Who is a
DUAL-STATUS ALIEN ?
A Dual-Status Alien is someone who was a Citizen of a Foreign Country, moved to the US, or moved out of the US in the Current Tax Year where the Alien could be a Part-Year Resident (Dual-Status), Non-Resident or a Full Year Resident. This is possible in the Year of Arrival and Departure to the United States. In the year of Arrival, there are several elections available that can even make a Non-Resident a Dual-Status Resident or a Full Year Resident. To be a Dual-Status Alien, the Taxpayer will have to meet the Substantial Presence Test or the SPT (>183 DAYS) in the US or use the 1st year choice through the 7701(b) to be one.
What is an Example of a Dual-Status Alien?
Andy, who is single, is a UK National who comes to the United States on a 2-year Assignment on Jun 1st, 2021. Andy has 214 days in the US for 2021. Andy files a Dual-Status Tax Return and is a Resident for Tax purposes from June 1, 2021. His Worldwide Income is Taxable from that date. Prior to his arrival, he will be considered as a Non-Resident of the US. Form 1040 will be the Tax Return and Form 1040NR will be the Statement.
Drew, single from Denmark, left the US on 1st November 2021 after a 2-year Assignment. Drew has spent just 304 days in the US. Since she meets the SPT Test, she will be considered as a Dual-Status Resident for the Tax Year 2021.
How to File a Dual-Status Tax Return?
This would completely depend on whether you are coming to the US or departing from the US. If you are coming to the United States in the Middle of the Year, with over 183 days in the US, You will file Form 1040, which will be the Tax Return and Form 1040NR will be the Statement that will go along with the Return for the Non-Residency Period. Dual-Status Return will be written on the Top of Form 1040. Similarly “ Dual-Status Statement” will be written on top of Form 1040NR.
The opposite would apply for someone who is leaving the United States and is a Non-Resident at the end of the Year. Form 1040NR will be the Tax Return and Form 1040 will be the Statement. The Dual-Status Tax Return Filing Status can be either Single or Married Filing Separately (MFS). You cannot file a Joint Return with Spouse for Dual-Status Return.
Elections discussed later, can help you to file Married Filing Joint(MFJ). However, at that point, you are considered as a full-year tax resident from January 1st till December 31st of that year.
What are the limitations of a Dual Status Alien?
A dual-status alien has several limitations when it comes to filing a tax return in the year of arrival or departure.
Common ones include:
- Limited Tax Credits,
- Exemptions,
- No Standard Deductions
- Limited Filing Status (Single or MFS).
Yes, a Dual-Status Alien cannot file a Joint Tax Return with Spouse.The biggest loss is however, no standard deductions can be claimed by a dual-status. That’s a loss of $12, XXX to the Taxpayer.
Due to these limitations, the taxpayer might incur a huge Tax Bill in the year of Arrival or Departure to the US.
WHAT IS DE-MINIMUS RULE?
Well, an individual may be in the U.S. for up to 10 days without triggering his or her residency start date if the individual is able to establish that, during that period, his or her tax home was in a foreign country and he or she maintained a closer connection to that foreign country than to the U.S. An individual may disregard multiple periods of days so long as the total number of days in all periods does not exceed 10. However, an individual may not disregard any days that occur in a period of consecutive days unless all days in that period can be excluded. Also, any days excluded under this de minimis rule still count for purposes of determining total days of presence. An individual who wishes to exclude days under this rule must file a statement with the IRS.
CAN A DUAL-STATUS ALIEN FILE A JOINT Return?
Absolutely, using the 6013(G) or the 6013 (H) Election an Non-Resident Alien or a Dual Status-Alien can become a Full Year Resident and enjoy the same benefits or the Tax Obligations as a US Resident would. The downside to this election is that your worldwide income is subject to tax for the entire year. This requires Tax Planning and Guidance from a Qualified Professional.
Under the 6013(H) Election :
- You are a nonresident alien at the beginning of the year
- You are a resident alien or U.S. citizen at the end of the year
- You are married to a U.S. citizen or resident alien at the end of the year
- Must have a statement signed by both spouses & attached to the Tax Return.
- This one time election must be made timely. (You get this chance only once in your lifetime, irrespective of how many times you remarry!)
Through this election, you could consider Claiming Foreign Tax Credit or Foreign Earned income Exclusion to reduce your Tax liability after being taxed as a Full Year Resident.
Under the 6013(G) Election:
A nonresident does not become a US resident during the year and is married to a US Citizen or a Resident Alien at the end of the taxable year, may elect with his or her spouse to file a joint Form 1040 and be treated as a U.S. resident for income tax purposes for that year under IRC § 6013(g). Similar to the H election, a signed statement is required from both the spouses. Also, this is a one time election valid until its revoked, death, legal separation or terminated by inadequate records. These Tax Returns have to be Paper filed with the IRS.
What is a Dual-STATUS FIRST YEAR CHOICE?
The first-year choice will make the taxpayer’s residency start on the day of arrival. If Mr. X arrived in the US on September 1st, 2022 for a 2-year assignment, his residency will start on 1 September if he meets the below tests:
- Be present in the United States for at least 31 days in a row in the current year (2022), and
- Be present in the United States for at least 75% of the number of days following the 31-day period, beginning with the first day of the 31-day period and ending with the last day of the current year (2022). (For purposes of this 75% requirement, you can treat up to 5 days of absence from the United States as days of presence in the United States.)
- Meet the substantial presence Test through a look back in 2023. Mr. X had 61 days in 2022, Zero days in 2021, and has 165 days in 2023.
2023 Day count: 165
2022 Day Count: 61 (⅓ of 61 is 20 days)
2021 Day Count: 0 (⅙ of 0 is 0 days)
Total Days for Substantial Presence Test is 185 days for Mr. X.
Mr. X will have to be in the US till June 14, 2023, to meet the SPT test and then file his 2022 Tax Return. He must request an extension by using Form 4868.
- A Statement is required to be attached to his Form 1040 stating
- That you are making the first-year choice for the current year (2022).
- That you were not a U.S. resident in the prior year (2021).
- That you qualified as a U.S. resident under the substantial presence test in the following year (2023).
- The number of days of presence in the U.S. during the current year (2022).
- The date or dates of your 31-day period of presence and the period of continuous presence in the U.S. during the current year (2022).
- The date or dates of absence from the U.S. during the current year (2022), if any, that you are treating as days of presence under the first-year choice – see (2), above
5. Through the First-year choice of the Dual-Status Alien:
- Mr. X will be a Non-Resident from January 1st till October 2022.
- Mr. X will be a Resident from November 1st till December 31st, 2022.
When counting the days of presence in (1) and (2) above, do not include the days you were present in the U.S. as an exempt individual.
If you make the first-year choice, your residency starting date for the current year (2022) is the first day of the earliest 31-day period (described in (1) above) that you use to qualify for the choice. You are then treated as a U.S. resident for the rest of the year.
If you are present for more than one 31-day period and you satisfy condition (2) above for each of those periods, your residency starting date is the first day of the first 31-day period. If you are present for more than one 31-day period but you satisfy condition (2) above only for a later 31-day period, your residency starting date is the first day of that later 31-day period.
Continuing with the example: 1. Mr. X came to the U.S. on November 1, 2022, and was here 31 consecutive days (from November 1 through December 1, 2022). J returned to the foreign country on December 1 and came back to the United States on December 17, 2022. J stayed in the United States for the rest of the year. During the following year (2023), J was a resident of the United States under the substantial presence test. J can make the first-year choice for 2022 because J was in the United States in 2022 for a period of 31 days in a row (November 1 through December 1) and for at least 75% of the days following (and including) the first day of that 31-day period (46 total days of presence in the United States divided by 61 days in the period from November 1 through December 31 equals 75.4%). If J makes the first-year choice, J’s residency starting date will be November 1, 2022.
As mentioned earlier Mr. X, who is a Dual-Status Alien cannot File a joint return, if married, unless he is claiming the elections mentioned above.
FUN-FACT: Even if both the individual and his or her spouse are nonresident aliens at the beginning of the tax year and both were resident aliens at the end of the tax year, the election under IRC § 6013(h) can still be made. However, if an individual is single at the end of the tax year, this election cannot be made.
Once you make the first-year choice, you may not revoke it without the approval of the Internal Revenue Service.
What about State Taxes for Dual-Status Alien?
All 50 States, the District of Columbia, and other territories in the United States have their own rules when it comes to Tax Residency. Most of them do follow federal tax returns for residency, in some cases, they don’t entertain treaties/elections/exemptions on the state tax return. Apart from state, there are locality/city taxes as well. Explaining Tax Residency positions for all States is beyond the scope of this Article.
FINAL THOUGHTS
Being a dual-status alien in the United States is a complicated affair. As a Foreign National or an International Student, it is imperative to understand all the ramifications that come with being a US Tax resident (Part-Year or Full Year). There are Additional FinCen114 and FATCA (Form 8938) reporting for a Foreign National to deal with. The consumer level Tax software and the local block accountant simply don’t cut it when it comes to dealing with these complicated Tax residency issues.
If you are arriving in the US in the second half of the latter part of the year, a Dual Status Tax Return would be the best option. The income that you earned in your Home Country will not be taxed on your US Tax Return. However, if you do arrive within the 1st couple of months of the Tax year and are Married, Filing a Joint Return using the 6013(h) election is your best bet. You can claim $25, xxx of Standard Deduction for filing MFJ, favorable Tax rates, and credits. In the year of Departure, you must Attach a Departure Statement stating the date you left the US.
Having a Tax Professional to figure out the most optimal filing status for you is crucial for a Foreign National in the Year of Arrival and Departure. Being Tax compliant is one of the requirements of your Visa and helps you in the future if you ever decide to take up the Green Card.
Got Questions? Contact us at SuperExpat@cloudexpattax.com
FAQ about Dual-Status Alien?
1. I am a Student from India on an F-1 visa to the United States. On October 1st, 2022, I got my H-1 Visa and started working for my US employer in Texas. What return should I file?
Ans: In this case, you should file a form 1040NR, since Taxpayer has only 92 days in the US after receiving the H1 Visa. The Taxpayer can also use the First year choice and file a Dual Status Return as well. In the following year, should file Full Year Resident Tax Return (Form 1040)
2. Tim from the UK comes to the US on Jan 1st 2022 and leaves the US on Jan 8th, 2022. It was his look-see Trip. Tim again comes on March 1st on a permanent Assignment to the US. What Return will Tim Prepare?
Ans: Since the number of Days are less than 10, under the de-minimis Rule those days can be exempt. The Taxpayer can prepare a Dual Status Tax return starting from March 1st as the Residency Start Date. If it is more than 10 days, then we will have to look into Tax Treaties and completion of Form 8833.
3. Jenny is a Employee from China on a L-1 visa, departs the US on 1 November and files a Dual Status Tax Return for 2022. In 2023, she comes back to the US on May 1st ,2023. Can she again file a Dual Status Tax Return in 2023?
Ans. No, under the No-Lapse Rule, intervening period between residency and non residency will always be deemed as a period of residency. It assumes that Jenny never left the US. Also, Jenny will have to amend the prior year tax return to full year resident return.