Dual-Status Aliens: How to File Your US Income Tax Return
Dual-status aliens face some unique circumstances when it comes to filing tax returns or reporting foreign accounts.
What is a dual-status alien? A dual-status alien is an individual who is considered to have been both a resident and a nonresident of the United States in the same tax year. This is generally caused by an immigration occurrence such as acquiring or revoking a Green Card, dealing with expatriation issues, or arriving or leaving with a visa.
Residents and nonresidents have different requirements when it comes to reporting income. There are also different tax forms for residents and nonresidents.
US Residents are required to file an annual U.S. federal tax return using one of the 1040 Forms. Nonresidents file their income tax returns by using Form 1040NR. For the period where dual status aliens are considered U.S. residents they are required to report their global income – regardless of where it came from. For the nonresidency period of the tax year they are only required to report income that was earned in the United States. With the exception of qualified dividends, US Residents are taxed at a progressive rate depending on the income level. Nonresidents are also taxed on a progressive scale on income that has been earned in the United States. Nonresidents are taxed at a rate of 30% for most types of income not effectively connected with the U.S. trade or business - unless the preferential Tax Treaty rate can be applied.
Self-employed US Residents are required to pay a self-employment tax in addition to the progressive tax rate mentioned above. Self-employed nonresidents are not required to pay a U.S.self-employment tax. The reason for the difference is that US Citizens are required to pay into the Social Security Program and the Medicare system.
The ability to claim deductions and credits are different for residents and nonresidents. Residents have more options for reducing their tax liability than nonresidents have.
If a US Resident is married and/or has children, he/she can file a joint return and claim exemptions for children. There are also a variety of other deductions that allows US Residents to reduce their income tax liability. These deductions are in addition to the standard exemption available to a taxpayer. There are also additional credits available to US Persons once the taxable income and tax due have been calculated.
Nonresidents don’t have the same deductions and credits available. Nonresidents are unable to get an additional break from their taxes for their spouse or children. The only thing that nonresidents are able to deduct are expenses associated with the mission of earning US-sourced income.
Dual-status citizens must submit two income tax returns – each consistent with the tax rules and concessions allowed for each resident status.
When you have qualified as both a resident and a nonresident in the same year, you will need to file two separate returns and submit them to the IRS together. It will be important for you to know the time at which you earned income. For income earned while you had a resident status, you will enter that income on Form 1040. The income you earned as a nonresident will be filed on Form 1040NR. Remember that your global income must be considered for the time during which you were a resident of the United States. When it comes time to file Form 1040NR, you will only be required to report your US-sourced income.
There are different rules for dual-status taxpayers to file a joint return, and it has to do with the timing of when you were a resident and when you were a nonresident.
If you started the year out as a nonresident, became a resident during the tax year, and are married to a US Resident when the year comes to an end, you will not be required to file Form 1040NR. You will be allowed to file a joint return with your spouse using a regular Form 1040. You are allowed to make this election even if you and your spouse are both dual-status aliens. If you make this election, you will be required to report your global income, but you would also be able to take advantage of the exclusions, deductions, and credits available to US Persons. In many cases the lower tax rate and higher deductions related to the status “married filing jointly” justify reporting the higher income for the year.
Be careful not to confuse the information above with the election to file a joint return being made by a US Resident with a nonresident spouse. If you are a US Resident and you are married to a nonresident, you may choose to include your nonresident spouse on a joint tax return if it would be fiscally beneficial.
If you become a US Resident during the year, you will be required to report your foreign financial accounts on FinCEN Form 114. You may also be required to file FATCA Form 8938 if your foreign assets reach or exceed certain thresholds.
For FinCEN Form 114, you are required to report all foreign financial accounts if the total balance on all of your accounts combined is at least $10K. This is true even if that level was reached only one day out of the year. On FATCA form 8938, you will be required to report your foreign assets if they have a value of $50K at any point during the year or $75K at the end of the year. Those are the thresholds for single US Residents; for married couples, the threshold is doubled.
Keep in mind that there is no tax associated with reporting your foreign financial accounts and/or foreign assets. If you want to avoid this mandatory reporting, you will need to transfer your funds to a US bank account. You may also want to sell your foreign assets if you don’t want to be bothered by FATCA reporting guidelines. If you sell your investments, though, it could result in capital gains or capital loss, and these would be taxable situations.
I.J. Zemelman, EA is the founder of Taxes for Expats