The Taxation of Dual-Status Aliens

May 10, 2016 : Sasha Drakulovic – The Tax Institute

If you are a foreign national and came to the U.S. in the middle of the year, you may be surprised to learn there are three ways the U.S. can tax you: as a nonresident alien, a resident alien or a dual-status alien. A dual-status alien is someone who is both a resident alien and nonresident alien in the same tax year. This generally happens in the year someone enters or leaves the U.S.

Let’s look at an example. Jeffrey is a French citizen who had never before been in the U.S.. He entered the U.S. on an H visa on May 1, 2015, and stayed the rest of the year. Jeffrey meets the substantial presence test because he was in the U.S. for more than 183 days during the year. In this example, Jeffrey is a dual-status alien because he is both a nonresident alien and a resident alien in the same year. He will be a nonresident alien from January 1 to April 30, and a resident alien from May 1 to December 31.

Dual-status tax year

A dual-status tax year is split into two parts – the nonresident alien portion and the resident alien portion.   You will be taxed only on your U.S. source income during the nonresident alien portion of your year and on worldwide income for the resident alien portion of your year.

For example, let’s say Jeffrey received dividends from a U.S. company in February 2015 during his nonresident portion of the year. Because the dividends are U.S. source income, it will be reportable for his nonresident portion of the year. If Jeffrey received dividends from a foreign company during the nonresident portion of the year, he would not report the income in the dual-status year.

How to file a dual-status return

If you are a resident alien at the end of the year, like Jeffrey, you must file Form 1040. Write “Dual-Status Return” across the top of your Form 1040. You must also attach a statement to your return to show any U.S. source income from the part of the year you are a nonresident. Form 1040NR can be used as the statement, but make sure to write “Dual-Status Statement” across the top. A dual-status return cannot be e-filed.

If you are instead a resident alien at the beginning of the year and a nonresident alien at the end, you will use Form 1040NR as your return and Form 1040 as the statement.

Restrictions for dual-status taxpayers

If you are a dual-status taxpayer, the following restrictions apply to how you can file:

  • You cannot use the standard deduction.       However, you may itemize deductions. Note that generally only itemized deductions related to a U.S. trade or business will be allowed for your nonresident portion of the tax year.
  • Exemptions for a spouse or dependent are allowed for the resident alien part of your tax year. However, your total spousal and dependent exemptions cannot exceed your taxable income (figured without deducting personal exemptions) for the period you are a resident alien.  You can only claim spousal or dependent exemptions for the nonresident portion of your year if you were a resident of Canada or Mexico, a U.S. national, or a qualifying Indian student or business apprentice.
  • You cannot use the head of household filing status.
  • You cannot file a joint return, unless you are married to a U.S. citizen or resident alien at the end of the year and make an election to file married filing jointly. See below for more information on the election to file a joint return.
  • If you are a nonresident alien and married to a U.S. citizen or resident alien for all or part of the tax year, and you do not choose to make the election to file jointly, you must use married filing separate as your filing status. You cannot file as married filing jointly or as single.
  • If you are a nonresident alien and married to a U.S. citizen or resident alien, you may not take the earned income credit, the credit for the elderly or disabled, or an education credit unless you elect to be taxed as a resident alien jointly with your spouse in lieu of these dual-status taxpayer rules.

Married filing jointly election

If you are a dual-status alien, and are married to a U.S. citizen or resident alien at the end of the year, you may make an election under § 6013(h) to file as married filing jointly. This election will treat you as a resident alien the entire year, so you will not be subject to the restrictions on dual-status taxpayers as outlined above. However, this election will also make your worldwide income subject to U.S. reporting for the entire tax year, as well as FBAR and FATCA reporting requirements for the entire year.

You may make this election if all of the following apply:

  1. You are a nonresident alien at the beginning of the year
  2. You are a resident alien or U.S. citizen at the end of the year
  3. You are married to a U.S. citizen or resident alien at the end of the year
  4. Your spouse joins you in making the choice.

When you make this election, the following apply:

  1. You will be treated as a resident alien for the entire tax year and taxed on worldwide income
  2. You must file a joint return for the year you make this choice
  3. Neither you nor your spouse can make this choice for any later tax year, even if you are separated, divorced or remarried.

Note that even if you are treated as a resident alien for the time you were a nonresident alien, you may be able to exclude foreign earned income for this portion of the year using the foreign earned income exclusion.

In order to make this election, a statement should be attached to your return signed by both you and your spouse.

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Sasha Drakulovic – The Tax Institute

Sasha is a tax research analyst specializing in international tax issues and real property. She received her J.D. and LLM from the University of Missouri-Kansas City School of Law.