Dual-status aliens involve some unique considerations from a tax perspective. What exactly is a dual-status alien? In the simplest of terms, a dual-status alien is a person who, within the same tax year, is considered both a resident for US tax purposes and a nonresident for tax purposes, under any of the residency tests. This usually concurs with an immigration event: legal patriation or expatriation, acquisition or revocation of lawful permanent residency (“green card”), or aliens on visas arriving or leaving.
US Residents vs. Non-Residents
While US residents file annual income tax returns using the Form 1040 series, US nonresidents file income tax returns using the Form 1040NR series. US residents are taxed on their worldwide income, regardless of its origin or where the person lives at the time the income is received. US nonresidents are taxed only on their income from sources in the US. Aside from long-term capital gains and qualified dividends, which are taxed at more favorable rates, US residents calculate tax on all income on a progressive scale, regardless of the character of the income. Nonresidents are taxed at progressive rates on income that comes from business activities in the US (employment or transacting business); absent treaty provisions, nonresidents are taxed at a flat 30% on most investment income.
Residents who are self-employed pay, in addition to income tax, self-employment tax on their net profits, to generate an earnings record in the Social Security and Medicare systems. Nonresidents who are self-employed in the United States do not pay self-employment tax.
US residents who are married or who have children may file tax returns jointly with their spouses and claim exemptions for their children. A variety of filing statuses may be used, depending on marital status and personal situation, some of which are more beneficial than others. US residents are also permitted, for purposes of calculating tax liability, several deductions in addition to the personal exemptions. Absent specific deductions, a standard deduction is permitted against general taxable income. Once taxable income and liability is calculated, US residents are also allowed to claim several credits to reduce the actual tax paid.
Considerations for Non-Residents
Nonresidents generally cannot use the more favorable filing statuses. Nonresidents with children generally cannot claim any US tax benefit from their children; married nonresidents generally cannot claim any US tax benefit from their spouses. The only deductions permitted against taxable income are those incurred to generate income; once tax liability is calculated, many credits permitted for US residents are not available to nonresidents.
Filing as a dual-status alien
Because a dual-status alien is both a resident and a nonresident in the same year, his US tax return has characteristics of both residents and nonresidents. In effect, he files two returns together: one as a resident, following the tax rules for US residents, reporting income for the part of the year in which he was a resident; another as a nonresident, following the tax rules for US nonresidents, reporting income for the part of the year in which he was a nonresident. He is taxed only on his US-sourced income for the nonresident portion of the year, but on his worldwide income for the resident portion of the year. Like most nonresident returns, a married dual-status alien cannot file jointly with his spouse or claim the standard deduction. Whether he is a resident or a nonresident at the end of the year determines which form he files; the other form is used as a statement to support the calculations of tax.
Filing a joint return
If a person who would otherwise be considered a dual-status alien is a nonresident at the beginning of the year, a resident at the end of the year, and is married to a US resident at the end of the year, the restrictions imposed on dual-status returns can be avoided by both spouses electing to file a joint return as residents. This election can be made even if both spouses would otherwise be dual-status aliens, as long as both are residents at the end of the year. While this does subject income from the nonresident period to US tax, the usual methods of reducing tax liability via deductions, exemptions, and credits remain.
While this election should not be confused with the election made by a married US resident with a nonresident alien spouse to treat the nonresident alien spouse as a US resident for tax purposes, there are similarities between the two elections in that both elections allow a joint income tax return to be filed, and both elections may only be made once during a taxpayer’s lifetime.
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