as your Days of presence:

  • Days of commute, If you are a regular commuter to the US from a residence in Canada or Mexico

  • Days in which you spent less than 24 hours in the US when in transit between 2 places outside US

  • Days spent in the United States as a crew member of a foreign vessel.

  • Days you are unable to leave the US because of a medical issue that arose while in the US

  • Days you are an exempt individual:

    • If you are present temporarily as a Foreign Government related individual in the US under an “A” or “G” (excluding A-3 and G-5) Visa

    • If you are a teacher/trainee temporarily present in the US under a “J” or “Q” visa, substantially complying with the Visa’s requirements

    • If you are a student temporarily present in the US under an “F,” “J,” “M,” or “Q” visa, substantially complying with the Visa’s requirements

    • If you are a professional athlete temporarily in the US to compete in charitable sports events.

 

 

Dual Status Taxation: How is it done?

 

The tax laws that apply to the resident alien portion and the non-resident alien portion of the tax year are different. For the resident alien portion of the year, you are taxed for ALL sources of income (including all foreign income) that you received during your stay as a resident alien. However, for the non-resident alien portion of the year, your sources of income from the US, and all countries that have a tax treaty with it, are taxed.

Restrictions as a Dual Status Tax payer

 

  • You cannot avail Standard deductions on your tax liability (Itemized deductions are allowed)

  • Joint return filing is NOT allowed (unless you are a dual status alien married to a US citizen or resident alien)

  • You are NOT allowed to use the Tax computation worksheet or head of household tax table column

  • For the period that you are a resident alien, deductions on the exemptions of your spouse and qualified dependents cannot exceed your taxable income (this is done NOT accounting for deductions on your personal exemption)

  • As a non-resident alien married to a US citizen or resident alien for the complete or part of the tax year, and you do not opt for joint filing with your spouse, you have to figure your tax using the Tax Table column for “married filing separately”

  • You cannot opt for earned income credit (EIC), education credits or credits for the elderly and disabled unless: (a) you are married (or) (b) your spouse is a US citizen or resident alien and you choose to be treated as a resident

 

 

Figuring your Tax

 

Income

  • Your income during the period of residence AND your income connected to a business/trade in the US during your period of nonresidence, post allowable deductions, is summed up and taxed at rates that apply to US citizens and residents.

  • If your income is NOT connected to any trade/business in the US, then it is subject to 30% (or) lower (depending on the tax treaty rate). No deductions can be availed for this income

Credit

  • You can claim foreign tax credit using Form 1116 filed along with your income tax returns

  • There are special circumstances where you cannot claim credits such as child tax credit, adoption credit, etc. which are outlined in Publication 519

 

 

Forms: What and when to file?

 

As Dual Status tax payers, the form you file is dependent on your status at the end of the tax year i.e., if you are a resident or non-resident alien.

For resident alien:

Form 1040EZ,1040A, or 1040with an attached statement showing nonresident period income using Form 1040NRor Form 1040NR-EZ, marked “Dual-Status Return” on top of page

For non resident alien:

Form 1040NR or Form 1040NR-EZwith an attached statement showing resident period income using Form 1040, marked “Dual-Status Return” on top of page.

For Calendar year basis: Returns must be filed by April 15th of the year following your tax year, For other tax periods: Returns should be filed bythe 15th day of the 6th month, after the close of your tax year.

If Form 4868 is filed by the deadlines, a 6 month extension can be availed on filing the returns.

For more information about the Dual Status Taxation, you can simply contact us.

Reference: IRS Publication 519 Tax Guide for Aliens

Also read Foreign Tax Credit: An Insight Guide, and Can IRS revoke or deny your passport?

You might also be interested in reading about Trucker Tax – Owner Operator Tax Deductions

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